Presentación de Erik Simanis & Brian Kurtz del Taller: "Running the Right Numbers at the BoP" Durante el ELAC 2015, en México, D.F.

1. *So
Erik Simanis, MBA, PhD
Partner, The Intrapreneur Lab
www.eriksimanis.com
Running the RIGHT Numbers at the
Bottom of the Pyramid

2. © 2015, Erik Simanis 2
Conven)onal
“top-­‐down”
approaches
to
making
the
business
case
conceal
unrealis)c
assump)ons
about
four
key
business
unit
variables
(R,
B,
T,
&
L)
that
oGen
dictate
profitability.
Companies
go
to
pilot
with
products
at
price
points/margins
that
have
no
path
to
profitability.
The Problem

3. © 2015, Erik Simanis 3

4. © 2015, Erik Simanis 4
Top-Down Business Case
Total
Market
Size
Yr
1
Conversion
Rate
Avg
Annual
Consump)on
X
=
Total
Volume
Yr
1
X
Total
Volume
Current
COGS
X
=
Total
Contribu3on
Yr
1
X
NPV
analysis,
assuming
an
ini)al
cap
ex
cost
and
standard
CAGR
in
volumes
over
investment
period
Lower
Margin
Fixes
the
Price
Point

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6. © 2015, Erik Simanis 6
The Accelerating Treadmill
Travel
further
and
further
away
Hire
more
people
Opera)onal
costs
escalate
Not
hiXng
target
sales
Raises
target
sales

7. © 2015, Erik Simanis 7
The Traditional Channel
Distributor
Business
Retailer
Business
B2C
MNC
B2B
MNC
Professional
MarketingLow
Touch
Channel

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The Channel Gap
B2C
MNC
B2B
MNC
Low-Income
Mass Market
?
High Touch

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Channel Constraints
Poor Infrastructure Pushes
Down the Maximum Efficient
Scale of the Business Unit
High-touch Sales Drives Up
the Business Unit’s Fixed
Labor Cost
Scale
Cost
Structure

10. © 2015, Erik Simanis 10
?
The Business Unit
=
HEAD
OFFICE
BUSINESS UNIT
Territory 1
BUSINESS UNIT
Territory 2
BUSINESS UNIT
Territory ~ n
BUSINESS UNIT
Territory 4
BUSINESS UNIT
Territory 3
Coordina(on)&)
Scale)
Economies)
Product(
Cash(
Product(
Cash(
Product(
Cash(
Product(
Cash(
Product(
Cash(

11. © 2015, Erik Simanis 11
Village
1
Village
3
Village
4
Village
8
Village
7
Village
5
Village
9
Village
2
Price
=
$1.00/HH/MO
Margin
=
20%
Cont/HH/MO
=
$0.20
B/E
Penetra)on:
10,000
HH
%
of
Total
Pop
=
100%
Price
=
$1.00/HH/MO
Margin
=
50%
Cont/HH/MO
=
$0.50
B/E
Penetra)on:
4,000
HH
%
of
Total
Pop
=
40%
Price
=
$3.00/HH/MO
Margin
=
50%
Cont/HH/MO
=
$1.50
B/E
Penetra)on:
1,333
HH
%
of
Total
Pop
=
13%
REACHABLE
TARGET
POPULATION:
10,000
HH
Village
10
Business
Unit
(Branch)
BIZ
UNIT
OPERATIONAL
COSTS/MO:
$2,000
Low Margin, High Volume Myth
Village
6

12. © 2015, Erik Simanis 12
Business Unit Economic Drivers
Reachable
Market
(R)
Monthly
Customer
Transac3ons
(T)
Customer
Base
(B)
Monthly
Customer
Sales
Load
(L)
REVENUES
COSTS
Business
Unit
Profits
+
+
=

