Knowing Your Business Case

By David H. Williams

Developers heard the same mantra over and over again from every carrier and venture capitalist at the last two CTIA meetings: it is critical to understand your LBS application's business case if you are to have any hope of it being accepted and/or funded. Since the business side of the LBS equation can be somewhat foreign to many developers, LBS360.NET is starting a series of articles to help developers learn more. This first article provides an overview of the first two steps in articulating your business case: a) articulating your value proposition; and b) sizing the market.

Articulating Your Value Proposition
The first step to knowing your business case is being able to describe the specific value that your application will provide to the end buyers by demonstrating your detailed knowledge of their demographics and buyer values. This "value proposition" in turn should not just drive product marketing, but also help prioritize design requirements and ultimately, how the LBS business is run.

Here's a list of the most likely LBS value proposition elements, singularly or in combination.

For Business Customers:
  • Enabling new sources of revenue (new services, premium upgrades to existing services)
  • Enabling cost savings (reducing service time/time to repair, persons needed for a given task)
  • Improving speed/productivity of operations (improve customer responsiveness, increase tech visits per day)
  • Improving quality (fewer mistakes)
For Consumers:
  • Extending sense of community (notable for social networking applications)
  • Improving safety/security (a "real" benefit)
  • Peace of mind (a "perceived" benefit)
For Consumers and Businesses:
  • Comprehensiveness (one-stop shopping)
  • Convenience (ease of doing business)
  • Reliability/consistency (can we count on it every time?)
  • Accuracy (distinctly different value proposition from reliability)
  • Access to experts, special services
  • Customer satisfaction (an abstract concept; link it to customer dissatisfiers if at all possible, which may or may not be included in the above)
The value realized and/or perceived by the end customer through one or more of the benefits above will, in turn, drive the business model and ultimately the pricing of the service - the heart of any business case.

You need to be as detailed as possible in thinking about the value to the end customer (meaning - the end buyer). For example, for a personal safety application, it is not enough to state that "peace of mind" is the key value proposition for the "personal safety" market; you need to break it down further. As an example, the figure below shows how the value proposition can shift between niche market demographics for the same application, even if only subtly.

Source: E911-LBS Consulting. (Click for larger image)

If your application runs on a wireless carrier platform, you need to understand the carrier's value proposition as well. Ultimately, carriers are interested primarily in three things. Can the application:
  • Attract new subscribers?
  • Increase average revenue per unit? (ARPU - the average spend of a subscriber per month)
  • Keep existing subscribers? (e.g. reduce "churn")
Of course the value propositions of the end customer and the wireless carrier are linked - subscribers won't pay extra for the service unless they see the value - but it is essential that you keep the carrier's bottom line values in mind as you prepare your business case.

Sizing the Market
The next step, sizing the market, is key to answering one of the first questions that venture capitalists will ask - "What is your addressable market?" This is the potential number of subscribers toward whom your application is targeted. What are the realistic prospects for them as potential buys? It is important that you think this through carefully - overestimating the market will damage your credibility, and underestimating it will cause you to be passed over for higher revenue potential opportunities.

Here is an example of the market sizing process. Say you want to develop an LBS driver management application for the pizza delivery market in the United States. What is the realistic market potential for your application?

First, you would articulate the value proposition. From your research you would conclude that the pizza business is a low margin, high volume dependent business. As a result, cost savings and speed of delivery without compromising safety and quality would be the primary areas of interest if you were a pizza business owner or manager - the ultimate buyer of the service.

Improving the efficiency of the delivery people would enable more pizzas per driver per shift to be delivered, thereby reducing delivery cost per transaction. It could also improve customer satisfaction (pizza there faster, fresher, hotter), employee satisfaction (more tips per shift, less time spent searching for customer), maybe provide a competitive advantage (e.g. 30 minute guarantee!ï¿1⁄2ï¿1⁄2), and possibly improve volume (if delivery capacity or range was a constraint).

Determining the market potential for this (or any) LBS application requires combining facts with assumptions, and overlaying both with common sense and reason. Continuing with the pizza delivery example, the questions you would want to ask, and answer through research, would include the following.
  • How many pizza outlets are there in the U.S.? (Note: this is not the same as asking how many pizza businesses there are, as one business with many outlets would be counted as one business by some data sources.) In addition, you may want to distinguish between establishments where the sole/primary business is pizza and others that have pizza among many menu choices (e.g. Italian restaurants). Sources of data could include U.S. government trade and census sites, as well as particular trade publications and associations, such as Pizza Today Magazine, Pizza Pasta & Italian Food magazine, and The Pizza and Pasta Association (these are real entities!).
  • How many of these places of business offer delivery service? This will start the process of adding assumptions to the mix, as the data may or may not be available. A reasonable assumption (adding common sense to the mix) is that 80% of the places of business where the sole or primary product is pizza offer delivery, and 10% of those that offer pizza as one of many menu choices offer delivery. You may want to do an informal survey of local pizza places to see if this is true, if a more formal study is not possible. The more data the better however!
  • You could ask, "On average, how many delivery people provide delivery service for a place of business?" However, this question needs to be modified to ask: How many delivery people provide the delivery service at the same time for a place of business? A place of business may have several drivers in total, but most of them will likely be part-time employees. In any event it is unlikely that a place of business would have more than two or three working simultaneously (an assumption that needs to be tested). So, instead of using seven or eight drivers in the business case assumptions, a more reasonable number is two or three, with drivers handing off their handsets/wireless device to the drivers on the next shift. Like you or me, pizza business owners are not likely to pay for more than they need.
Using these data you can calculate the total number of pizza delivery drivers (i.e. number of potential pizza delivery wireless devices/subscriptions) that is the target market for the LBS application.

The next step: determining what kind of business model would be most attractive to you, the carrier, the end customer, and what kind of pricing it would involve. Stay tuned; we will cover this next month.

Published Thursday, November 30th, 2006

Written by David H. Williams

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