miguelmartins17 commented 4 years ago

I'm sorry to ask this silly question, but what is the meaning of pivoting? I was reading the missing part and I don't understand how this word fits in.

nelsonic commented 4 years ago

@miguelmartins17 great question. We often take these terms for granted. 👍 What did Google say when you searched for it...? 🤔💭

Defintion

A pivot is a "structured course correction designed to test a new fundamental hypothesis about the product, strategy, and engine of growth."

See: https://en.wikipedia.org/wiki/Lean_startup#Pivot What is "Lean Startup"? see: https://github.com/dwyl/library/issues/74 (you should definitely read it!)

Explanation

A Pivot is when you have tested your business idea with customers and there is no progress¹, so you decide to change idea/market to an alternative that has more positive feedback.

The term comes from sports where a pivot (e.g: in Basketball) is a rapid change in direction.

Pivots fairly normal in the startup world when an idea does not get enough users/revenue. Famous pivots you should know about include Twitter, Paypal and Instagram. https://www.forbes.com/sites/jasonnazar/2013/10/08/14-famous-business-pivots

¹There can be many reasons for a lack of progress/traction in a business/idea, the two main reasons are: either you have not made something that people want/need or not communicated the availability, features/benefits clearly to the target customer(s). Others could include: price, (wrong) location, (better) alternative products.

Example

Imagine that you really like pizza 🍕 and you decide to open a business selling pizza on the beach in summer because you hypothesise (a fancy way of saying you have an educated guess) that people will buy lots of pizza on the beach.

After a few days running (market testing) the pizza stand you see that you are only selling 10 pizzas per day at €5 each which is only €50/day ... not enough to cover your costs! 😞 It takes too long to cook each pizza ⏳ and it turns out that most people bring food from home so they don't need pizza!

Meanwhile the ice-cream stand next to you has a massive line and they selling 500 cones per day at €2.5 each ... €1,250/day! 😮 ... 🍦=💰 ... 💡

You realise that you can buy gourmet ice-cream from a reputable manufacturer icegourmet.pt for €5/litre² recheio-gelado-gourmes

and an ice-cream fridge for €1200 https://www.olx.pt/anuncio/vitrine-gelados-IDEVLT0.html Your have some graphic design skills and know about 99designs so you can create a brand identity for your gourmet ice-creams in a couple of days...

So with a €1400 investment (1200 for the fridge, 100 for stock and 100 for branding), you Pivot from Pizza to ice-cream and it's a success! 🎉

²Instead of spending months/years on product development perfecting the recipes for the "piu fini gelato", you decide to buy the product and focus on selling it at profit. You plan to develop your own flavours over the winter with the profits you make this first summer. 💭

Revenue

One litre of ice cream is enough to make 7 cones/cups. You sell each two ball/flavour cone/cup for €2 (which is cheaper than the competition, but not too cheap so people don't think it's bad quality...) 7 x €2 = €14 revenue.

Costs

There are two types of cost in this business, raw materials or ingredients (variable) and overheads such as the fridge, staff and electricity (fixed "overheads") that must be paid even if no product is sold!

"Ingredients" (Variable)

The cost of the the ice-cream per unit (cone/cup) sold is €5/7 = €0.714 Waffle cones (or paper cups) cost €0.20 each So the cost per cone is 0.714 + 0.20 = €0.914 a gross margin of 54.3%.

Note: we aren't including "toppings" which are super profitable because they usually only cost 10 cents and usually sell for 50 cents! We are keeping our system simple for now, we can always expand later! 😉

"Overheads" (Fixed)

Your biggest cost (after the "raw materials") is the people serving your ice-cream. Staff members must earn €700/month working 8 hours per day (8 hours x 20 days per month = 160 hours per month. €700/160h = €4.375/h) If you have 2 people at all times (one to receive payment and the other to serve) you are paying €4.375 x 2 = €8.75/hour in staff costs. €8.75/h x 8h = €70/day

The ice-cream fridge cost €1200 to buy and you want to pay it off in one summer (60 days). 1200/60 = €20/day

Electricity costs €4/day as you need to keep the semi-open fridge on for 24h/day.

Total overhead cost per day = €94/day

Profit

The ice-cream stand needs to sell 86.6 (round up to 87) ice-creams per day to cover all costs. After all costs are paid you start making a profit. You set the target of selling 200 ice creams per day and tell your staff they will get a €10/day bonus if they reach 200 and a €20 bonus if they sell 300. (this gives them an incentive to stay motivated, smile and be friendly to customers so they come back and tell their friends about their great experience).

You sell an average of 250 ice creams per day (capturing a 50% market share) And after 60 days (July & August) you have sold 15,000 ice creams!

At the end of the summer you are left with €10,650 in profit. 🏦 Which is more than you would have made in a year working at your old job. (€700 x 14 = €9800) So you decide to take a month off to go travelling! 🛫

Pivoting from the original idea of selling pizza to ice-cream on the beach payed off really well. 🍨 🚀

dwyl / technical-glossary

Meaning of "pivoting" #52