13. © 2015, Erik Simanis 13
Business
Unit’s
Whole
Cost
Structure
Es)mate
Business
Unit’s
Opera)onal
Costs
Allocate
Head
Office’s
Opera)onal
Costs
Es)mate
Business
Unit’s
Investment
Costs
Allocate
Head
Office’s
Investment
Costs
TOTAL
OPERATIONAL
COSTS
TOTAL
INVESTMENT
COSTS
Bound
the
Business
Unit
&
Head
Office
Calculate
Required
Price
&
Margin
P&L
NPV
+
Bottom-Up Modeling

14. © 2015, Erik Simanis 14

15. © 2015, Erik Simanis 15
1. Bound the Biz Unit (a)
Fix
Geographical
Reach
(R)

16. © 2015, Erik Simanis 16
Business Unit Reach (Total # Households in Area) 150,000
% BOP Households 57%
% Households with Children 30%
Available Target Market (Households) Per Biz Unit 25,470
Available Target Market 25,470
Steady State Penetration Rate 15%
Customer Base: 3,821
Customer Base 3,821
Product Lifespan (months) 1
Repurchase Rate 75%
Monthly Customer Transactions: 2,865
Business Unit Target Market
Business Unit Customer Base At Scale
Business Unit Monthly Transactions
1. Bound The Biz Unit (b)

17. © 2015, Erik Simanis 17
Business Unit Reach (Total # Households in Area) 150,000
% BOP Households 57%
% Households with Children 30%
Available Target Market (Households) Per Biz Unit 25,470
Available Target Market 25,470
Steady State Penetration Rate 15%
Customer Base: 3,821
Customer Base 3,821
Product Lifespan (months) 1
Repurchase Rate 75%
Monthly Customer Transactions: 2,865
Business Unit Target Market
Business Unit Customer Base At Scale
Business Unit Monthly Transactions
Customer
Base
(B)
=
Avail.
Target
Mkt
x
Steady-­‐State
Penetra3on
Rate
1. Bound The Biz Unit (b)

18. © 2015, Erik Simanis 18
Business Unit Reach (Total # Households in Area) 150,000
% BOP Households 57%
% Households with Children 30%
Available Target Market (Households) Per Biz Unit 25,470
Available Target Market 25,470
Steady State Penetration Rate 15%
Customer Base: 3,821
Customer Base 3,821
Product Lifespan (months) 1
Repurchase Rate 75%
Monthly Customer Transactions: 2,865
Business Unit Target Market
Business Unit Customer Base At Scale
Business Unit Monthly Transactions
1. Bound The Biz Unit (b)
Transac3ons/Mo
(T)
=
Customer
Base
x
Prod
Lifespan
x
Repurchase
Rate

19. © 2015, Erik Simanis 19
Business Unit Reach (Total # Households in Area) 150,000
% BOP Households 57%
% Households with Children 30%
Available Target Market (Households) Per Biz Unit 25,470
Available Target Market 25,470
Steady State Penetration Rate 15%
Customer Base: 3,821
Customer Base 3,821
Product Lifespan (months) 1
Repurchase Rate 75%
Monthly Customer Transactions: 2,865
Business Unit Target Market
Business Unit Customer Base At Scale
Business Unit Monthly Transactions
1. Bound The Head Office (c)
HEAD
OFFICE
Bangladesh Urban Population (Households) 6,065,000
Business Unit Reach 150,000
Business Units at Scale: 41
# Business Units at Scale

20. © 2015, Erik Simanis 20
Salespeople Per Business Unit
Total Customer Transctions/Mo 2865
Days/Month Available For Customer Visits 15
Customer Visits/Day/Salesperson 5
Size of Customer Group 2
Required # of Salespeople: 20
HEAD
OFFICE
BUSINESS
UNIT
2: Total Operational Costs (a)
Set
Customer
Load/
Salesperson
(L)
Set
Biz
Unit
Load/
Territory
Manager
Business Units at Scale 41
Business Unit Load/Territory Manager 6
# Territory Managers: 7
Territory Managers

