Video: Other cost considerations and model validationCopy

There are other cost considerations worth discussing, and here we will discuss them. We will also discuss how you may validate your model.https://youtu.be/gYvafIcfCF0

Transcript

Now, what I want to do is look at; we’ve looked at all those assumptions; I want to look at our labor. I want to look at some assumptions around those direct costs and this is this is that fancy title like cost of goods sold or what we often refer to as cogs C-O-G-S. But, these are really just direct costs. This is actually back to our frosting example. So, this is a good so you know, we think about the total number of units sold that came right from our revenue page. You remember from our revenue we knew that we had some sales through stores, some sales through amazon, and some sales directly from our website; and what we did was we added up each of those and we and we put that we know that in q1 we’re going to sell 1400 units, and we know that because we’ve modeled it on the revenue side that we’re going to sell 1400 units. But now we’re looking at the cost side of that. What’s going to take for us to, you know, produce those 1400 cans of frosting that we know we’re going to sell on the revenues, on the revenue side, okay?

So, here we have 1400 units’ products. So, like can’t, nope, I don’t. I’m going to just walk through it so 1400 cans of frosting we know the ingredients are going to cost us 2.25. So, that’s the stuff inside the frosting; sugar and the oil and whatever. So, the total cost fourteen hundred times two dollars and twenty five cents is three thousand one hundred fifty. And, you can see ingredients, um, over time are pretty static. We think, maybe, by the second half of year or two, we might be able to drop that cost a little bit. But, still like not much. And, some of that’s really based on, you know, how much volume we have, okay? Then, we have packaging costs, right? You got to put the frosting in something. So, for every unit we know that it’s going to be 10 cents. So, our total packaging costs 1400 units times 10 cents that’s going to be the 140 that’s going to be our packaging costs.

Then, we have production cost that’s going to be like the labor that goes into, and it’s a variable cost because it’s not, you know, it’s a machine or even if it’s a human, we know that, you know, that’s going to vary a lot, by, it’s going to vary. Every single unit we produce, we have to pay the production cost and that’s going to be 50 cents for, you know, for this example. Now, this one interestingly, you saw, you know, the view that the ingredients cost don’t go down much even over time. The packaging costs really don’t go down at all. But, look, production costs really they can go down pretty steeply. We start at 50, 50 cents per unit in the first quarter when we’re only producing 1400 units, but by the time we get down to producing 3,000 units like pretty much double, right? Not a huge jump in volume, but uh, but a big enough jump in volume that it really drops our production costs down.

So, something to keep in mind that you want to look at not every unit cost is going to go down by the same amount. Some things are going to create pretty stagnant, like that plastic container that the frosting goes in. It just is what it is. But, production costs may go down one more time, okay? Then, you got that shipping cost again, 50 cents per, that one’s not moving at all, and shipping costs often don’t because you’re relying typically a third party for shipping. So, there you go, there’s our total. So, when you add up this ingredients cost and the packaging cost and the production cost, the shipping cost that’s going to give you your total cost based on this unit sold. So, we see that the 1400 times, oh, you know when we add all those up we get that total cost is 4 690 dollars to produce all those units. But, we also know that we can add the 2.25, that’s our ingredients per unit, and the 10 cents, the packaging per unit production cost 50 cents, and the shipping cost 50 cents and we get 3.35 cents per unit, and that will help us track over time how our unit cost changes. These are all variable because every single unit we produce, we’re adding that additional cost pretty directly, okay? So, that’s kind of what it looks like to, whoops, to build out a product cost assumption.

Let’s talk about a little bit about marketing, because I think marketing is really important, um, and really is going to be a key driver often of businesses. We saw when we talked about, you know, revenue, we built a bunch of assumptions that kind of looked at like direct sales people. So, you kind of got a feel for, you know, when you, when you have sales people, you know, make a bunch of assumptions about sales people. You’re going to want to then put that into your costs, and you can pull that from the assumptions you made on the revenue side. But, there are other kind of more direct marketing costs. So, here’s just a couple of examples. So, the way that we’ve laid this out is there a number of different tactics you can use; there’s public relations, like getting your, you know, your name in a newspaper trade marketing that can be like, if you’re selling, this is back to, this is pretty quick.

So, we’re talking about salons. So, there are, you know, the things that the makeup show there are these sort of you know, shows these are places that people who buy salon equipment go to. You can advertise at those places. So, thinking about are there a group of people who often buy the kind of thing that you’re selling and can you get in their magazines or in there, in their world print, ad print and online? Also in the sort of trend magazines online ads directly to professionals paid searches that would be like a Google kind of thing? Um, and then obviously, uh, direct and really important. In this marketing, these set of tactics you can kind of see this, but there’s actually two sets of consumers of this product because this is an online platform what they call a two-sided marketplace. You’ve got the salons you want to get, so there’s some advertising and marketing costs about that are trying to attract salons.

But, they are also trying to attract the individual consumers and go on the platform and book the salon appointment; so, in this case, you’re actually, you’ve got some tactics directed at the, like the end user; the booker of this appointment. And then, some marketing tactics that are really at the salons and some that actually do both like these you know? PR is often going to kind of be more general. I’m going to, you know, cover both sides, okay? So, again you know some things to keep in mind; monthly how much are you going to pay per month? You know, and then you have to make sure to multiply that by three, you know? Is this a one-time cost, or is it, you know, every other month is a six-time cost depending on, you know, maybe this magazine publishes every other month. So, just thinking a little bit about the cadence of these marketing activities and then really thinking about using, you know, here, you know, the average cost per click for beauty and industry keywords average is $1.20 and she got that information from edwards.google.com. and so, you know, these are direct links to the assumptions of places that she’s getting this information, and there is information out there, like, you just have to go searching for it in order to really, you know, find those like good underlying assumptions.