Direct and Indirect Costs, Cash and Accrual Basis Accounting, Perceived Value. Slides by Emma Tracanella

1. Value Analysis
IED
Lesson 4
Emma Tracanella
emma.tracanella@gmail.com

2. Course program
1. Italian Startups
2. Set up a startup in Italy
3. I've got an idea. And now?
4. Value analysis
5. Business model
6. Communicate, communicate, communicate
7. Being net
8. Find your market
9. Funding: venture capital, business angel and other
ways of financing
10. Pitch

3. Today's table of content
1. Direct and Indirect Costs
2. Cash and Accrual Basis Accounting
3. Perceived Value

4. I've got an idea. And now?: quick recap
During last lesson we discussed:
1. General design principles (no ToDo list available..)
2. Definition of a project (clear goal that must be
reached in a fixed time using available resources)
3. Product life cycle (planning, analysis, design,
implementation, maintenance... maturity and decline
or evolutionary maintenance and a new cycle)

5. I've got an idea. And now?: quick recap
We detailed
• Some basics useful from concept to company
• What is a lean startup
• How to formalize and write my project
• Who can help me (Kublai, business incubators,
seed accelerators)

6. All you need to know about costs

7. Costs
In production, research, retail, and accounting,
a cost is the value of money that has been
used up to produce something, and hence is
not available for use anymore.
Two kind of costs:
• Direct costs
• Indirect costs

8. Direct costs
Costs that can be identified specifically with a
particular project or activity, or that can be
directly assigned to them with a high degree of
accuracy.
Direct costs generally includes:
• Salary and wages
• Material, supplies and equipment
purchased directly for the specific project
• Communication and travels costs

9. Indirect costs
Costs that are not classified as direct
Indirect costs generally includes:
• Salary of administrative staff providing
normal support activities
• Office supplies, computers
• Local telephone calls
• Memberships
=> Overhead

10. Bykes
Direct costs:
• Metals
• Wages for assembly
Indirect costs:
• Abrasive, glue, pink
• Rent
• Insurance

11. Actual cost of doing business
• Before you can price a product or a service, you
need to know your cost to produce it.

12. Photographer
• How much charge a photo?
• Minimum fee?
• No costs?
A useful tool: the Cost of Business calculator. It list
annual expenses, but it depends on your inputs
which can be hard to estimate.

13. Cost of doing business calculator/1
Expenses
• Office and/or studio (rent, mortgage payments,
taxes, insurances, home maintenance, …)
• Phone (cell and/or landline and faxes) – remember
to include also the cost of the phone itself
• Photo/Video/Audio Equipment and Accessories
• Equipment services and Repairs
https://nppa.org/calculator

14. Cost of doing business calculator/2
• Computer(s) (harware and software)
• Broadband internet
• Web hosting/Portal services
• Vehicle Expenses (Lease, Insurance,
Maintenance)
• Office supplies and Furnitures
• Postage and Shipping
https://nppa.org/calculator

15. Cost of doing business calculator/3
• Professional Development
• Advertising and Promotion
• Subsciption and Dues
• Equipment and Business Insurance
• Health Insurance/Deductibles/Copays
• Legal and Accounting Services
https://nppa.org/calculator

16. Cost of doing business calculator/4
• Taxes and Licenses (Business and Self-
Employment)
• Office Assistance (Payroll, Answering Service,
Intern, etc.)
• Utilities
• Travel and Entertainment
https://nppa.org/calculator

17. Cost of doing business calculator/5
Income factors
• Desired Annual Salary
• Non-assigment Income
• Number of Days You Can Bill Per Year
https://nppa.org/calculator

18. Cost of doing business calculator /6
https://nppa.org/calculator

19. Accounting
• The difference between cash and accrual basis
accounting has to do with the time frame in which
revenues and expenses are recorded and reported.
• Cash basis accounting will suffice if your business
is a simple one. However, the accrual basis will
give a more accurate picture of the results of
business operations.

20. Cash Accounting
• Revenues are reported on the income statement in
the period in which the cash is received from
customers.
• Expenses are reported on the income statement
when the cash is paid out.
Focus on the amount of cash in bank and on making
sure all bills are paid.

21. Accrual Basis Accounting
• Revenues are reported on the income statement
when they are earned - which often occurs before
the cash is received from the customers.
• Expenses are reported on the income statement in
the period when they occur or when they expire -
which is often in a period different from when the
payment is made.
Provides more information about the business and
gives meaningfull financial reports.

22. Value
• The extent to which a good or service is perceived
by its customer to meet his or her needs or wants,
measured by the customer’s willingness to pay for
it
• It depends more on the customer’s perception of
the worth of the product than on its intrinsict value.
How do we create the perception of value when we
talk to our customers?

23. Gillette Fusion
• Amazon’s price: 19.25$
• 8 cartridges
• Cost/cartridge: 2.41$
• You need the razor
(11.49$)

24. Gillette Custum Plus Disposable
• Amazon’s price: 20.97$
• 30 razors
• Cost/razor: 0.70$

25. Gillette Fusion vs. Custom Plus
Prices
• 19.25$ vs. 20.97$
• 8 cartridge vs. 30 razors
Cost in use
• 2.41$ vs. 0.70$
Additional perceived values justify the additional cost
in use
• Durability of blade
• Comfort
• Less irritation

26. Gillette Idea
By providing something at below the market price
(the razor), you can create a market for a secondary
product (the blade) upon which you make ongoing
profits.
The mark-up on the secondary products is
disproportionate relative to their cost so were highly
profitable for the manufacturer.

27. 3M Scotch® Tape
• Amazon’s price: $1.70
• Lenght 650 inches
• Cost/inch: $0.003
• Cost to hang a poster: $0.01

28. 3M Scotch® Command Strips
• Amazon’s price: $2.70
• 12 strips
• Cost/strip: $0.08$
• Cost to hang a poster: $0.32

29. 3M Scotch® Tape vs. Strips
Prices
• $1.70 vs. $2.70
• Using Scotch Tape, the user can hang 75
posters vs. 3 for the command strips
Cost in use
• $0.01 vs. $0.32 to hang 1 poster
Additional perceived values justify the additional cost
in use
• Less damage to wall
• Simplicity to remove
• Durability

30. A-Style
Logo
• 1989 stikers on the walls of Milano
and Roma
• Patented by Italian designer Marco
Bruns
Clothing Brand
• Italian brand founded in 1999
A-style has used street-level buzz
marketing to grow to international
prominence

31. Lacoste
• Founded in 1933 by the tennis man Rene
Lacoste
• At the end of 1990 the company change its
strategy: marketing, retails outlets, product
range, …
• Sale of t-shirts in limited series
Re-establishing Lacoste as “a distinctive premium
brand”

32. More Examples

33. Freemium
Giving away a product that people want for Free and
Selling premium products.
• Skype:
• A free quality product
• Selling cheap calls to ordinary phones
• Only 8% buy something
https://www.freemium.org

34. 4 Freemium Models
• Time-limited
• Feature-limited (Dropbox – Flickr)
• Seat-limited
• Customer-type limited

35. Advertising Model
Became popular with the growth of radio and TV.
• Indirect revenue from people looking to
promote services
• Increasingly difficult
• Youtube, Facebook

36. Low-Cost Model
• Significant volumes of customers (at a low
customer acquisition cost) and by charging a very
low price
• Revenue from a whole host of ancillary sources
• Ryanair

37. Analyze Competitors

38. Next week
Business model.
(with Frieda Brioschi)