ESPRESSO OPERATIONS
Virtual Business - Retailing
Lesson Goals, Objectives & Notes
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Lesson 1: Pricing
 Goal: In this lesson, you explore the nature of pricing and discover its importance in the success of your store. You
change prices and record changes in demand and profits.
 Objective: After finishing the lesson, you should understand pricing related terms including price, revenue, margin,
demand, and profit. You should understand the effect of prices on demand and profits. You should also show
proficiency in the pricing screen. Note: advanced pricing, including varying margin on products to create “loss leaders,”
is covered in the Advanced Promotion lesson.
 Notes:
1. All businesses face two conflicting pressures when setting prices:
a. If you price too high, you won’t sell many goods because customers will go to competitors or not buy at all.
b. If you price too low, you will make little or no money on each item you sell.
2. Successful businesses find a price that is high enough to make money and low enough to attract customers.
3. Most businesses have a general pricing policy that applies to most products. You should follow this lead and set all
your prices using the Pricing screen.
4. Real businesses routinely track their competitor’s prices by visiting stores or looking on the Internet. To see
competitor prices, you can click on See Percent of Competitor in the Pricing window.
Lesson 2: Purchasing
 Goal: In this lesson, you explore the purchasing process of a retail store, how just-in-time inventory systems work and
why it is important to monitor sales and shrinkage.
 Objective: After finishing the lesson, you should show an understanding of the considerations in setting purchasing
policies for a store. You should understand how purchasing impacts sales and profits. You should also show proficiency
in the purchasing screen.
 Notes:
1. Buyers must make certain there is an adequate amount of stock to satisfy customer demand. If there is not, sales
will be lost and customers will become disgruntled.
2. If buyers purchase too much product:
a. Perishable products such as milk can expire. This “shrinkage” is normally recorded under Cost of Goods Sold
on a business’s Income Statement.
b. There may not be enough physical space to house certain faster selling products.
3. In addition to financial reports, most businesses have product reporting systems that can tell them sales and
shrinkage for each product they sell. This system is accessed by clicking the Products button on the main toolbar.
4. Most convenience stores can receive daily shipments from their suppliers. This is also true in the simulation. All
deliveries are made at midnight.
5. One of the four P’s of marketing is Product. In a retail environment, your main control of “product” is through what
you purchase.
Lesson 3: Staffing
 Goal: In this lesson, you explore the need to have adequate staffing levels in a business. You explore how staffing
levels affect customer satisfaction and profitability
 Objectives: After finishing this lesson, you should be able to recognize the tradeoffs between maximizing customer
satisfaction and managing for profitability. You should understand how to set staffing levels across several different
jobs. You should also show proficiency in the use of the Staffing screen.
 Notes:
1. The functions needed to run a business must be identified so that the business may be properly staffed—the
functions that need to be staffed are cashier and stocker.
2. If a retail business understaffs cashiers, long customer lines can occur and customers may leave out of frustration.
3. If a retail business understaffs stockers, shelves will not be refilled quickly and customers may not be able to find
what they need.
4. If a retail business overstaffs any functions, profits will suffer. Employee wages are a major expense of a retail
establishment and control of that expense is a key to profitability.
5. Depending on a store’s location and customers, some times of day may have very little customer traffic. A store
should close at these times to save on wages. You close by having no cashiers. You can still have stockers restock
shelves when you are closed.
Lesson 4: Promotion
 Goal: In this lesson, you explore the importance of promotion to your business. You use both radio advertising and
billboards to attract customers to your store. You learn to optimize your spending on both types of media. Note: direct
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mail advertising and storefront signage are covered in the lessons Targeted Marketing and Advanced Promotion
respectively.
 Objectives: After finishing this lesson, you should show an understanding of different promotional strategies. You
should understand certain terms, such as Cost per Thousand (CPM) used in purchasing advertising. You should also
show proficiency in the use of the promotion screen and Billboard promotion screen.
 Notes:
1. Businesses need a promotional budget large enough to generate awareness and demand but not so large as to drain
the business of profits.
