HOTL9880 – Entrepreneurship/

Intrapreneurship in Hospitality
and Tourism
Class #8

Dr. Adam Weaver

School of Hospitality and Tourism
Niagara College Canada
The Lean Canvas Model: Cost Structure
and Revenue Streams
 Today’s Key Questions
• What costs are associated with the creation of a business?
• What factors should entrepreneurs keep in mind when
calculating the amount of money they will need for their
start-up investment?
• What are fixed costs and what are variable costs? How are
they different from each other?
• How do businesses generate revenue?
 Cost of Operating a Business
• To run a successful business, you need to determine
and keep track of costs
• Cash coming in should exceed the cash going out
• Typically, we sell products and services for more than
they cost
• You are probably aiming to earn a profit (social
enterprises can be an exception)
 Examples of Costs
• Many costs are associated with the establishment and
growth of a small business
• These costs include start-up purchases, fixed costs, variable
costs, and cash reserves
• How much money will you need to establish your business?
• Start-up investment, or seed capital, is the one-time expense
of opening a business
 Start-Up Investment
• Start-up investment, or seed capital, is the one-time expense of
opening a business
• In the case of a restaurant, start-up expenses would include stoves,
food processors, tables, chairs, silverware, and other items that would
not be replace very often
• Also included might be the one-time cost of purchasing land and
constructing a building
• It might be wise, at first, to rent a property and even (kitchen)
equipment
 Start-Up Investment
• Some entrepreneurs choose to consider the amount of time they put
into getting their business off the group
• This time sunk into business development becomes part of the start-up
investment
• To do so, place a value on your own time per hour and multiply by the
number of hours you think you will be spending to get your business
going
• Remember that the time spent developing your business is time that you
would not be able to work for an employer in order to earn money
 Start-Up Investment: Hot Dog Stand
• For a hot dog stand, the start-up investment might be as follows:
• Hot dog cart = $3,000
• Business licenses = $100
• Business cards and flyers = $200
• Beginning inventory (hot dogs, buns, mustard, and other condiments) = $100
• Cash box and other = $100
• Total start-up investment without contingency = $3,500
• Contingency: 10% of start-up investment = $350
• Total start-up investment with contingency = $3,850
 The Value of Brainstorming
• Try to anticipate every possible cost
• You could talk to other business owners in your industry (please do not
contact other businesses for this course)
• You could ask these business owners: What costs did you fail to anticipate?
• You may discover, for example, that you need licenses and insurance that
you did not expect
• To address contingencies and emergencies, add 10 percent to your total
estimate
 Research the Costs
• You can also do some research to assess your start-up costs
• To what extent are there business plan models for the industry you
have chosen?
• You may need to adapt the cost data to fit your business and obtain
quotations on pricing from potential suppliers
• You do not want to be caught by surprise about costs that you could
have predicted
• Remember to reference the sources that you use
 Think, Pair, Share
• Meet with the other students from your project group for 5
minutes. What are the costs associated with starting up your
proposed business?
 Start-Up Investment Checklist
• Certificates and certifications
• Licenses and permits
• Insurance
• Marketing materials
• Payroll
• Professional fees (accounting and legal)
• Rent
• Office supplies
 Start-Up Investment Checklist
• Utilities
• Website fees
• Building and/or land (if purchased)
• Leasehold improvements
• Equipment (including installation)
• Furniture and fixtures
• Inventory (raw materials or finished goods)
 Start-Up Investment Checklist
• Rent deposit
• Signage
• Utility deposits
• Vehicles
• Contingency funds (10%)
 Keeping a Reserve
• Start-up investment should include one more thing: a cash reserve, an
emergency fund of cash resources that equal at least half your start-
up costs
• For the previously mentioned hot dog cart example, the reserve
would be half of $3,850, or $1,925, raising to $5,775 the total start-up
sum required
• Entrepreneurs must be prepared for the unexpected
• The reserve will provide a moderate cushion of protection when you
need it
 Keeping a Reserve
• If your computer breaks down or your biggest supplier raises prices, you will be
glad you had this money on hand
• Having a cash reserve will also enable you to take advantage of opportunities
• Assume that you own a vintage bed-and-breakfast property, and you hear from a
friend whose elderly relative has died and left her some antique furniture
• She is willing to sell you the furniture for $1,000 which you think would be
perfect for your property
• If you did not have extra cash on hand, you could not have purchased the
furniture
 Predict the Payback Period
• When compiling and analyzing start-up costs, one consideration
will be how long it will take for you to earn back your start-up
investment
• The payback period is an estimate of how long it will take your
business to bring in enough cash to cover the start-up investment
• It is measured in months
• Payback Period = Start-Up Investment/Net Cash Flow Per Month
 Predict the Payback Period: An Example
• A small bubble tea café requires a start-up investment of $65,000
• The business is projecting a net cash flow per month of $13,000
• How many months will it take to make back the start-up
investment?
