Entrepreneurship: New Venture Creation

Mid-Term Case Test

BACKYARD PUB: INFLATABLE IDEAS

Professor: Dr. Gerry Kerr

ID:110009767

Student: Cynthia Zhen

February 13, 2020

Introduction
Ryan Thompson was a third-year student at Western University in London, Ontario as a
Management and Organizational studies major. He is struggling to decide whether or not to start a
new business in the party supply rental industry. His goal was to gain the experience needed to help
him secure a full-time employment position upon graduation. He must consider if this job is viable
and whether it will make him the salary of at least $4000 a month by the second year of operations.
Also, he needs to make sure that whether this venture was worthwhile and would allow enough time
for him to complete his studies from September to April. To help make his decision, this report
intended to assess the business concept of BP, the external analysis and provide final
recommendations with an implementation plan on whether this event would be a feasible business
idea.
Internal Analysis
For product differentiation, BP’s largest strength is its uniqueness and its portability. None of the
other inflatable businesses have the same product as BP, providing them with a first-mover industry
advantage.
According to SWOT analysis, the biggest weakness is that it is a seasonal business which means
the company does not generate any revenue between November to March.
Furthermore, BP’s sole product offering is the inflatable pub – whereas all other competitors offer
more product lines, services, partnerships, or expertise that BP does not have. And BP also lacks years
of experience, partnerships with venues or wedding planners, or a well-known reputation to build a
product image and recognition, which leads to their bargaining power as a supplier relatively low,
meanwhile the bargaining power of buyers is high.
Another weakness is that BP has insufficient cash flows, which indicates that the incoming cash
flows of BP are insufficient to meet the outgoing cash flow needs of the business. This event will slow
down BP’s normal operations, future investments and growth objectives.
Targeting Market, Analysis
BP currently has four consumer groups that could choose from: Consumers under 25: This group
have limited disposable income and have specific tastes in what they are looking for. They may find
the inflatable pub too pricey or may simply prefer other alternatives, such as at-home parties or indoor
social gatherings.
Consumers under 25-44: This group have greater disposable income and look at party rentals to assist
with children’s birthdays, baptisms, milestone anniversaries, weddings. However, an inflatable pub
would not be attractive for these events which suggests that it may not be worthwhile to target this
consumer group
Consumers 45-64: This consumer group has the most disposable income and represented 35.2% of the
industry revenues. The uniqueness of the in-between two generations: their parents and their children
makes this group not only wealthy enough to afford homes with backyards but also has the time and
influence in their families to plan creative events. They should be ideal customers for BP’s product.
Consumers over 65: Although this group is often more willing to be more creative with their event
rentals and may find an inflatable pub attractive, there may be more health restrictions that would
limit the final decision in choosing an inflatable pub. This group has potential, but not stable.
External Analysis:
For the external analysis, using the Porter’s Five Forces Framework:
➢ Threat of new entrants: High. As mentioned before, the industry is friendly for most people to
entry because of the low barrier and small competitor base.
➢ Bargaining power of Suppliers: Low. And BP also lacks years of experience, partnerships with
venues or wedding planners, or a well-known reputation to build a product image and recognition.
➢ Bargaining power of Buyers: High. Other competitors offer more product lines, services,
partnerships, or expertise that BP does not have.
➢ Substitutes: High. Customers looking for tents may easily substitute to more formal tents offered
by regular party suppliers.
➢ Rivalry: Moderate to high. I-Fast, party's ltd and Redline inflatables are two main direct
competitors who offer party supply rentals due to their rich experiences. Meanwhile, A&B Party and
RBL are indirect competitors because A&B Party has the largest tent, which is attractive weddings
and other formal activities, and RBL is the only one who sells commercial awnings and screens.
Quantitative Analysis:
The salary cost resulted in a negative net cash flow in 2017 and 2018 for BYP, which may lead
to a business failure or they will not be able to afford their debt. Also, this event is a long-term
problem for the company. They need to find a new way to earn more money. If the sales are going
well in the future, the company will make money. The variable cost doesn’t affect cash budget
because the company’s cash flow is not sensitive. Moreover, June, July, and August are the highest
demand period and the company will have a chance to add to their cash. For the break-even, the
variable cost is very low compared with the total cost which leads to a margin of contribution is very
high, so the fixed cost is the most important part of total cost which means the company can get high
