Mr. Cohen's story

It’s December, 2008 and you’re home from your freshman year at Tufts University for Christmas vacation.  At dinner last night, your father told you that Lehman Brothers went into bankruptcy and that the economy is in crisis.  You hadn’t given it much thought as you’ve been focused on surviving the combination of partying and studying you’ve experienced in your first three months away from home.  You therefore listen impassively, wondering how this is the slightest bit relevant to you.  It hits you when your father tells you that the family lost a great deal of money in its investments and that he’s been laid off.  He tells you not to worry, but he’s concerned as to how he can pay for your college, as well as your sister and brother’s tuition at the Lab School.  

You didn’t sleep much last night, as you start to think of how you can help your family.  You’re enjoying your college experience, but don’t want to be a burden to your parents.  It would be great if you could find a way to contribute towards the costs of your college.  As you’re reflecting on this, you’re going through an old trunk that had been in storage and realize this is clothes from your father’s college days.  You’re not very impressed with his sartorial tastes, but come across something curious.  It looks like a scarf, but there’s a hat attached.  You try it on and it looks cool and is incredibly warm.  You can’t wait to get back to school and show your friends, when it occurs to you that they might want one too.  In fact, you start to wonder ifothers would want it as well and whether there might be an opportunity to make some money here.  

You pull up your notes from your economics class and find the session on entrepreneurship and starting a new business.  It reminds you that every business requires 5 key elements, including:

1.

A well-defined product or service

2.

A clear understanding of who the customer is and what they want

3.

The ability to identify and assess the competitors or alternatives to your product or service

4.

Your source of competitive advantage

5.

How you fundamentally make money

Your notes speak to the value of preparing a business plan, which will allow you to organize your thoughts around each of these elements.  It will challenge your thinking regarding exactly what you intend on selling, who the most likely customers to buy will be, how the needs of those customers are currently being met and why they would purchase your product rather than that which they currently buy.  Lastly, you realize that if you take the risk with your human capital to invest in a startup business, it has to produce a return in excess of what you could earn elsewhere.  Otherwise, it’s a great philosophical exercise with no real purpose as it simply isn’t actionable.  That isn’t a very good use of your time or energy, especially as a freshman in college.

The Product

You really like how cool this scarf/hat looks, but realize that college kids generally like to promote their schools and to wear things with the school colors and emblem.  It occurs to you thatthe product can be even more powerful if you go to the various schools around the east coast and induce them to let you make scarf/hats that promote their universities.  You’ll have to determine the materials, colors and design, but you’ve concluded you’ll base it at least initially on the colleges from which you secure support and partnership.

You call your roommate and tell him about your plan.  In describing your scarf/hat, you’re asked what it’s going to be called.  Your roommate suggests calling it a “SCAT”, while you prefer “HARF”.  You google each and discover that SCAT means to “go away or move fast” while HARF has no definition in Webster’s’ dictionary leading you to lean in that direction.  That is until it occurs to you that many use that term to refer to what happens when you get sick from too much drinking.  You realize that naming your product and how you position it in the eyes of the customer means something.  You make a note to talk to your friend who’s a junior taking the marketing class and spent a dinner one evening regaling you of stories about how brilliant Starbucks, Nike and Apple have been in terms of branding a product.  

Customers

A quick google check shows that there are 60 colleges in Boston alone, with 250,000 students.  There are 8 schools in the Ivy League, with almost 120,000 students including their graduate schools and 11 schools in the New England Small College Athletic Conference of which Tufts a member, with 26,000 students in their undergraduate colleges.  Although smaller than the Ivy League’s enrollment, you believe their passion for those schools are strong and will likely make them particularly interested in your product.

When including alumni, parents, grandparents, siblings, faculty and other friends of these universities, you conclude you have a sizeable market into which you can sell your product.  You guess that there must be at least 1 million potential interested prospects and that a 1% market penetration suggests you can sell as much as 10,000 of these.  That starts to sound like a real business.