• Payback Period = Start-Up Investment/Net Cash Flow Per
Month
• What is the correct answer?
 Predict the Payback Period
• Knowing the payback period is important for a start-up or an existing
firm so that the time horizon is known, and the timing of funds
availability is clear
• The payback period does not take into account future earnings,
opportunities for alternative investments, or the overall value of the
company
• It is only based upon net cash
• It is a relatively good indicator of the time needed to earn back the
initial funding
 Variable and Fixed Costs
• Variable costs change based on the volume of units sold or
produced
• They are expenses that vary directly with changes in
production or sales volume
• Fixed costs are expenses that must be paid regardless of
whether sales are being generated (or not)
• Fixed costs are also referred to as fixed operating costs
 Variable Costs
• There are two categories of variable costs
• (1) Cost of goods sold (COGS) or cost of services sold (COSS)
• The cost of materials used to make the product (or deliver the
service)
• The cost of labour used to make the product (or deliver the service)
• (2) Other variable costs
• Commissions or other compensation based on sales volume
• Shipping and handling charges
 Fixed Costs
• Fixed costs stay constant whether you sell many units or very few
• They do not vary with changes in the volume of production or sales
• There is rent to be paid as well as salaries, insurance, and equipment
(rented or purchased)
• A deli has to pay the same rent each month whether it sells one
sandwich or a 1,000 sandwiches
• However, the owner of the deli can change the cost of the rent by
moving, or he/she can increase or decrease the advertising budget
 Fixed Costs
• There are seven common fixed operating costs:
• Utilities (gas, electricity, telephone service, and Internet service)
• Salaries (indirect labour)
• Advertising
• Insurance
• Interest
• Rent
• Depreciation (the percentage of value of an asset subtracted each year until the value
become zero, to reflect wear and tear on the asset)
 Fixed Costs: They Sometimes Change
Over Time
• You pay our restaurant manager $5,500 per month in salary
• You have to pay that amount whether the restaurant sells one meal or
a several thousand
• The cost is fixed
• Fixed operating costs can change over time; at some point, you may
give your restaurant manager a raise
• You may hire a new manager at a lower salary (should your current
manager resign)
• The word “fixed” does not mean the cost never changes
 Fixed Costs: They Sometimes Change
Over Time
• (1) Advertising costs. The cost of advertising will change based on
decisions the entrepreneur makes about how much to spend to reach
consumers
• The cost of advertising is not directly tied to current sales (though,
poor sales may prompt an increase in advertising)
• (2) Heating and cooling costs. The price of heating and cooling goes
up or down
• Factors such as the weather and utility prices play a role, not the
amount of revenue the business earns
 The Dangers of Fixed Costs
• If a business does not have enough sales to cover its fixed costs, it will
lose money
• If losses continue, the business will have to close
• Fixed costs are “dangerous” (they represent a risk) because they must
be paid whether or not the business is making enough sales/money
to cover them
• Variable costs, in contrast, do not threaten a business’s survival
because they are proportional to sales
 The Impact of Inflation
• Inflation is the gradual, continuous increase in the prices of products and
services, usually resulting from a rise in the amount of money in circulation in an
economy
• If you save $2,000 per year to buy new tables and chairs (which cost $10,000 the
last time you bought them) for your restaurant, but find at the end of five years
that the cost of replacing them has risen to $15,000 because of inflation, you
could find it a challenge to buy the much-needed replacements
• Keep up with economic trends by reading the financial section in the newspapers
as well as financial magazines
• By staying up to date on what is happening, you can invest wisely
Revenue Streams
 Modes of Revenue Generation
• A revenue model helps determine how to convert the value your customer
receives into money the customer gives to you
• A revenue model is a company’s strategy for making money from the value it
provides to customers
• (1) You can sell products or services for purchase (a one-time transaction)
• You can charge an admission fee for one visit
• (2) You use a subscription-based model for the fees you charge (visitors can
access your service as many times as they wish within the subscription period)
• What about a weekly or monthly pass?
