Please Read Instructions: Identify revenue streams for the group's proposed solution, including the unit and volume being sold, and the price each unit will sell for. Outline sales projection conside

Discussion 2 Financial Lesson & Example

Objective

The objective of this lesson is to assist you with research and identify the sales, expenses, and net profit of the solution your group determined in Assignment 1.

It would be helpful to have the Financial Workbook open when reviewing this document.

Determining the Unit

When identifying your revenue stream(s), you will first need to determine what your unit of measure is and what value it brings to the organization. Ask yourself how the solution will add value to the company. Will it increase sales? Or decrease costs? In any event, the solution will impact the bottom line. In order to determine by how much, the solution has to be quantified by a unit.

With the solution in mind, what will the company sell or how will it reduce costs? Is it a product or service? A product is tangible and itself is the unit. For example, Activision Blizzard develops and sells video games. One video game is considered a unit.

A unit of service is intangible and is measured differently. Examples of services are hours, or memberships, or a fee. For example, Pandora sells memberships and one membership is considered a unit. Facebook monetizes its website by selling advertisement space. The space of the advertisement and the frequency by which it is shown on the website is considered the unit.

Sales Projections - Determining the Sales or Unit Price

Once you’ve identified your revenue stream(s), you will need to determine how much you are going to sell your product or service for. The unit price is the price you will sell each unit for to the consumer.

For this assignment, we are not requiring you to be exact on the unit price, however, we do expect a reasonable amount of research to determine the unit sale price. You will be expected to explain the logic and research conducted to determine the unit price and unit cost (the costs you will have that are associated with the production of the product or service).

If your solution is to increase sales of the current product or service, the unit price will be whatever they sell if for currently. If the unit is enhanced in some way, the current unit price should be used as the base by which you determine the new unit price. However, if the solution calls for a new product or service, research is needed to determine what the unit can be sold for. Use the research you have completed thus far in the internal and external analysis. Does the competition currently sell the unit? If so, this can be a base for the unit price. Is there a demand from the customer for the unit? How large is the customer base? Think about the psychographics of the customer. How much can they afford to pay for the product or service? Lastly, how much does it cost to produce each unit? Considering this, how much do you need to sell each unit to earn a profit?

Unit Volume - How are Sales Projected?

Your unit volume is used to determine the number of units you expect to sell over a given time. For the sake of this project, you’ll be projecting a yearly volume.

Again, use the research conducted in the internal and external analysis to project the sales volume you will have in years 1, 2 and 3. If the competition is selling the same product or service, how many customers can be pulled from the competition? What is the competitive advantage that is offered over the competition? What does the customer landscape look like that demands the product/service? Have there been previous sales of a similar product within the company and how can the results be duplicated or improved upon? In other words, companies typically use prior year history to project unit sales. Sales typically increase based on unit cost, demand in the market, economic conditions and business trends.

Expenses

As with the sales price, think about the unit that is being sold. Does it need to be designed by a designer and then built by a manufacturer? If the unit is currently being sold, what operational changes need to take place if sales increase? Would the company need to increase staff, acquire a new building, or equipment? How does the company sell the product (advertising) and once they buy it, how does the unit reach the customer (distribution)? Each product has some sort of risk/legal ramification linked to it. Consider licensing, insurance, contractual, intellectual property considerations, and established or proposed laws as factors.

If the solution includes collaboration with another company, consider the amount the company would have to pay the collaborator for the partnership. For example, an artist uses CD Baby to sell and distribute their digital downloads. Each download would be considered a unit and CD Baby would receive a percentage of each download sold.

Let’s look at the release of a Blizzard video game as another example. The game itself has to be designed and tested and would require hours of time by a gaming developer(s). Therefore, annual salary would be considered in the Employees section of the Expenses tab. The assumption is the game will be released on a compact disc. The cost of the actual disc and the services of copying the game onto the disc would be considered on the Distribution line of the Marketing section. Legally, Blizzard would contract with the employee(s), possibly a non-compete and the game would be patented. All of the associated costs would be captured in the Professional Services section. Rounding out the product lifecycle is advertising and shipping. The assumption is Online Advertising on Twitch, GameTrailers, and N4G. The cost of the creating the advertisement and the spot would be on the Online Advertising line of the Marketing section.

What if the Solution does not affect Sales?

It is possible that a solution impacts the bottom line not through an increase in sales but a decrease in costs. For example, due to the current digital distribution trend in the market, a solution for Virgin Atlantic is to stop distribution of music through physical CD’s. This solution saves the company $.05 per unit sold because there is no product to manufacture, store or distribute. Currently, Virgin sells 200M CDs annually. This savings impacts the bottom line by $10M.

Significance of the Financial Standings (from Section 2)

Understanding the trends in a company’s Balance Sheet and Income Statement is significant before and after a company proposes a change. A consistent decrease in sales or an increase in debt are indicators to make business changes. A decrease in sales naturally indicates the company is losing customers and money. Slight changes are normal, however, if the changes sway more than the competition, a new strategy needs to be put in place. In addition to reviewing sales and debt figures, a company’s stock price is a good indicator of company success. The higher the stock’s price in the market compared to its initial face value (the price it sold for the first time available on the market), the greater investor confidence in it. If investors continue to buy the stock, the more capital it will have to grow and prosper.

Let’s put this into practice: Pandora Example

To follow along with this example, you’ll want to have the Pandora Workbook Example file open.

Pandora wants to increase sales and stay competitive in the marketplace. A possible solution is to introduce a Platinum level of the Pandora One membership. Each membership includes ad and check-in free service and the member can choose to listen to one artist, not several within the genre. Currently, the Pandora One membership sells for $6.99 per month and following several focus group surveys and a competitive analysis, it is determined consumers will pay $7.99 per month for the Platinum level. Currently, there are 33 million members of Pandora’s free service. When introduced, the Pandora One memberships captured 20% of the free service consumers. We are projecting the Platinum level will capture 10% of the market or 3.3 million members in year 1 and taper off in years 2 and 3. The costs associated to starting the Platinum level membership includes:

Three (3) IT Professionals $1.9M Annually for 1 year

Executive/ Customer Support Salaries $1.5M Annually for 1 year

Increased Storage/Intellectual Prop $. 25 Per member per month

Advertising Campaign $5.0M One time cost

Total Cost of PO Platinum $18.3 Million