Competitors

Your enthusiasm grows when you discover that no one else has produced this product.  You do however realize that each of these schools sells hats and scarves with their emblems on them.  You therefore have to figure out how to draw customers away from those products towards yours.  Some combination of its cost, warmth or “cool” factor has to be suitably compelling to induce them to buy and to convince them to buy our product rather than the hat or scarves otherwise readily available.

Competitive Advantage

Your notes from the economics class define “competitive advantage” as differentiation from the competition in the eyes of your customer in a manner that they value.  They go on to say that this can come from being the low cost provider or finding ways to enhance the value proposition of owning the product.  This might be through design, the quality of the product (in our case the materials used), the brand and corresponding “coolness” factor, how the product is sold to you (which might be online with direct delivery as opposed to purchasing in the store) or the level of support available after the purchase.  It should be noted that perception is often reality in these circumstances, affording you the opportunity to persuade the customer of your value proposition.

You conclude you’re going to sell the product online and in school stores, with delivery at no charge.  You further decide to manufacture with a softer material than that which school hats and scarves show, but with incredibly cool design.  After reading the book about Steve Jobs, you realize how much Apple was driven by offering products that were beautiful and highly functional for customers.  You also decide that you’ll provide a one year warranty to replace any scarves that experience problems with the materials and you want to consider a warranty to replace lost products, subject to some level of proof, a signed statement representing the loss and the purchase of “lost goods insurance”.  

Making Money

You’ve now discussed this with your friends, representatives from a few schools and your family and everyone is excited.  They think the product could be very useful and for which there would be demand, but more importantly think you’re a rock star entrepreneur.  They have all figuratively or literally given you the “high five” for the concept.  The problem is that it ultimately is a total waste of time and energy if the product can’t be manufactured and sold for a profit, after taking into account all of the associated costs.  In fact, given that you intend on spending a considerable amount of your own time on this, it occurs to you that the profit should be enough to properly compensate you as if you were working full time.  

You start with determining what price you can charge for your product.  After doing a bit of research, you find that hats sell for around $25-$30, while scarves are an additional $25-$40, depending on the quality of the merchandise.  You believe you can charge more than what one would cost, but not as much as two.  Your initial thought is to charge $37.5, which is halfway between the cost of both products.

You now have to make sure that you can manufacture and distribute them for an amount considerably less than that.  You quickly realize you can’t accomplish that goal if the product is made in the US and start to look for places in the Far East that are established, reliable and cost effective.  You find that depending upon how many are manufactured, you can have them made and delivered to the store or a warehouse for distribution for $8 a hat.  You immediately conclude you’re going to get rich.

You call the schools and start to inquire about using their emblems and selling in their school stores.  They love the idea, but tell you that they want $6 for use of the school’s colors and emblems and $3.5 for any sales through their store.  This eats into your profit, but you’re still seeing $20 per sale of profit and that sounds pretty good.  You start to look at additional costs and realize you need marketing and advertising, accounting support, certain licenses and tax payments and a series of other administrative costs.  Again, depending on how many you sell, this looks like it will total $50,000, which is $5 per product if you hit your 10,000 sales estimate.  Your profit is now down to $15 per sale, but if you can achieve your 10,000 sales, you’re in pretty good shape.  Moreover, if you get lucky and sales results are twice that amount, next year’s Christmas vacation sounds a lot better than this one.

Conclusion

You have now consumed the bulk of your Christmas vacation planning this business.  You have a product you think customers will love, for which there is little competition and you can differentiate yourself in a manner the customer will value.  You see a large market for this product and a fairly attractive profit margin.  You’ll need some capital to get started, will have to find time to fit this in between classes and studies and it’s a little daunting to even consider the uncertainty of how this gets done.  All that said, your family is going to be experiencing financial challenges and this could be an invaluable source of support.  Do you take the plunge?