This is a simple “How to Report” to show you what it is you will need to know when starting your new business. In this passage we are going to be reviewing 4 different business models to help you make better decision when starting your new business. Let’s start with Porters five forces model.
Porter’s five forces model (Figure 1) is a business strategy tool that helps a person analyze all the different strengths, weaknesses, pros and cons of the industry and your business. Let’s begging by looking at Potential Entrants, in here we study how hard it is to enter, if you need any knowledge, and if there are any barriers to enter. If entering the market is very easy then this becomes a bad thing because it will lead to lots of competition which means lower income to stay competitive. Next, let’s examine the buyers, is there a high demand for the product, is it price sensitive, easy to switch to another brand. By having a high price sensitive product you won’t have much control over your selling price. If the competition brings down their price so will you because with high price sensitive products the customer is looking for the better price. To continue, we have threat of substitution, can the customer substitute your product or service by doing it themselves if they can what is the ease of them doing it. The easier your product/service is to substitute the least of the need/worth for it. Also, Porter identified Supplier Power, is there a number of suppliers, how unique is the product/service, is it easy to switch from suppliers, and is it costly to switch from supplier. Here you analyze how much power the supplier has over you or how much power you have over the supplier; if the industry doesn’t have many suppliers then they could be a factor in driving up prices. Last, Porter identified Industry Rivalry, is there a lot of competition in the industry and how does your product differ from the competition. If there is a lot of competition in the industry you will constantly have to be creative to make your product stand out from the other ones. Next, we will be analyzing the break-even point. The break-even point can be defined as the levels of sales where total costs equal to total revenue. Another way to put it is how many items you must sell to cover all expenses. As you can see in Figure 2 the red dot indicates the break-even point for that certain product/service anything under that the company is at a loss and over that at a profit. You can find out your break even sales in units and dollars. The formulas are as follow:
Unit contribution margin(ucm)= selling price-unit variable cost.
Contribution margin ratio=
Break-even sales in units=
Break-even sales in dollars=
This is a very important tool to learn so you can price your product/service correctly. Once you know how many units of the item you must sell to break-even you can consider if the product is worth the time and will be profitable or not.
To continue with, we will be analyzing the Product