profit from each service after break-even point, means that the company should really focus on
consumer loyalty.
Issues
Within the industry, Ryan has already lost the best time to enter the business. He should consider
carefully for the decision because if his marketing strategy does not work for the industry, it is very
likely to fail. Also, BP’s greatest threat is if a competitor such as I-Fast or Redline Inflatables (RI)
purchases their own inflatable pub product. These businesses could learn from BP’s failure or success
with the product to determine if they should invest in one themselves, which is possible because the
product is not patented by Thompson. BP would find great difficulty in competing with I-Fast or RI’s
product packages, expertise, reputation and wide-spread customer base. Although BP differentiates
itself from other inflatable competitors with providing a “tent” area for users. However, customers
looking for tents may easily substitute to more formal tents offered by regular party suppliers.
Another issue is that the inflatable pub product is dimensionally large and will only fit in larger
backyards, which means it is not appropriate for more formal events, such as weddings or corporate
events. The inflatable appearance of the pub may also appear as too casual and too small for weddings
or some corporate events, who might prefer tents offered by competitors. Hence, these constraints
place limits on the number of customers that BP can serve.
One issue is that BP has insufficient cash flows, which indicates that the incoming cash flows of
BP are insufficient to meet the outgoing cash flow needs of the business. This event will slow down
BP’s normal operations, future investments and growth objectives.
Alternatives:
1. Since BYP could not pay Ryan a salary of $10,000 during the first fiscal year, he could go directly
to find a job in summer, which related to party and event's planning, which could let him learn rich
experiences from the company’s long operations' history and events which are kind of similar to
BYP’s idea. And after working for few years, he may be more qualified and confident to open new
business.
2. BP has a strong opportunity to explore the “other event rentals” subset of the party supply rental
industry, which is neither dominated by inflatable or regular party suppliers. This area might include
partnering with community events, festivals, or pop-up events. What's more, the industry in London
has no major players and is not dominated by a single company. The tent accident that occurred with
Signature Event Rentals and Linen Service may also negatively impact the public’s opinion of using
traditional tents and may switch to an inflatable tented area like the pub product instead.
3. For marketing method, using online marketing with Facebook and Instagram, is effective for
businesses like BP, who have a small marketing budget and want to get many impressions but will
only pay for when users click on the ad.
4. Using Canada Post’s Smart mail assists BP by targeting households that have enough backyard
space for the inflatable pub product. While this type of marketing is more specific and targeted, it is
effective in reaching out to the consumers who are often the decision makers for how their own space
will be used.
5. Many consumers in the industry look to Google for comparing party supplies and these are often
the consumers who are likely to convert their searches into sales.
6. Since location cannot be changed due to being in London and studying in the 2018，locating the
company in London will have advantage of having the experience of living here, it will be easier to
understand and relate to the possible market.
7. Pricing options based on other competitors’ prices, customers’ satisfaction, and the variable costs.
The price will be as low as we can since it already meets a reasonable breakeven, and the expectation
of CEO to attract customers.
8. Giving production residuals to loyal customers to keep their loyalty and to make sure there is no
waste of any useful resources.
Recommendations and Implementation
Although BP is very unique and has potential customers, it is more than hard to make the
company to sustain a long-term run and compete with competitors who already had popularity and
trustees among London area, especially when the market is reaching a saturation.
Instead of pursuing high revenues and great profits at the beginning, I suggest BP start with
building it’s brand image and customers’ loyalty by offering lower prices and satisfying every
customer in order to get the momentum we need to be legitimized. First years should be to move
forward and keep just above the breakeven limits. Also, the business should target consumers aged 45
to 64. As mentioned in the earlier analysis, many consumers in this age range have larger disposable
income and have decision-making influence in their families. They may be taking care of an elderly
parent’s birthday party or advising their children on their own parties. This age group is also more
likely to own their own houses rather than condos and townhomes that younger demographics opt for.
Last but not least, BP should put emphasis on promotion to create product awareness. It could use
social media like Instagram and Facebook to boost the exposure with fewer costs, and using Canada
Smart Mail as well as Google AdWords to target customers who will be more likely to become a deal.
Appendix A
Threats of
New
Entrants
High

