We put together our mega List of Business Ideas. Now, how do we decide which is the most viable (capable of being successful) idea? If you don’t have a list yet, no worries! Just read this post to help you create a list of potential businesses and then come back to this activity. Concepts like profit vs revenue, how to do market research and how to price a product, are all easier to comprehend with concrete ideas in mind.
Over the next few days, we will create a business plan, learn about marketing, design a logo and practice pitching our business idea. If your kids want to read an absolutely fantastic book about how a child becomes an entrepreneur, check out The Tuttle Twins and their Spectacular Show Business (the entire Tuttle Twins series gets two huge thumbs up from our kids!) Make sure that you join our Facebook Group and follow us on Pinterest, so you that you won’t miss the additional lessons in this series!
Profit vs Revenue
A very important concept for all entrepreneurs to understand is the difference between profit vs revenue. You can have a company that sells $100 worth of t-shirts. However, if it costs you $150 to make and ship those t-shirts, you are going to lose $50!
What is Revenue?
The amount of income generated by your company’s primary operations (usually services or sale of goods) is your revenue. Let’s break that down with an example. If you are selling t-shirts online for $10 a piece, and you sell ten shirts, then your total revenue is $100. Revenue is sometimes thought of as “sales,” because it is the amount of money that you receive. Revenue does not subtract what the items cost you or any of your expenses (like shipping, for example).
What is Profit?
When people use the term “bottom line,” they are talking about profit. Another way to think about profit is, “how much money do I walk away with at the end of the day?” Obviously, especially for startup companies, you may decide to take your profits and put them back into your company. This is called reinvesting and is one way to grow a larger business over time. However, even if you reinvest, it is still considered your profit! In order to figure out the profit, you subtract your expenses from your revenue. Here is a basic equation for calculating profit!
Profit = Revenue – Expenses
As you can see, when you compare profit vs revenue, profit is always less than or equal to revenue.
Let’s go back to our t-shirt example, to better understand how profits work. Each shirt costs us $5 to buy the materials and $3 to ship it to a buyer.
Total Expenses = $5 (Cost of Materials) + $3 (Shipping)
Total Expenses = $8
Then, we enter that total expenses into our profit equation as follows.
Profit = $10 (Revenue) – $8 (Expenses)
Profit = $2
Our profit on every shirt that we sell is $2. What happens if there is a shortage in t-shirt material next month though? Suddenly, our cost of materials might increase to $8 per shirt! Then, our total expenses will become $11. Instead of making $2 on each shirt, our profit is now -$1. That means that we are losing $1 on every shirt we sell. As you can see, you must be very careful with how to price a product. By doing that, you can make changes if you are suddenly losing money on each item you sell!
Nonprofit vs For Profit
Another decision that you have to consider is whether your company will be a nonprofit vs for profit. What is the difference between the two? Now that we understand what a profit is, and how it differs from the revenue, we can better understand the difference between nonprofits and for profits.
What is a Nonprofit Business?
If you are thinking about starting a business that will provide a benefit to the public or further a social cause that is important to you, then you might want to consider forming a nonprofit organization. This type of business receives tax-exemptions from the Internal Revenue Service (IRS), which is one advantage. Also, if people donate money to you and you are a nonprofit organization, then their donations are usually tax-deductible. Therefore, people who donate to you could save money, which is an incentive for them to give you donations.
Nonprofit vs Not-For-Profit
Let’s quickly touch on the differences between a nonprofit and a not-for-profit organization, because these two terms are often confused!
- A nonprofit, as mentioned above, must has a social benefit for the public. A non-for-profit organization may exist solely for members of the company, rather than for society as a whole.
- Not-for-profits have no paid employees and are run only by volunteers. Nonprofits may have paid employees.
- Not-for-profits do not aim to earn revenue. Whereas, nonprofits do aim to generate revenue (though profits are not meant to benefit any individual person).
- Nonprofits may be a separate legal entity, whereas not-for-profits cannot be.
What is a For-Profit Business?
If your goal is to earn a profit, then you are probably going to start a for-profit business. With this type of organization, you (as the owner) can decide to keep all of the profits for yourself. You can also decide to reinvest all (or a portion) of the money back into the business. Particularly when you are first starting off, you will likely want to reinvest at least some portion of your profits into helping your business to grow larger. Scaling a business up is the term used for focusing on making your business grow.