 Modes of Revenue Generation
• (3) You can generate revenue by selling sponsored space (website space or
physical space)
• (4) In the “freemium” model, the product is initially free but, eventually, the
user must pay to use the full product/have full functionality
• (5) The “bait” model: You first sell a cheap product and then enable
customers to buy expensive parts (for example, men’s razors)
• (6) The license model: You invent something once and you make money on
it again and again. A photographer takes a picture, and he/she can ask for
money if other people use his/her picture to put on a website
 Modes of Revenue Generation
• (7) The rental model: You use certain goods rarely, so it is often not worthwhile to buy them
• In that case, some people own these goods and they, for a certain price, want to rent them
to you for a certain period
• (8) The consumption model: The customer pays for what he/she consumes. With gas and
electric companies, you pay for the amount you consume
• (9) The brokerage or commission model: PayPal receives a commission for every successful
transaction that goes through its platform
• (10) The bundle model: You sell a certain product and in doing so you immediately sell
a related product. When you book a package vacation, you can sometimes buy travel
insurance immediately
 Modes of Revenue Generation
• (11) You create something customized for the customer. Consider a running shoe that
can be personalized (with a name) or a customer formulating his or her own shampoo
• (12) The donation model: People donate money to you. You are completely
dependent on the goodwill people have because they are free to give how much they
want. Wikipedia is built entirely around user donations
• (13) The arbitrage model: You profit from the price difference between two markets
supplying the same goods
• You buy a product at a cheap price from one platform and sell it on a different platform
(such as Amazon) in other countries
 What Price Will You Charge?
• What price will you charge for your product or service?
• Entrepreneurs should consider not only the economics of
pricing but also the psychology of pricing
• Simply undercutting your competitors’ prices will not
necessarily win you the largest market share
• Study the prices and pricing strategies of your (potential)
competitors
 What Price Will You Charge?
• (1) Value Pricing Strategy: It offers “more for less” by underscoring a
product’s quality while at the same time featuring its price
• Value pricing is not simply price cutting
• It means finding the balance between quality and price that will give
your target customers the value they seek
• (2) Prestige Pricing Strategy: When a firm sets high prices on its
products or services to send a message about premium quality, it is
using a prestige pricing strategy
 What Price Will You Charge?
• (3) Cost-Plus Pricing Strategy: This method is one of the most used
pricing strategies; you take your cost and add a desired profit margin
• It is the simplest approach to calculate once your costs are known and
your desired rate of return is established
• (4) Meet-or-Beat the Competition Pricing Strategy: It entails
constantly matching or undercutting the prices of your competition
• (5) Follow-the-Leader Pricing Strategy: It is similar to a meet-or-beat
the competition pricing strategy but with a particular competitor as
the model for pricing
 Today’s Key Questions
• What costs are associated with the creation of a business?
• What factors should entrepreneurs keep in mind when
calculating the amount of money they will need for their
start-up investment?
• What are fixed costs and what are variable costs? How are
they different from each other?
• How do businesses generate revenue?
 Possible Quiz Question
• Why is an understanding of money – costs as well as
ways to earn revenue – important for entrepreneurs?