B.P. of Rivalry B.P. of

Suppliers Moderate to Buyers
LOW high High

Substitutes
High

Appendix B

April,2017
First year of business
studying in UWO
First three years
Gaining working Targeted on marketing
experiences from and promotion on Focusing on qualitative
similar industry field social media like services, competitive
Fb,instgram and google prices, and promotions
search etc. to gain customers
loyalty and reputation
Appendix C
Pro-forma Statements of Earnings: CONSERVATIVE 2018-04-30 2019-04-30 2020-04-30

Revenue: (assume 60 rentals)

Package 1: Priced at $475 $ 7,125.00 =60*0.25*475 $ 15,200.00 =128*0.25*475 $ 20,900.00 =176*0.25*475
Package 2: Priced at $650 $ 19,500.00 =0.5*60*650 $ 41,600.00 =0.5*128*650 $ 57,200.00 =0.5*176*650
Package 3: Priced at $700 $ 10,500.00 =60*0.25*700 $ 22,400.00 =128*0.25*700 $ 30,800.00 =176*0.25*700
Add-on Convenience Package: Priced at $75 $ 1,125.00 =0.25*75*60 $ 2,400.00 =0.25*75*128 $ 3,300.00 =0.25*75*176

Total Revenue $ 38,250.00 $ 81,600.00 $ 112,200.00

Cost of goods sold

Package 1 $ 4,050.00 $ 10,125.00 $ 12,150.00
Package 2 $ 12,776.00 $ 31,940.00 $ 51,104.00
Package 3 $ 8,026.00 $ 20,065.00 $ 32,104.00
Add-on package $ 1,367.69 $ 1,367.69 $ 1,367.69
Total COGS $ 26,219.69 $ 63,497.69 $ 96,725.69

Gross Profit $ 12,030.31 $ 18,102.31 $ 15,474.31

Operating costs:
Variable cost:
Transaction cost $ 1,013.63 =0.0265*C10 $ 2,162.40 $ 2,973.30
Fuel expense 251.856 =15*2/100*60*13.2*1.06 537.2928 537.2928

Fixed cost:
Website cost $ 250.00 $ 250.00 $ 250.00
Incorporation Cost $2,500
Owner's Salary - first fiscal year $ 10,000
Owner's Salary - subsequent years 48000 48000
Business insurance 2400 =200*12 2400 2400
NUANS $ 40.00
Interest expense $ 14,400.00 $ 14,400.00 $ 14,400.00
Insurance $ 1,800.00 $ 1,800.00 $ 1,800.00
Part time employee $ 1,440.00 $ 1,440.00
Truck rental 960 960
Bank account fee 120 120 120
Storage csot 2880 =240*12 2880 =240*12 2880 =240*12
Depreciation of Truck 2750 =(36000-3000)/12 2750 =(36000-3000)/12 2750 =(36000-3000)/12
$ 38,405.48 $ 77,699.69 $ 78,510.59

Profit before tax: $ (26,375.17) $ (59,597.38) $ (63,036.28)

Pro-forma Statements of Earnings: Aggressive

Revenue: (assume 60 rentals) FY1 FY2 FY3

Package 1: Priced at $475 $ 10,925.00 $ 22,800.00 $ 32,300.00
Package 2: Priced at $650 $ 29,900.00 $ 62,400.00 $ 88,400.00
Package 3: Priced at $700 $ 16,100.00 $ 33,600.00 $ 47,600.00
Add-on Convenience Package: Priced at $75 $ 1,380.00 $ 3,600.00 $ 5,100.00

Total Revenue $ 58,305.00 $ 122,400.00 $ 173,400.00

Cost of goods sold

Package 1 $ 4,050.00 $ 10,125.00 $ 12,150.00
Package 2 $ 12,776.00 $ 31,940.00 $ 51,104.00
Package 3 $ 8,026.00 $ 20,065.00 $ 32,104.00
Add-on package $ 1,367.69 $ 1,367.69 $ 1,367.69
Total COGS $ 26,219.69 $ 63,497.69 $ 96,725.69

Gross Profit $ 32,085.31 $ 58,902.31 $ 76,674.31

Operating costs:
Variable cost:
Transaction cost $ 1,545.08 =0.0265*C10 $ 3,243.60 $ 4,595.10
Fuel expense 251.856 =15*2/100*60*13.2*1.06 537.2928 537.2928

Fixed cost:
Website cost $ 250.00 $ 250.00 $ 250.00
Incorporation Cost $2,500
Owner's Salary - first fiscal year $ 10,000
Owner's Salary - subsequent years 48000 48000
Business insurance 2400 =200*12 2400 2400
NUANS $ 40.00
Interest expense $ 14,400.00 $ 14,400.00 $ 14,400.00
Insurance $ 1,800.00 $ 1,800.00 $ 1,800.00
Part time employee $ 1,440.00 $ 1,440.00
Truck rental 960 960
Bank account fee 120 120 120
Storage csot 2880 =240*12 2880 =240*12 2880 =240*12
Depreciation of Truck 2750 =(36000-3000)/12 2750 =(36000-3000)/12 2750 =(36000-3000)/12
$ 38,936.94 $ 78,780.89 $ 80,132.39