AP® Business with Personal Finance review sheet from Aim for Five (aimforfive.com/business-finance/units/1/1-1)
Unit 1 · Topic 1.1
1.1 What Is a Business?
A business exists to solve problems for customers, and it survives only if it can earn more from that solution than the solution costs. This topic gives you the basic vocabulary of the whole course: business, customer, consumer, value creation and value capture.
Key terms
- business
- goods and services
- customer vs. consumer
- problem-solution fit
- value creation
- value capture
What counts as a business
A business is any organization that makes and delivers products. In this course, product means goods (things you can hold, like a phone case) and services (work done for you, like a haircut or a streaming subscription).
Size doesn't matter. A teenager reselling sneakers online is a business, and so is a company with stores in 40 countries. You can measure size in three ways: how far it reaches (one town or the whole world), how many employees it has, and how much revenue (money from sales) it brings in. A business can serve people face to face, online, or both.
Customer or consumer?
The customer is whoever pays. The consumer is whoever uses the product. Often they're the same person: you buy a burrito and you eat it. Often they aren't.
A parent buys cereal that a 7-year-old eats. A school district buys laptops that students use. A company pays for software its employees use. In each case the business has to please two groups: the person (or business) holding the money and the person actually using the product. That's why cereal boxes have cartoons for kids and nutrition claims for parents.
- Customer: an individual or a business that buys the product.
- Consumer: an individual who uses the product, whether or not they bought it.
Problems, needs and wants
Every product starts with something a customer is missing. A problem is something that frustrates people (my phone dies by 2 p.m.). A need is something people must have (somewhere to live). A want is something people would like (a nicer jacket). Together these are market opportunities.
When a product really fixes the problem or meets the need or want, the business has problem-solution fit. No business can serve everyone, so it has to choose which problems to focus on and which customers to serve. A portable charger company might focus on students and commuters rather than on people who sit at a desk next to an outlet all day.
Creating value vs. capturing value
Value is how much a product is worth to the customer: the benefit they get from it. A business creates value when its product actually helps with the customer's problem, need or want.
Creating value isn't enough to stay in business. A business captures value when it can charge a price higher than what the product cost to make and deliver. The gap between price and cost is what pays the owners and keeps the business running.
Some ideas create a lot of value but capture very little. A free app that millions of people love creates value, but if it has no way to earn money, it can't pay its servers or staff. Other businesses capture value well but create little, and customers eventually leave for something better. Strong businesses do both.
Worked examples
Try each one yourself first, then open the solution.
- Example 1
Spotting the customer and the consumer
For each case, name the customer and the consumer: (a) A grandparent buys wireless headphones as a birthday gift for a grandchild. (b) A hospital buys scrubs for its nurses. (c) You buy a video game for yourself.
Show the solutionHide the solution
- Step 1: Ask two questions each time: who pays, and who uses it?
- Step 2: (a) The grandparent pays, so the grandparent is the customer. The grandchild uses the headphones, so the grandchild is the consumer. The business has to appeal to both: a fair price and good reviews for the buyer, and style and sound for the user.
- Step 3: (b) The hospital pays, so the hospital (a business) is the customer. The nurses wear the scrubs, so they're the consumers.
- Step 4: (c) You pay and you play, so you're both.
Answer: (a) Customer: the grandparent; consumer: the grandchild. (b) Customer: the hospital; consumers: the nurses. (c) You are both the customer and the consumer.
- Example 2Calculator allowed
Does this smoothie stand capture value?
A smoothie stand sells smoothies for $6.00 each. Fruit, yogurt, cups and the stand's other costs work out to $4.50 per smoothie. It sells 200 smoothies a week. Does it capture value, and how much per week?
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- Step 1: Value capture means the price is higher than the cost to produce. Compare them: $6.00 is more than $4.50, so yes.
- Step 2: Value captured per smoothie = price − cost = $6.00 − $4.50 = $1.50.
- Step 3: Per week: $1.50 × 200 = $300.
Answer: Yes. It captures $1.50 per smoothie, or $300 a week.
Common mistakes
- Assuming the customer and the consumer are always the same person. Check who pays and who uses the product separately.
- Treating value creation and value capture as the same thing. Creating value means helping the customer; capturing value means charging more than the product cost to produce.
- Thinking a business must be big. A one-person online shop is a business if it produces and delivers goods or services.
On the exam
- Multiple-choice questions often describe a short business case and ask you to pick out the customer's problem, need or want, or to say whether a situation shows value creation or value capture.
- On Question 1 (Business Canvas Project), pitching your product means naming the target customer, the problem and how your product creates value, so practice saying all three in two or three sentences.
Connected topics
Videos
Check yourself: 1.1 What Is a Business?
5 questions on 1.1 What Is a Business?. Pick an answer to see if you got it, and why.
| Product | Price per unit | Cost to make and deliver per unit | Units sold per month |
|---|---|---|---|
| Phone case | $25 | $9 | 400 |
| Charging cable | $15 | $11 | 900 |
| Wireless earbuds | $60 | $52 | 150 |
Monthly data for Volt Shop, a hypothetical online seller of phone accessories
For which product does Volt Shop capture the most value per unit sold?
Which product earns Volt Shop the most total dollars above cost each month?
Customers say Volt Shop's earbuds solve the problem of tangled cords during workouts. This feedback is evidence of
Dana Ruiz, a parent of two, kept hearing other parents at her children's school complain that packing healthy lunches every morning took too long and that their children threw away food they didn't like.
Dana interviewed 30 parents at school pickup. Twenty-four said they spent at least 20 minutes each morning packing lunches, and 19 said their children regularly came home with uneaten food.
Dana then sketched an idea for LunchLoop, a weekly delivery of ready-to-pack lunch items that children choose from a picture menu. Before buying any kitchen equipment, she wrote a one-page description with sample menus, showed it to 15 of the parents and asked whether they would order it at $35 a week.
Dana estimates that each week of LunchLoop will cost her $26 to prepare and deliver.
Hypothetical business scenario
Which of the following correctly identifies LunchLoop's customer and consumer?
If LunchLoop sells for $35 a week, which statement best describes how Dana captures value?
0 of 5 answered