21. © 2015, Erik Simanis 21
2: Total Operational Costs (b)
Unit Cost
(Taka) Units
Total
(Taka)
Total
(USD)
Wage + Benefits:
General Manager 40,000 1 40,000 500
Sales Supervisors 18,000 2 36,000 450
Salespeople 10,000 20 200,000 2,500
Delivery People 7,000 5 35,000 438
Transportation Allowance:
General Manager 200 22 4,400 55
Sales Supervisors 150 44 6,600 83
Salespeople 100 440 44,000 550
Delivery People 50 110 5,500 69
Phone Allowance:
General Manager 200 22 4,400 55
Sales Supervisors 150 44 6,600 83
Salespeople 75 440 33,000 413
Delivery People 50 110 5,500 69
421,000 5,263
Monthly HR Expense for Business Unit
Item
Delivery Cycles
Computers
Tablets
Phones
Printer
Office Equip/Furniture
Total:
Monthly Depreciation Expense for Business Unit
Unit Cost
(USD) Yrs Dep.
1,875 5
2,625 3
6,000 3
719 3
300 3
1,250 3
Monthly Depreciation Expense for Business Unit
Mos Dep
60
36
36
36
36
36
Monthly Depreciation Expense for Business Unit
Dep. Expense
(Monthly-USD)
31
73
167
20
8
35
334
Monthly Depreciation Expense for Business Unit
Delivery Cycles Maintenance
Sales Uniforms
Rent
Marketing (per Customer)
SGA
Monthly General Operating Costs for
Business Unit
Unit Cost
(USD) Units
10 5
4 13
200 1
0.30 2,865
65 1
Monthly General Operating Costs for
Business Unit
Total
(USD)
50
47
200
860
65
1,221
Monthly General Operating Costs for
Business Unit
1.
HR
Expense
2.
CAP
Asset
Dep.
Expenses
3.
Gen.
Opera3ng
Expense
HEAD
OFFICE
(Allocation)
BUSINESS
UNIT
+

22. © 2015, Erik Simanis 22
3: Total Investment Costs
1.
Working
Capital
Expense
HEAD
OFFICE
(Allocation)
BUSINESS
UNIT
+
USD
Human Resource Expense/Mo 5,623
General Operating Expense/Mo 1,221
Total 6,844
Average Monthly Working Cap Exp. 3,422
Months to Reach Target Sales 16
Total Start-up Working Capital Expense 54,756
Investment Period (Mos) 60
Monthly Start-up Working Cap Exp 913
Monthly Start-Up Working Capital Expense
Business Unit

23. © 2015, Erik Simanis 23
3: Total Investment Costs
1.
Working
Capital
Expense
HEAD
OFFICE
(Allocation)
BUSINESS
UNIT
+
2.
Investment
Returns
USD
Working Capital 54,756
Capital Assets 12,769
Total 67,525
Target Rate of Return 35%
Required Return on Investment 23,634
Investment Period (Mos) 60
Monthly Investment Returns 394
Monthly Required Investment Returns Business
Unit
USD
Human Resource Expense/Mo 5,623
General Operating Expense/Mo 1,221
Total 6,844
Average Monthly Working Cap Exp. 3,422
Months to Reach Target Sales 16
Total Start-up Working Capital Expense 54,756
Investment Period (Mos) 60
Monthly Start-up Working Cap Exp 913
Monthly Start-Up Working Capital Expense
Business Unit

24. © 2015, Erik Simanis 24
3: Total Investment Costs
1.
Working
Capital
Expense
HEAD
OFFICE
(Allocation)
BUSINESS
UNIT
+
2.
Investment
Returns
USD
Working Capital 54,756
Capital Assets 12,769
Total 67,525
Target Rate of Return 35%
Required Return on Investment 23,634
Investment Period (Mos) 60
Monthly Investment Returns 394
Monthly Required Investment Returns Business
Unit
USD
Human Resource Expense/Mo 5,623
General Operating Expense/Mo 1,221
Total 6,844
Average Monthly Working Cap Exp. 3,422
Months to Reach Target Sales 16
Total Start-up Working Capital Expense 54,756
Investment Period (Mos) 60
Monthly Start-up Working Cap Exp 913
Monthly Start-Up Working Capital Expense
Business Unit
3.
Income
Tax
Monthly Working Cap + Investment Returns 1,307
Tax Rate 28%
359
Monthly Income Taxes
=
Profit
Ader
Tax