How to Price a Product
Now that we understand the differences between profit and revenue, as well as nonprofit, not-for-profit and for-profit organizations, let’s take a look at how we price a product or service that we are going to sell. Since we will not be focusing on not-for-profit businesses, we want to make sure that we are profitable! In order to figure out what we should charge, let’s collect the following information.
- How much will the materials and shipping costs us?
- What are you aiming to earn (in profit) for each hour that you work?
- How much time will it take to make / assemble / package each item?
- Will it take time to post the item for sale or market it so that buyers can find it? If so, how much time will this take?
Back of the Envelope Calculation
We are obviously simplifying things dramatically in our calculation, because we are doing what is called a “back of the envelope calculation.” That means that we are estimating our numbers to get a general idea for if our price works!
Let’s do a back of the envelope calculation with our t-shirt example using the following numbers.
- Materials & shipping = $8
- Time to make & package each shirt = 15 minutes
- Time to post online & market = 5 minutes
- How much you want to earn per hour = $10/hr
If it takes 20 minutes per shirt to create it, package it, post it online and advertise it, then we can create three shirts per hour. Our materials and shipping costs for three shirts is $24 (since it is $8 for one shirt). Let’s say that I want to make $10 in profit for every hour that I work. In other words, you want to be paid $10 per hour. In order to make that happen, we will need to charge $10 + $24 (or $34) for the three shirts. That comes out to approximately $11.33 per shirt ($34 divided by 3). So in order to earn $10 per hour, we have to charge roughly $11.33 per shirt. Again, if we compare profit vs revenue for the hour, the profit is $10 while the revenue is $34.
How to Do Market Research
Fantastic! We know how much we want to charge for each of our t-shirts to pay ourselves exactly what we want! However, there is one small problem, how do we know if people are willing to pay that price? In order for your business to make sense, it has to be a win-win for you AND for your customers. Further, how do we decide what color t-shirt people are most likely to buy? Do they prefer all cotton or a fabric that is a mixture of polyester and cotton? Market research becomes key for answering these questions! Here is a great list of ways to conduct market research for free. Make sure that your parents are on-board with the websites first (as not everything out there is “kid-friendly”!
The social media website Quora is perfect for doing market research! You simply post a question and other users will reply and give you their opinions.
Amazon Book Reviews
Checkout the Amazon book reviews for books in the same category as your potential company. Positive reviews may give you an insight into what your users are looking for. Negative reviews are even better, because they often will talk about an unmet need of your customers.
Lots of meaningful and helpful conversations are found on Reddit (along with lots of photos of cats!) Depending on what your business idea is, there may be a subreddit category that is full of your potential customers. You can browse through other people’s conversations or post your own.
There are Facebook groups for every community that you can think of! Find a Facebook group where your customers are likely to be hanging out, and ask some questions or even post a “poll.” You may want to check with the admin of the group first, to be sure that you are not breaking any rules. You should also make sure to be an active member of the Facebook group by commenting on other people’s posts, so that you are not seen as someone who is just there to “use” the people in the group.
The Competitive Analysis
The first step in doing a competitive analysis is to put together a list of all of your competitors. You may want to put together a simple spreadsheet to answer the following questions for each competitor.
- Who are they?
- Are they big or small companies?
- What are their strengths and weaknesses?
- What will you do to differentiate your business? Or, in other words, how will you or the product you are selling be different / better than what your competition is offering? Will you be less expensive? Better quality? Include a feature that nobody else has?
For example, if you do some research and find that your competitors are selling similar t-shirts for $8 per shirt, then you have to ask yourself a few questions. Can I decrease how much each shirt costs me to make and ship it? Am I willing to earn less per hour? Is there something that makes my t-shirts worth paying extra for? If the answer to all three questions is “no,” then it may be time to go back to the drawing board!
How to Price Your Product
At this point, you understand the difference between profit vs revenue, and nonprofit vs not-for-profits vs for-profit organizations. Do you have a price for your product? Have you done market research and a competitive analysis to make sure that you business and price will work? If so, then share your final business idea that you will continue working on with us in our Facebook Group and Facebook Page, so that we can give you feedback! You never know what resources, help or ideas you might get by brainstorming! If you have realized that you business is not viable, then head back here to come up with a new business idea!