“Cash is oxygen.” – Gary Vaynerchuk
Cash flow is key. Max and I agree with the gurus on this one. Having positive cash flow is crucial to business survival. That’s part of the reason we started this journey. We want to build a business starting with $0.00 and stay cash flow positive for the full 30 days. So far, so good. We are +$86.83 at the moment.
That was relatively easy through the validation phase, but now we are in the dirt. We are talking actual cost to get coffee to a customer’s door. Now it’s real. Now pennies matter. Now shipping costs aren’t just theory.
Cash Flow Discussion
We started by creating a spreadsheet. To protect the suppliers, I’m going to leave out the some of the numbers, but essentially we looked at the following:
- Product Cost (PC): Our cost for the actual product
- Ship-to-Us Cost (SUC): Cost to ship the product to us
- Branding Cost (BC): Cost to brand the product
- Ship-to-Customer Cost (SCC): Cost to deliver the product to the customer
- Profit Margin (PM): The desired profit margin that we would like to achieve
From these values, we can calculate the customer cost required to meet our profit margins.
It’s a pretty basic formula. We simply add up all of our expenses above:
Total Cost = PC + SUC + BC + SCC
It can be a little more tricky to calculate the customer cost from the Total Cost and desired profit margin, but the formula is just:
Customer Cost = Total Cost * PM + Total Cost
Cash Flow and Marketplace Knowledge
Back calculating a customer cost based on the desired profit margin is great – when it works. Desired customer cost outside the context of your market is irrelevant though. If your calculation comes out to a customer cost of $1,200 for a bag of coffee beans, you’re probably in a whole lot of trouble.
To reconcile this, we did some more in depth competitor analysis. There are a lot of games played with product shipping. Free shipping just means the shipping cost is built into the product cost. Many companies either overcharge or undercharge for shipping and make up the difference in product cost. Because of this, we did our analysis and calculated the cost per ounce of coffee delivered to a customer’s door. Using this method, we could take into account the true customer cost to get their coffee.
How Much Does a Coffee Subscription Cost?
We analyzed about 15 competitors in the coffee subscription space and found the average cost to have coffee delivered to your door is $1.50/ounce. Love it or hate it, that’s what the market is capable of withstanding at the moment. We need to make sure we are near that or have a strong case for going higher or lower.
To go higher, we need to be able to justify the extra cost in the market. If we are asking for more money, we must reach the customer base that has that extra money with a message that explains why they should spend it with us.
If we go lower, it’s not a huge hinderance for the 30 day project because our goal is to raise $1,500 gross. We can succeed in the project by making $1.0o per sale. We could price compete in that way just to make the $1,500, but we think it is more applicable to the rest of you if we don’t go that route. If instead, we price our product and build our business the way that we would recommend doing so. Because of that, we aren’t going to low-ball the market.
The final pricing will be decided very soon, but for now we at least know where the market is and we know that we can produce a quality product for a reasonable price inside that market.
Income and Expense Summary
- TOTAL INCOME TO DATE: $88.00
- TOTAL EXPENSES TO DATE: $1.17