A Test Preparation Firm, Business Proposal Example

This business proposal is for the opening of a test preparation firm that will assist students in studying for a number of different tests including graduate/ professional score entrance test (e.g., GMAT), professional tests (e.g., CFA).  Although there is room in the current market for the firm’s business model to succeed, one of the main obstacles will be the level of existing competition: There are several, high-profile test preparation companies with an established market share as the main competitors. Within this established market structure, however, there are opportunities for a nimble start-up with a different pricing scheme, lower labor costs, and an innovative delivery method.  The company’s business model will implement various innovations: 1) base pay for instructors plus a bonus based on the performance of testing students; 2) greater base salary for teachers who demonstrate a greater higher average score on the test being taken.

The pricing of the product (classes) will be quite complex at first, and likely differ based on the test taken.  The pricing of the product will be complex because calculating the profit-maximizing quantity for simple goods is quite easy, for services quite difficult.There are two main cost inputs in this model: 1) the books and other materials needed for the students; 2) the costs of employing the teachers for test preparation classes.Normally, one might assume that both of these items are fixed costs; however, the firm’s business model is special in that we separate the difference between fixed costs and variable costs.  The books in the model are fixed costs along with the basic administrative costs that must be performed to maintain basic operations.  However, the labor involved is a variable cost in this equation because the firm employs teachers as consultants that are only paid if there are enough students who demand to take a certain class- there is no contracted labor.  This business model allows the firm to be more flexible than other firms that have high levels of overhead including administrative and the employment of teachers over the long-term.  In addition, the company will implement a decentralized model in a number of different markets: Rather than maintaining a national presence, the firm will start off with operations on four college campuses that are identified as having a large percentage of students going to graduate school being located in mid-to large-sized metropolitan areas.  Thus, how to increase revenue and profit maximization will be established at the local level- the basic business model tells one that revenues increase through economies of scale: increasing the number of students who take the classes. There is no readily available data for the marginal cost and revenues associated with test preparation companies.  For argument’s sake, let’s posit that it costs $100 per hour for the teacher’s labor including renting a place to teach.  This means that revenues, in the form of student tuition, will at least need to equal $100 to reach the market equilibrium for marginal revenue to equal marginal cost (Mankiw, 2008; Baumol, 2008).  Since the main unit of cost here is the teacher’s time, the marginal cost, or the cost of producing the next “good” is the increment of the teacher’s time plus the administrative costs involved in producing the material.  The marginal revenue in this business model is the revenue received from another student attending a class- roughly the cost of tuition paid per student per class (Minanbe, 1970).  The profit maximizing strategy will be aimed at attracting more students to pay for class, while trying to benefit off economies of scale by leveraging a teacher’s time for many students. This will inevitably be a process of trial and error in determining how many students can be placed in a class without a loss in the student’s learning experience and personal attention.