Frame and Wheel read the story in the New York Times about the college graduates who make their own jobs. It is inspiring stuff and the importance of being frugal resonates with Frame and Wheel, who is now at the part of the business plan where a financial forecast for the business is mentioned. Frame and Wheel was advised by a veteran entrepreneur not to spend too much time on financial forecasts at this stage because things always change and after all it is just a spreadsheet. Frame and Wheel will post the income statement (which will certainly change) and commentary in small parts so as to make the entry more readable.
Year end 31 Dec | 2011 | 2012 | 2013 |
Selling prices | |||
Frameset price | 2,500 | 2,500 | 2,500 |
Demo / Custom | 5,000 | 5,000 | 5,000 |
Build kits | 1,600 | 1,600 | 1,600 |
Wheels | 1,800 | 1,800 | 1,800 |
Handlebars | 300 | 300 | 300 |
Stems | 120 | 120 | 120 |
Saddle | 180 | 180 | 180 |
Pedals | 225 | 225 | 225 |
Tires | 160 | 160 | 160 |
Per unit costs | |||
Framesets | 700 | 700 | 700 |
Build kits | 1,200 | 1,200 | 1,200 |
Wheels | 1,600 | 1,600 | 1,600 |
Handlebars | 200 | 200 | 200 |
Stems | 70 | 70 | 70 |
Saddle | 125 | 125 | 125 |
Pedals | 180 | 180 | 180 |
Tires | 80 | 80 | 80 |
IBS commission | 20% | 20% | 20% |
IBS interconnection ($) | 100 | 100 | 100 |
Volume | |||
Originated on line | 5 | 10 | 20 |
Originated with IBS | 3 | 10 | 20 |
Custom models | 2 | 2 | 2 |
Total | 10 | 22 | 42 |
Value | |||
On line | 12,500 | 25,000 | 50,000 |
IBS revenue | 7,500 | 25,000 | 50,000 |
Built up custom | 10,000 | 10,000 | 10,000 |
Total | 30,000 | 60,000 | 110,000 |
Cost of goods | |||
Frame set | 7,000 | 15,400 | 29,400 |
Components | 6,910 | 6,910 | 6,910 |
IBS commission | 1,499 | 4,999 | 9,999 |
IBS interconnection ($) | 500 | 1,000 | 2,000 |
Total | 15,909 | 28,309 | 48,309 |
Gross income | 14,091 | 31,691 | 61,691 |
Operating expenses | |||
Rent | 0 | 0 | 0 |
Salary | 0 | 12,000 | 12,000 |
Insurance | 1,750 | 2,000 | 3,000 |
Marketing | 100 | 200 | 300 |
Accounting | 600 | 600 | 600 |
Supplies | 100 | 200 | 300 |
Legal fees | 300 | 400 | 500 |
IT support | 300 | 400 | 500 |
Total | 3,150 | 15,800 | 17,200 |
Operating income | 10,941 | 15,891 | 44,491 |
Interest expense | 0 | 0 | 0 |
Income before tax | 10,941 | 15,891 | 44,491 |
Tax | 3,829 | 5,562 | 15,572 |
Net profit | 7,112 | 10,329 | 28,919 |
Dividend | 0 | 0 | 5,784 |
Gross margin (%) | 47.0% | 52.8% | 56.1% |
Operating margin (%) | 36.5% | 26.5% | 40.4% |
Net income margin (%) | 23.7% | 17.2% | 26.3% |
Dividend payout ratio (%) | 0.00% | 0.00% | 20.00% |
Frame and Wheel refers to the polls about selling prices for the frameset and calculates that a weighted average price is about $2,000 per frameset. Some days, Frame and Wheel believes this to be optimistic and some days not; that is why Frame and Wheel is inclined to let the market decide, through the use of eBay. Below are some preliminary observations on this model.
Frame and Wheel realizes that the notion of building up all the bikes is misplaced, unless there are buyers ready to buy them. Building up ten bikes is not feasible and it will force Frame and Wheel into the "push" model trap as well as financial losses. Building up just two bikes will be feasible, but still costly and risky, because there will not be any identified buyer. Nevertheless, it necessary to have some bikes in the market, and the test riders who are willing to ride these bikes will have to promise to write about their ride and race experiences on their Facebook pages or on a blog as part of the deal. Given that Frame and Wheel will be one of the test riders, one bike will be built out like this: DA7900, Zipp 303 tubular, 3T Team stem and 3T Rotunda carbon bars, Aliante saddle, Vittoria Corsa tires). The other bike will be built out based on the poll (SRAM REd, Zipp 404 clincher, and perhaps what the test rider prefers). Frame and Wheel will explore the idea of using micro suppliers to lower the cost of components so that the retail price of the built up bikes can be as competitive as possible.
The model quantifies the idea of an agency model, which produces a commission for the IBS. The commission is a sum of money (20% of the frameset selling price) that is paid to the IBS for originating a sale. This sum of money is less than the traditional gross margin an IBS makes on a bicycle using the traditional model, but it is justifiable because the IBS is taking no risk. This is how the commission model works: The IBS convinces a consumer (perhaps because a demo bike is at the IBS gratis), the IBS orders the frame set from Frame and Wheel (who either has it or adds it to a list of orders placed every six months), Frame and Wheel pays the IBS a commission on the transaction.
The model also quantifies the interconnection payment paid to the IBS for framesets that are purchased by a consumer from the company's website and delivered to the consumers favorite IBS. This sum is $100; it helps the IBS cover the cost of building the frameset up. For example, the consumer purchases the frame from the company website and has it delivered to his favorite IBS; IBS receives the frameset plus payment of $100 from the company; IBS works with consumer to choose components and wheels if needed.
Finally, the model shows a revenue breakdown for the company. Frame and Wheel expects that 42% of revenue will come from customers through the company's website; 30% from custom built demo bikes for test rider and 25% from IBS orders. Ultimately, Frame and Wheel hopes that the bulk of revenue comes from on line orders and the IBS.
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