Drone Services as a Business – Part 2
People frequently contact us asking how they can “get into the drone business”. While there are many alternatives, some will find using a drone in a service related business appealing. We are offering this “Drone Services-as-a-Business”, (DSAB), series of articles to share some of our practical experience with commercial use of drones and in start-ups in general. We hope that newly minted entrepreneurs and seasoned business people looking for a new challenge will find some value in these discussions. We appreciate your feedback and suggestions.
- This is Part-2 in a series. – In this instalment we’ll propose some how-to’s:
- Considerations for starting your business from scratch,
- Discussion of some business/financial assumptions, and
- How to mitigate some of the risks we identified in Part-1.
Then in the next instalment, we will go thru some case studies, talk more about marketing plans, and funding sources.
- In Part-1 we discussed:
- Common business applications for drones
- How does “Drone Services as a Business” work?
- How big is the market?
- What are the risks?
You can view Part-1 here: http://droneyard.com/2015/10/27/drone-as-a-service-great-opportunity-but-changes-on-the-horizon-2/
Getting your Business Started
Starting a business is not easy; in fact, most businesses fail in their first year and fewer than 20% of those remaining will survive for five years. Furthermore, the drone industry is brand new and experiencing dramatic accelerated change which creates significant additional risks. If you were starting an auto business or selling TVs, there are some best practices you could draw upon but because DSAB is an emerging industry, we are all trying to figure it out as we go along. There are still many lessons to be learned as the marketplace accepts this transformative technology.
That said, starting a service business usually doesn’t require a large capital investment, can take advantage of many inexpensive business and technical systems, and can be started fairly quickly. In the DSAB model, a small investment in a drone, some post processing software, and readily available cloud/internet based business systems for sales/marketing, accounting, etc. can put you in business in days or weeks.
If you are starting a business for the first time, we strongly urge you to consider developing your initial plan through fast prototyping and using the business model canvas methodology: –https://en.wikipedia.org/wiki/Business_Model_Canvas . Another good source if information is “The Startup Owner’s Manual” by Steve Blank.
You must have a plan even though it will change. Without a roadmap to get started you may end up a few months down the road chasing ideas that are not critical to your success. Key issues to begin with include:
- Conduct Market Research – You don’t need to hire a marketing agency and conduct focus groups. Instead, decide who your target market is and how you will attract them – Then before you do anything else, go out and talk to at least twenty prospects, preferably in person. The best way to find out what a customer needs is to ask. Said another way, building a product/service in a vacuum is a sure plan for failure. Use this time to define exactly how your service offering will solve the business problems identified by your prospective customers.
- Build a go-to-market plan – No, people won’t beat a path to your door if you build a simple website and wait for customers to show up. Even the best mousetrap needs to be sold. More on this when we go through some case studies.
- Find a way to test your early assumptions by trying to sell your service…. Worry less about the price at this time and more about getting someone to say YES to your offering.
- Make sure you have adequate resources, (usually people, time and money), to weather the many ups and downs you will encounter as you grow your business. Most businesses fail because they run out of money. With some early planning you can help avoid this pitfall.
- Just go do it! – The old Nike commercial still applies. Get out there and personally do some jobs. Experience will tell you more than anything else what is working and what needs to change.
As you gain a little market experience, additional factors will become important:
- Customer Acquisition
- Who will you target to get customers? How will you get to the decision maker buying your service: advertising, direct/indirect sales, word of mouth, more? Sometimes it may be helpful to work through channel partners and other times, you should sell directly to your end customer.
- How much will they be willing to pay? Do some testing. The market will tell you if you are charging too much fairly quickly, but make sure you are not leaving money on the table by charging too little.
- Solution selling – people aren’t buying your brilliant ideas – they want solutions to their business problems. How do you communicate your value proposition to your prospects? Your marketing plan must have a laser focus on proving your value proposition to your prospect to get new business and similarly on retaining currents customers, make sure to emphasize quality service and support as well.
- Customer Acquisition & Retention
- You need a Business Contract – Make sure you have a reasonable contract with your customer detailing the service to be provided, timing, costs, and any promised deliverables. The time to set expectations is at the beginning of a transaction, not after you have completed the work or after something has gone wrong.
- Service level agreement – your reputation will only be as good as your ability to deliver on time and on budget. You should be willing to commit to timing and deliverables to your customer and then over-deliver.
- Excellence in customer service – the best way to get new business is from prior clients either directly or through referral or word of mouth. Giving best-in-class service to your customers is key to your continued growth. Learn from your early mistakes and adjust your offering.
- KPI’s – Key indicators to closely monitor the health of your company are a must. Look at software as a service benchmarks to create your own. A quick Google search will give you lots of reading material. Items to consider include customer acquisition cost, sales cycle time, customer retention, customer satisfaction, and lifetime value of a customer to name just a few. You need a measuring stick to monitor your results every single day.
- Staffing – Because you are selling a service, labor will be involved; And labor is one of the most difficult components of any business model to scale. In addition to finding and retaining qualified talent, costs, and training, you will need to spend a significant amount of time managing them to expected service levels.
