CS73N Note on Business Plans

Created April 2005 by Gio Wiederhold, renamed 7 April 2006, updated 14,16 April 2006, material added 1 May 2006, Oct 2007 needs cleanup for consistency.

Also see Notes 07 on Business Plans , started by Avron Barr, 2 May 2006 

Business Plans

Formally, a business plan is a document to present to investors showing why they should spend money on you and your ideas. For the class we just want to see what you expect the costs and benefits to be.

To bring a common metric into a business plan, money is used. Costs of your time, resources, as computers, other people's time, etc. needed are on one side; benefits appear on the other side. If the benefits are societal, then you still want to able to compare with other means that can achieve those benefits.

Since your project or business should be sustainable over a long term, you will need to estimate cost and benefits for many years (or quarters) into the future.

Business discussion

First you have to describe your business:
What does it provide?
Is it for profit? By subscription, pay-per-use, sales-commissions, advertising?

If not who will pay for it? A sponsor, donations, you yourself -- your time?

Location of a business? Consider costs, shipping, credibility, returns

What's the equivalent of location on the web? Virtual communities: sufferers from arthritis, multiuser game players. Or a credible institution, like a Stanford environmental group. 

Will you sell tangibles (require shipping), or intangibles?

Cost of shipping large amounts of tangibles has gone down, due to containerization. Made it more difficult for small enterprises.

Income sources

If it is for a public benefit, is there already an organization that serves the area?

•  Will there be benefits or conflicts with such an organization?

If it is a business: Will it derive income from

• Sales of information, by use or by subscription?
• Sales of goods, by commission or obtain direct support from the business?
• Derive income from advertising on the site?  

Will advertising conflict, dilute, reduce trust in what you present?

Advertising is a huge fraction of business outlays, in magnitude comparable to what is spent on the goods themselves.  An estimate is that world wide $450 billion is spent on advertising, of which $24B went to Internet advertising ["The Next Big Thing"; The Economist, 6 Oct. 2007].  But there is much competition, and advertising on mobile devices is growing fast.

Web businesses to depend on advertising, as Google, make it easy for you to place ads for products that your readers might want to buy on your own website.  If a reader of your website clicks on an advertisement, then you get a share of the income that Google would have obtained for a click on an advertisement for that sponsor.  Some reimbursements occur when a reader actually makes a purchase, such a reimbursements would be larger but also much less frequent.

The business model of Google itself involves then three parties:

1. A selling business, that selects which words (`Adwords') in a query or a result, or an email, should trigger display of their ad. Multiple Adwords can be chosen to get more and broader display of ads. Each time a purchaser clicks on ad, a `clickthrough' tyhe businesses will be charged something, say about 50 cents. The businesses also give a budget over a period, which, when exhausted, stops any further displays. The budgets can be increased any day. A frequent search term like `movie' requires a large budget to keep displaying ads. Adword combinations can be selected to improve the focus.
   
2. The browser website,which will select one or few of the businesses for display of advertisements, in order not to dilute the impact.  The website will also wants to exhaust the businesses' budget, and uses its knowledge of of purchasers likelihood to click on term and the remaining budget of the businesses to optimize its income.
3. The purchaser, who reacts to the displayed advertisements. Of interest is here how often displayed advertisement is clicked on, and how often a clickthrough actually results in a purchase.  Also the number, size, and position of advertisements are relevant variables
   

These models are still being refined. The field is new, and differs from newspaper and magazines' experience in advertising. It is eas for a website to try alternatives in some of its customers , in order to assess what type of displays elicit the most effective reaction.

 Specifics of a Business Plan

For every year (or every quarter) you list the costs and the benefits

Costs:

1. Your time, namely hours and cost per hour. What is your time worth?  Is a student's time free or cheap?  How much is your tuition, living expenses, etc., that allow you to attend Stanford?  How much time should you spend studying?  The quotient gives a lower bound on what your time is worth.

2. The time of others helping you, same calculation, or the cost of hired help.

3. Computer cost, Internet connection cost. If it's a commercial venture, you can't expect Stanford to pay for computers and Internet connections.

4. Do you have to buy anything?

5. If you sell tangibles, then there is a cost-of-goods being sold.

Note that all systems need maintenance, since stuff gets out of date - even the knowledge embodied in software. A general estimate is that it costs at least 15% / year of the original cost to maintain stuff.

Revenues

Income, as discussed above, or simply what a sponsor would have to pay to recover the total cost.

            Can your web page be sponsored? 

• By a trade or scientific organization
• By a government agency
• By a commercial company for goodwill?

If you are selling stuff: are your goods fungible or unique?

How will you set the price?
          Will you have to collect money from customers – How will the income be collected?  There will be collection cost and trust issues. Would PayPal work for you – see Business Week, 23 May 2005, p.10

 Consider

Consider return policies and methods.

You will have to deal with customer problems when customers don't like what they got.

Business Models

For most ventures, initial years or quarters show a loss, and eventually, at the break-even point a profit. The initial profit will first have to pay the debts that have accrued during the period you made a loss. And then you can accumulate new capital, pay back the stockholders, or invest it in a new venture.