25. © 2015, Erik Simanis 25
Product Bundle 1 2.65
Packaging & Label 0.05
Coupon 0.02
Loyalty Awards 0.63
3.35
Total Operating (Biz Unit + HO Allocation) 7,183
Total Investment (Biz Unit + HO Allocation) 1,749
# Sales Transactions/Mo 2,865
3.12
Variable Costs/Transaction 3.35
Whole Costs/Transaction 3.12
Target Price: 6.46
Membership Price 6.46
Total Variable Costs 3.35
Target GM: 48%
Target Price & Margin
1. Variable Costs/Transaction
2. Biz Unit Whole Costs/Transaction
Target Price
Target Gross Margin
4: Set Required Price & Margin (Method A)
Variable
Costs
Per
Transac3on
Whole
Costs
Per
Transac3on
Required
Price
&
Margin
+
=
4: Set Required Price & Margin (Method A)

26. © 2015, Erik Simanis 26
Total Operational Cost/Mo 7,183
Total Investment Cost/Mo 1,749
Transactions/Mo 2,865
Cost/Transaction 3.12
Price $3.75 $5.00 $6.46 $8.00
Gross Margin 83% 62% 48% 39%
Contribution $3.12 $3.12 $3.12 $3.12
Cost of Goods Sold Limit $0.63 $1.88 $3.34 $4.88
Method B: Target Price & Margin
4: Set Required Price & Margin (Method B)
=
Required
Contribu)on/Trans.
Contribution $3.12 $3.12 $3.12 $3.12
Cost of Goods Sold Limit $0.63 $1.88 $3.34 $4.88

27. © 2015, Erik Simanis 27
OPERATING DRIVERS Monthly %
Unit Sales
Eye Glass Packages
Basic 298 25%
Premium 595 50%
Deluxe 298 25%
TOTAL: 1,190 100%
Add-Ons %
Lenses 1,488 25%
Arms 1,488 25%
Accessories 2,975 50%
TOTAL: 5,950 100%
GROSS SALES RS %
Eye Glass Packages 1,128,442 52.7%
Add-Ons 1,012,056 47.3%
TOTAL 2,140,498 100%
Whole Cost P&L
Creating a Whole Cost P&L (a)

28. © 2015, Erik Simanis 28
COST OF GOODS SOLD RS %
Eye Glass Packages
Basic 90,738 7.2%
Premium 324,275 25.8%
Deluxe 248,413 19.7%
Add-Ons
Lenses 260,313 20.7%
Arms 111,563 8.9%
Accessories 223,125 17.7%
TOTAL 1,258,425 100%
CONTRIBUTION RS %
Eye Glass Packages 465,017 53%
Add-Ons 417,056 47%
TOTAL 882,073 100%
WHOLE COSTS RS %
I. TOTAL OPERATIONAL COSTS
BUSINESS UNIT:
Human Resources 383,700 43.5%
Capital Asset Depreciation 69,306 7.9%
General Operating 198,959 22.6%
HEAD OFFICE, ALLOCATION:
Human Resources 21,392 2.4%
Capital Asset Depreciation 743 0.1%
General Operating 8,928 1.0%
TOTAL: 683,026 77.4%
II. TOTAL INVESTMENT COSTS
BUSINESS UNIT:
Working Capital 97,110 11.0%
Investment Returns 59,023 6.7%
HEAD OFFICE, ALLOCATION:
Working Capital 24,256 2.7%
Investment Returns 731 0.1%
TOTAL: 181,120 20.5%
III. TAXES
BUSINESS UNIT 17,707 2.0%
HEAD OFFICE, ALLOCATION 219 0.0%
TOTAL TAXES 17,926 2.0%
WHOLE COSTS 882,073 100%
SURPLUS PROFITS 0
Creating a Whole Cost P&L (b)

29. *So
Erik Simanis, MBA, PhD
Partner, The Intrapreneur Lab
www.eriksimanis.com
Running the RIGHT Numbers at the
Bottom of the Pyramid