Financial Model Considerations
Your income statement and balance sheet are the ultimate measuring sticks for how well you are doing. But in the early stages of growing your business, cash-at-hand is almost certainly your most important financial consideration. Monitoring cash flow daily is key. Following are several other key financial considerations:
- Unit profit models – No you can’t make it up on the volume – unless you can make a profit on each service you perform, you will be in trouble – freebies and loss leaders are not a good idea in a startup business. Consider each component of your service by determining how much time, material/supplies costs, distribution, and re-work will be involved. Then determine what gross margin you want to make and that will give you a rough approximation of how much you will need to charge for your service. If that is more than you think your customers would be willing to pay, or the value created, then start over.
- Revenue projections
- Market share doesn’t buy your service, customers do. Any forecast that is built upon a market share estimate is doomed. Never say: “All I need is 0.1% of the market”. Your revenue model needs to be built bottoms-up, ie what does it take to generate a lead, forecast what percentage will convert to customers, and when multiplied by pricing, you get your revenue. We will discuss this in more detail in our next article.
- Pricing model considerations – freemium, multiple categories, (silver, gold, platinum)? Chances are that all of your customers won’t fit into a single pricing model. Be prepared to offer a range of service offerings at different price points.
- Operating Expenses/overhead
- Customer acquisition costs can vary significantly. If you have repeat business from a customer, ie serving a realtor, then your marketing costs may be relatively low. However, if your business is project to project, then you will need to have an ongoing lead generation and marketing effort. You should make an estimate of the ‘lifetime value of a customer’ at the very beginning of your marketing development plans. This potentially will be one of your largest expenses unless you rely strictly on word-of-mouth referrals. We will discuss this in more detail in our next article in this series.
- Traditional operating expenses – rent, insurance, staff, marketing, systems, etc. are all relatively small for a DSAB business. One standout however is liability insurance. Make sure you have adequate coverage for the inevitable mishaps.
- Capital Expenditures – There is good news here. Most DSAB businesses don’t require a lot of capital to get started. You will probably only need to invest in one or two drones to start, and you need to have post processing software to create end products for your customers. You can build administrative functions as the need arises, so it is best to keep your ongoing expenses low to start. Hire a bookkeeper, rent some inexpensive space or work from home, and as you grow expand from there.
In Part 1 of this series we identified several risks:
- Is the market over-hyped?
- What about regulatory risks
- What are the disruptive DSAB risks on the horizon?
- Over-hyped Marketplace – Last time we discussed how much expectations are exceeding our ability to deliver actionable solutions. You can help mitigate this phenomenon by creating a clearly defined service, ie what exact service you will perform, what outputs you will deliver, when it will be completed, and how much it will cost. Then document your service in a clearly defined contract with your customer. Putting deliverables in writing up front will help you avoid many future problems. Finally, do your absolute best to “OVER DELIVER” on your results. Find a way to add a little extra and your customers will reward you with testimonials, referrals and overall goodwill.
- Regulatory Issues – Depending on what country, or state or province, you probably will be subject to some form of regulation. Furthermore, almost all drone regulations are going to change as the technology gains wider marketplace acceptance. So it is imperative for you to not only follow the rules, but also make sure that you find a way to keep current with them. One good way is to find legal counsel with direct industry involvement and pay them a small retainer to keep you updated. Next, it is also important to speak out to regulators, especially in the US. Your voice is very important in providing balance to the public news stories and private lobbying that is a threat to all DSAB providers. Im not suggesting that you become an activist, but it is important to have your voice be heard and to support industry associations that share your point of view.
- Future Risks to the DSAB Business Model – This is a large topic that we will address more fully in another article. For now, I would look for several key trends:
- First there will be a significant number of new entrants once the FAA in the US publishes commercial drone rules. That will create new competition, there will be pricing pressures, and getting your message to your prospects will become more costly. We’ll develop this more fully in a future article.
- Next, look for major advances in software analytics. Right now there are very few tools that actually deliver true “ROI solutions”. You will need to continuously upgrade your service offering by investing in new developments as they come to market. We have barely scratched the surface of big data predictive and proscriptive analytics and will be important for you to stay current with new capabilities.
- Third, look for continued improvements in both drones and sensors. In particular, improvements in ‘ease of use’ will cause you to change your business model. As drones become easier to use, your value proposition will move from being a data gatherer to become a subject-matter-expert in interpretation of the data. Once again, we’ll discuss this in more detail in the future.
- There are many more risks and opportunities on the horizon that we will discuss in future articles.
What do you think? Feedback is appreciated, email me at firstname.lastname@example.org. I promise to provide an update with your good suggestions included. Thanks go to Doug Andriu at SkyData Pro for his valuable insights.
What’s in the next article?
In the next instalment we’ll go through some case studies and respond to your feedback.
Event 38 designs and manufactures drones, specialized optical sensors, and a cloud based Drone Data Management SystemTM for small and medium sized businesses. Today we have customers in 55 countries using our products for agriculture, surveying, construction, environmental preservation, and other applications. Please contact us at www.event38.com
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