The previous post covers the main questions the founder and I asked ourselves while thinking about the potential size of our “pie”. It took us a while, but once that was settled, we proceeded to understand at what cost and how on earth was Asan going to actually serve it.
This is where it gets interesting. Now, Asan is already selling products in India and has been for the last few months so understanding the costs of producing and distributing was easier based on current results. The main challenge is understanding where this is going and how it changes over time. Here are a few questions that might help when doing a similar exercise:
1. What is your unit of analysis? The first thing you need to understand is what is your ultimate unit of analysis, that is what unit is going to help you understand if the business is actually profitable- is it profitable to produce one more unit? This element is highly dependent on the nature of your business model. So sit down and think, is it a user? A product? For example, typical software companies think of users as their unit of analysis. Once you’ve nailed this, you will be able to allocate your variable and fixed costs appropriately and assess the well known unit economics of your business.
2. How do your gross margins change over time? Economies of scale! It becomes increasingly important to understand how your main production costs change over time in order to have a clear view of how your gross margins change over time.
3. How do you project administrative costs? This is a very big and important questions for early stages companies, mainly because the way that they are currently running their business is probably not at all representative of how it will be managed once they start growing. Common ways to project main SG&A costs are as % of total sales, assuming a % growth based on industry standards, assuming % growth based on inflation, etc. An interesting discussion to have here is how we think the employee base will grow. How do you see the operational/development/management needs evolve with time?
These are VERY basic questions, but when you need to start from scratch, this could be a good place to start!
