Unit 1 · Topic 1.1 · about 25 minutes
What Is a Business?
Say what a business does, tell a customer from a consumer, and decide whether a business is creating value, capturing value or both.
Predict first
A startup sells a phone charger that fills a dead battery in five minutes. People who try it love it. The catch: every charger costs the startup more to make than buyers are willing to pay for it. Has the startup created value?
What counts as a business
A business is an organization or entity that produces and distributes products. In this course a product can be a good, a service or both. A good is something you can hold, like a hoodie. A service is work done for you, like a haircut.
Size does not decide whether something is a business. Size can be measured by geographic reach (how wide an area the customers come from), by number of employees or by revenues (the money a business takes in from sales), and a business can be any size by every measure. Jade's Lawn Care is one person with one mower, working a few blocks of her neighborhood. A regional grocery chain might run 40 stores in three states with 3,000 employees. Both are businesses.
A business can serve customers face to face, like a barbershop, or virtually, like a one-person shop that sells phone cases online from a garage. Plenty of businesses do both.
Customers and consumers
A customer is an individual or a business that purchases a good or service. A consumer is an individual who uses a good or service, whether or not they are the one who bought it.
When you buy a burrito and eat it, you are both. When a parent buys a car seat for a baby, the parent is the customer and the baby is the consumer. A business can be a customer too: a pizzeria that buys 40 cases of cheese a week from a dairy is the dairy's customer. It is not a consumer, because a consumer is always an individual.
The difference matters because the person who pays and the person who uses can care about different things. The parent compares safety ratings and prices. The baby only cares whether the seat is comfortable. A car seat company has to win over both of them.
Sort it
Decide each one's role in the purchase the card describes. Tap a card, then tap its bin.
Customer only
Consumer only
Customer and consumer
Starting from a problem, need or want
Every business starts from something customers are missing. Businesses identify customer problems, needs and wants, which are market opportunities, and develop goods and services to address them. When a product addresses the problem, need or want it was built for, the business has achieved problem-solution fit.
Marisol spotted a market opportunity at the Eastgate office park. Its 900 workers had nowhere to buy lunch but a vending machine, since the nearest restaurant was a 15-minute drive away. Now she parks her food truck there from 11:30 to 1:30 every weekday, and every order is ready in five minutes. When workers buy lunch from her and are back at their desks on time, her product fits their problem.
No business can satisfy every potential customer, so each one has to select which problems, needs and wants to focus on, and which customers to serve. Marisol could also cater weddings or sell at weekend festivals. With one truck and two employees, chasing all of it would leave every group poorly served, so she sticks with the office workers and the lunch problem she found.
Creating value and capturing value
Value is the worth or benefit of a product to customers. To the Eastgate workers, Marisol's truck is worth something real: a hot lunch without a half-hour round trip.
Value creation occurs when a business provides a product that responds to customers' problems, needs and wants. Marisol created value the first day her truck solved the lunch problem.
Value capture occurs when a business is able to charge customers a higher price for a product than it cost to produce. One of her chicken bowls costs Marisol $4.10 to produce, counting the food, the container and her cook's time.
She sells each bowl for $11.00, so she captures value on every one. Not every business that creates value manages to capture it.
| Product | Price | Cost to produce | Creates value? | Captures value? |
|---|---|---|---|---|
| Marisol's chicken bowl | $11.00 | $4.10 | Yes: a fast, hot lunch near work | Yes: the price is higher than the cost |
| Five-minute phone charger | $45 | $60 | Yes: a full battery in minutes | No: the price is lower than the cost |
| Hand-painted phone case | $25 | $25 | Yes: buyers want a one-of-a-kind case | No: the price only equals the cost |
Worked examplePedal Fix: value created, value not captured
Pedal Fix sends a van to fix bikes at customers' homes. Each flat-tire repair costs Pedal Fix $38 to produce, counting the new tube, the mechanic's time and the fuel for the trip.
In its first month, Pedal Fix charged $35 per repair and booked 120 repairs. Customers said the best part was not hauling a bike to a shop. Did Pedal Fix create value? Did it capture value? What has to change?
Value created? Yes. Customers had a problem (a flat tire and no easy way to get the bike to a shop), and the service responds to it. The 120 bookings show they wanted it.
Value captured? No. Each repair sold for $3 less than it cost to produce. Across 120 repairs, that is $360 lost in one month.
What has to change? Pedal Fix has to charge more than each repair costs to produce, or bring that cost below the price. It raises the price to $49. Most customers keep booking, because skipping the trip to a shop is worth more to them than the higher price.
Check the new price. Each repair now sells for $11 more than it costs to produce (49 minus 38), so Pedal Fix captures value on every repair and still creates it.
Pedal Fix created value from its first day, but it captured value only once each repair was priced above its $38 cost to produce.
Check your understanding
Which of these is NOT a business?
A cereal company prints cartoon characters on its box at a young child's eye level. It also runs ads in parenting magazines about the cereal's added vitamins. Which statement best explains this approach?
Northgate Fitness opens in a neighborhood full of young families, where many parents want to exercise but have no one to watch their kids. The gym offers 45-minute classes with free childcare and skips the heavy equipment serious weightlifters want. What does this decision show?
Glow Lab sells a desk lamp that shifts color through the day to match natural light. Customers rave about it, and 8,000 people bought one last year. Each lamp sells for $39, exactly what it costs Glow Lab to produce. Which statement is correct?
TrailCharge sells a backpack with a built-in battery for charging a phone. Which fact is evidence that TrailCharge captures value?
Course alignment, for teachers
AP Business with Personal Finance topic 1.1, Unit 1: Businesses, Competition, and New Ideas.