Entrepreneurship

Chapter 2
Creating Business from Opportunity:
The Economics of One Unit

Mariotti: Entrepreneurship © 2007 Pearson Education. Upper Saddle River, NJ, 07458. All Rights Reserved.
 Market
A group of people who may be
interested in buying a particular
product or service.

Marriotti: Entrepreneurship © 2007 Pearson Education. Upper Saddle River, NJ, 07458. All Rights Reserved.
 4 Types of Business
1. Manufacturing—makes tangible product
2. Wholesale—buys in bulk from
manufacturer; sells smaller quantities to
retailers
3. Retail—sells one piece at time to
consumers.
4. Service—sells time/expertise to consumers.

Marriotti: Entrepreneurship © 2007 Pearson Education. Upper Saddle River, NJ, 07458. All Rights Reserved.
 The Business Definition
 The offer—what will you sell?
 Target market—to whom will you sell?
 Production and delivery—how will you
sell?

Before you can start your business,

you must define it.

Marriotti: Entrepreneurship © 2007 Pearson Education. Upper Saddle River, NJ, 07458. All Rights Reserved.
 Competitive Advantage
 What can you do better than the
competition that will draw customers to
your business?

 Think about what your customers need.

 You have unique knowledge of your

market!
Marriotti: Entrepreneurship © 2007 Pearson Education. Upper Saddle River, NJ, 07458. All Rights Reserved.
 Competitive Strategy
Business definition + competitive
advantage = competitive strategy

Strategy: plan for outperforming the

competition

Tactics: ways to carry out strategy

Marriotti: Entrepreneurship © 2007 Pearson Education. Upper Saddle River, NJ, 07458. All Rights Reserved.
 Recipe for Success
1. Understand the needs of your customers.
2. Offer them a sustainable competitive
advantage.
3. Deliver a product or service that meets
customer needs at a fair price.

sustainable = can be kept going over time

Marriotti: Entrepreneurship © 2007 Pearson Education. Upper Saddle River, NJ, 07458. All Rights Reserved.
 6 Factors of Competitive
Advantage
1. Quality
2. Price
3. Location
4. Selection
5. Service
6. Speed/turnaround

Marriotti: Entrepreneurship © 2007 Pearson Education. Upper Saddle River, NJ, 07458. All Rights Reserved.
 Naming Your Business
 Keep it simple.

 Don’t use your last name.

 The best name is one that tells

customers what the company does,
sells, or makes.

Marriotti: Entrepreneurship © 2007 Pearson Education. Upper Saddle River, NJ, 07458. All Rights Reserved.
 What Are Your Core Beliefs?
 Beliefs you will use to guide your business.
Example: My restaurant will support local
organic farmers.

 Core beliefs affect:

-materials you choose
-prices you charge
-how you treat customers

Marriotti: Entrepreneurship © 2007 Pearson Education. Upper Saddle River, NJ, 07458. All Rights Reserved.
 What Is Your USP?
 Unique Selling Proposition—what attracts
customers away from the competition and
toward your business?

1. Compare what your business offers to what

competitors offer.
2. Are you at a cost advantage or
disadvantage?

Marriotti: Entrepreneurship © 2007 Pearson Education. Upper Saddle River, NJ, 07458. All Rights Reserved.
 Check Out the Competition!
 The offer

 Target market

 Production and delivery capability

Marriotti: Entrepreneurship © 2007 Pearson Education. Upper Saddle River, NJ, 07458. All Rights Reserved.
 Mission Statement
 A concise statement of:
1. Your strategy
2. Your business definition
3. Your competitive advantage

Marriotti: Entrepreneurship © 2007 Pearson Education. Upper Saddle River, NJ, 07458. All Rights Reserved.
 Entrepreneurs Use Profits:
1. To pay themselves
2. To expand their businesses
3. To start or invest in other businesses

Gross profit = price – cost of goods sold

Marriotti: Entrepreneurship © 2007 Pearson Education. Upper Saddle River, NJ, 07458. All Rights Reserved.
 Define Your Unit of Sale
 Manufacturing—one order (e.g., 100
watches)
 Wholesale—a dozen (e.g., 12 watches)
 Retail—one item (e.g., 1 watch)
 Service—one hour of time (one hour mowing)
or one completed task (one lawn mowed)
 Combination—average sale per customer

Marriotti: Entrepreneurship © 2007 Pearson Education. Upper Saddle River, NJ, 07458. All Rights Reserved.
 Average Sale Per Customer

Average sale per customer

– average cost of sale per customer
Average gross profit per customer

Marriotti: Entrepreneurship © 2007 Pearson Education. Upper Saddle River, NJ, 07458. All Rights Reserved.
 Unit of Sale as a Combination
of Different Items

Marriotti: Entrepreneurship © 2007 Pearson Education. Upper Saddle River, NJ, 07458. All Rights Reserved.
 Cost of Goods Sold (COGS)

COGS = cost of labor and materials

required to make one additional unit

COSS (cost of services sold) = cost of

labor and materials required to provide
one additional unit of service

Marriotti: Entrepreneurship © 2007 Pearson Education. Upper Saddle River, NJ, 07458. All Rights Reserved.
 Economics of One Unit (EOU)
 Method for seeing if a business can be
profitable

 If one unit of sale is profitable, the

whole business is likely to be profitable.

Selling price per unit – COGS per unit = Gross profit per unit

Marriotti: Entrepreneurship © 2007 Pearson Education. Upper Saddle River, NJ, 07458. All Rights Reserved.
 Economics of One Unit (EOU) —
Manufacturing

Marriotti: Entrepreneurship © 2007 Pearson Education. Upper Saddle River, NJ, 07458. All Rights Reserved.
 Economics of One Unit (EOU) —
Wholesale

Marriotti: Entrepreneurship © 2007 Pearson Education. Upper Saddle River, NJ, 07458. All Rights Reserved.
 Economics of One Unit (EOU) —
Retail Business

Marriotti: Entrepreneurship © 2007 Pearson Education. Upper Saddle River, NJ, 07458. All Rights Reserved.
 Economics of One Unit (EOU) —
Service Business

Marriotti: Entrepreneurship © 2007 Pearson Education. Upper Saddle River, NJ, 07458. All Rights Reserved.
 Economics of One Unit (EOU) —
Example

Marriotti: Entrepreneurship © 2007 Pearson Education. Upper Saddle River, NJ, 07458. All Rights Reserved.
 The Entrepreneur’s Strategy:
1. Start a business with a profitable EOU
2. Hire others to create the units
3. Increase volume of units being sold
4. This frees the entrepreneur to start
new businesses

Result: The entrepreneur creates

jobs and wealth.
Marriotti: Entrepreneurship © 2007 Pearson Education. Upper Saddle River, NJ, 07458. All Rights Reserved.