Recently, fellow ACE guru Danny Antonio and I had a chance to discuss the QFP model for improving sales with two students. They were defending their Entrepreneurial Venture, an alternative requisite for the MBA program for which the traditional topping-off is the Management Research Report. While in the typical MRR, the students research on an industry and a specific firm to come up with a strategic plan, in the EV, students start up an enterprise and operate it during a good part of their second year of graduate studies at AIM. They have to regularly report their progress and learning experiences and submit a culminating document which includes a three-year plan on how to take the enterprise forward. In fact, many students wind up continuing the venture even after graduation.
These students had successfully incubated a lemon drink and were on the brink of entering the commercialization stage. In the course of our meeting, we asked them to formulate new strategies to increase sales in order to take the enterprise forward. Guru Danny Antonio wanted the students to come up with sales increasing strategies and brought out the QFP model for consideration: Q•quantity, F•frequency and P•price. In effect, the QFP model is the revenue equation. But what is interesting is the sequential ordering of the factors where, just like the QDP model often discussed in past articles, P or price is last.
For the QFP model, the first line of attack in order to increase revenues is to increase quantity. This can be done by making new users buy, or for new dealers to sell, the product or service. The next line of attack is to increase frequency. This can be done by increasing the use-per-unit-time of current users. A price increase is only the last resort.
From a strategic perspective, a revenue-increasing marketing strategy must have clear programs whose objectives are: (1) to increase the number of new users and/or dealers, and (2) to increase the frequency of current markets.
The point is to focus on new customers first and these can come from:
• new uses of the product/service,
• new customers never reached before,
• new areas never reached before, and
• new dealers/retailers.
On the matter of increasing frequency of use by existing users, these can come from:
• new uses/benefits of product/service; and
• more consumption/utility per unit time.
Going back to the students’ EV, the lemon drink had respectable sales performance. To start up, these budding entrepreneurs used a network spanning parents, relatives, friends, classmates, and neighbors. From this, they were able to generate the barest minimum initial capital required. They used OPM (this refers to other people’s money, not the more popular acronym for original Pilipino music).
It also meant getting credit lines from suppliers of firms with whom their parents had business relationships. Their lack of business track record was offset by relationships established by members of their network. They used idle family assets. They literally took a free ride on trips that their family vehicles would take. Such resourcefulness and networking ability are definitely crucial to a start-up’s survival. In fact, these traits brought the venture from infancy to toddler stage in less than a year. Now, it is ready to run.
What guru Danny Antonio and I wanted to do was to push these two students and make their baby run, and run faster–sooner than later. So we subjected them to a battery of pointers and questions:
• Increase sales faster but keep your price. You are in a highly price-sensitive game. The game cannot be won by price.
• Use the QFP model but increase the Q first!
• Your current dealers were generated because of networks and relationships. What did they waive because of the relationship? You may soon run out of dealers and need to go outside your network. You must know what they gave up.
• Are there other distributors, dealers or retailers you have not tapped? Who are they? What will make them listen to you? What do they need?
• Your product is fundamentally good. Does it give good margins to dealers/retailers?
• Are there other people who can benefit from your product? Who are consuming them and why? Is there a big untapped market out there?
• Increase the F next! Can your current consumers/dealers buy more frequently? What will make them buy the same volume frequently?
• What does your experience with the current customers/dealers tell you? Has the product gone out of stock in some of your dealers? Could that have sold more, if only…?
It was at this juncture that the two students smiled upon realization that their baby was ready to run fast. They realized that they had to come up with a program to increase quantity of sales by tapping outlets and distributors outside their network. They must know what margins the alternative products offer. They must identify ways of increasing the Q or quantity opportunities from new customers and use creativity to address and seize them.
The students saw that there was an opportunity to increase the frequency of purchase by existing dealers/customers since this would impact on sales. A program to increase the frequency and volume of purchase by existing channels were needed. They must identify ways or increasing the F or frequency opportunities from current customers and use creativity to seize them.
Bottom line was–they knew they needed to reflect on their experience in running the enterprise and to learn from it. The utilization of learnings to take control of their destiny must be done every day. Opportunity-seeking and the use of creativity are part of the daily grind of these two students and all genuine entrepreneurs.
(Alejandrino Ferreria is the dean of the Asian Center for Entrepreneurship of the Asian Institute of Management. For further comments and inquiries, you may contact him at: ace@aim.edu.ph. Published "Entrepreneur’s Helpline" columns can be viewed on the AIM website at http//: www.aim.edu.ph).