Brutally Sincere Business Model Lessons after 6 Months of Flowstate.ph

Most business histories are misleading. The stories that get told tend to be self-serving to the tellers. And the ones that get repeated are those that follow archetypes — like the heroes journey — the ones that we like to hear.

In the past, I taught entrepreneurship in college and high school. So I always wanted to capture what actually happens in a startup. I attempt to do that here, while things are fresh. I’m also old enough to not care about looking stupid, and to realize that no one actually cares.

Except perhaps if you are doing something similar — if you are building a business a la Steve Blank / Lean Startup / Evidence-based entrepreneurship — then I hope you enjoy the gory details.

I guess we could set the official start of Flowstate June 12, 2019, when I pitched the idea to my brother Peter Corazo and my cousin Jom Gonzales. The same day, Carlo Villarica and I recorded a podcast, where I mention the plan:

How Zerothreetwo Approaches Online Marketing with Kahlil Corazo - Zerothreetwo: We share what we…

Here was the initial business model canvas:

We prototyped two business models in the past 6 months:

• Consumer subscription
• Distribution via coffee shops

Before sharing our experience on those, let me share product development lessons:

• We developed some recipes that we liked and people seem to like: Milk chocolate, vegan (coconut milk chocolate), dark chocolate
• For most, the bottled dark chocolate (250ml) is “too much”. But it works as a shot, especially as part of a flight.
• Product development is fun
• Takes a lot of experimentation to know how a certain raw material behaves in the processing

Consumer subscription

We tested customer acquisition via Instagram ads. Here is the ad:

We spent PhP 1,000 advertising this on Instagram targeting people in Cebu who like chocolate. On the second half of this budget we targeted only women, based on the responses we were getting. Here are the results:

• 10,800 views
• 242 likes (I don’t know why it is only 18 in the embedded view above)

They convert through our website. We only accepted orders via Paypal. We got 4 customers. It seems only 1 was through the ads. 2 were people in our network. One was through the posting of one of our customers.

We lost one customer, most likely due to product (she was the only one who ordered the dark chocolate, she probably found it “too much.” She did not reply when I asked for feedback.). Two suspended their subscription while they are outside of Cebu for a vacation.

Thoughts

• There are too few Paypal users in Cebu to make this viable (credit card penetration is still at 6%).
• Paypal charges around 12% of the recurring fees
• Recurring fee options outside of Paypal are too messy or expensive to setup
• FB does not let me target the intersection of Paypal users and chocolate lovers
• The folks who have Paypal also seem to travel, and it makes sense that they suspend the subscription while they are out
• We can do cash on delivery with Lalamove, but that’s not a business I want to go into
• We can do one-time purchases instead of subscriptions, but that’s also not a business I want to go into
• If the prototype does not work, it is unlikely for the optimized, better executed version to work.
• I’ve been doing conversion-driven digital marketing for a decade, so I trust my gut feel on this. Cost of customer acquisition is too high.

Distribution via coffee shops

• We pitched to 3 coffee shops
• We did chocolate tasting meetups in 2 of them. They went well. Super rich in consumer insight (the kind where you see their eyes dilate)
• We tested charging for the 1st charging $10 for the first one. 2 signed up. They did not convert to subscribers.
• After a tasting session, one coffee shop wanted to resell our bottles.

Some footages from those chocolate tasting events:

Tasting meetups - @flowstate.ph

Thoughts

• The tasting probably works better as a sales tool instead of a paid gig (plus I get super anxious when it is paid)
• Margins appear to be too thin via coffee shops (I’d rather do other kinds of business)
• Coffee shop owners see an incoming trend of chocolate

Conclusions

This is what my intuition tells me: it makes better sense to train coffee shops to make the drinking chocolates themselves. We can be distributors of the raw material, cacao liquor. This is unseen but main business Linear Coffee Roasters. We can be the Linear for drinking chocolate.

The economics also makes better sense. There is no additional labor cost for coffeeshops to create the drinks, as they already have barristas in their payroll.

We can then expand to distributing the same products to restaurants (ie, couverture).

We can also try selling other products from the same suppliers (eg, craft chocolate bars, cacao butter, etc)

This also makes sense considering Peter’s and my plans for 2020. Peter might spend some time in the US. I’ll move to Davao, but will be in Cebu perhaps one week a month. We can’t build a manufacturing and retail business with these constraints. But these constrains might even be beneficial to a distributor.

Plus, we enjoy the R&D (we could do this, as well as training, as part of our service to customers). I enjoy the selling to businesses more than end-users. I like building relationships with suppliers.

Perhaps most importantly, this makes it more likely for us to have varieties of whole drinking chocolate in Cebu. Each cafe can develop its own style and its own fan base.

So it looks like this is the right business model to prototype next. Will keep you posted. Perhaps in another 6 months.

Here’s the updated business model canvas.