2. The effectiveness of a given amount of promotional spending can vary widely. For example, advertising on the
radio at a time of day when your target audience is asleep is ineffective but still costs money.
3. Successful businesses generate high awareness and demand within an affordable budget by being very selective with
their advertising purchases.
4. The amount a business needs to spend on promotion is affected by what its competitors spend on promotion. (Note:
This will become more clear in the multiplayer situation when you engage in escalating advertising wars.)
Lesson 5: Financing
 Goal: In this lesson, you control only the financing of your start-up business. You use two financing methods to insure
that your start-up has enough cash to get off the ground.
 Objectives: After finishing this lesson, you should understand how your policies for paying suppliers affect the amount
of cash you have. You should also be familiar with bank loans, interest rates, and terms of loans. Finally, you should be
able to compute whether borrowing money to take advantage of a supplier’s early payment discount, makes sense. You
should also show proficiency in the use of the Trade Credit and New Loan screens.
 Notes:
1. Most businesses begin by losing money. This means they need a source of cash in their initial stages. For most
small businesses, the sources of cash are the owner’s savings, credit from suppliers and loans from banks.
2. Without adequate financing, a start-up will almost certainly fail by running out of cash.
3. Credit from suppliers (also known as “trade credit”) is critical to a retail business because retail businesses purchase
a large quantity of goods and typically sell them at a modest margin.
4. Bank loans are also a key source of capital. The loans available to a business vary in amount, term of the loan, and
interest rating depending on the borrowing business’s credit rating. Credit ratings are determined based on the
financial health or outlook of the borrowing business.
5. Sometimes suppliers will offer discounts if they get paid early. Businesses must determine if they can afford to pay
early and if the discount is worth paying early. Sometimes it is wise to borrow a little extra from a bank to be sure
you can pay suppliers early.
Lesson 6: Market Research
 Goal: In this lesson, you discover why market research is important to the success of a business. You learn how to
collect market information using surveys and how to use the information to make your business more successful.
 Objectives: After finishing this lesson, you should be able to show how surveys can be used to learn about potential
customers and the competition. You should understand how surveys can be used to identify customer segments and the
behavior of people in those segments. You should also show proficiency in the use of the New Survey, Survey Results,
and Segment screens.
 Notes:
1. Market research is used to examine possible business opportunities, resolve business problems, create and execute
marketing plans and evaluate the outcome of these plans.
2. The purpose of market research is to facilitate decision-making within a business. For example, if a survey indicates
that most people living near a convenience store frequently need a particular product, it is wise for the store to stock
that product.
3. Marketers often use surveys to identify particular customer segments. Marketers are interested in segments because
they can tailor product offerings as well as promotional campaigns to appeal to a particular segment.
4. Market research can be expensive and must be planned wisely. The sample size of surveys should be large enough
to give good results but not so large as to waste money. Statisticians (and political pollsters) call a survey
statistically valid if you could repeat it with a different group of people and get the same results within a specified
range (often 2%).
Lesson 7: Targeted Marketing
 Goal: In this lesson, you learn the concept of targeted marketing and how particular media lend themselves to targeted
marketing. You discover how well targeted marketing campaigns can produce the same results as broader campaigns for
less cost.
 Objectives: After finishing this lesson, you should show an understanding of how to research a particular market
segment and design a marketing campaign to target the segment and address its needs. You should show proficiency in
using the market research tools and the Direct Mail screen.
 Notes:
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Marketing, and particularly, promotion, is usually a major expense of a business. The constant challenge to
marketers is to get the most from their promotional budget. One of the most important techniques for doing this
effectively is targeting the promotional effort.
2. If money is spent advertising to someone who will never come to a store (perhaps because it is just too far away),
then that money is wasted. If discounts are offered on products the customer never needs, then the discounts will do
nothing to increase sales.
3. Businesses constantly collect data on current customers and often purchase data on potential customers to make sure
that the offers and inducements that they make are attractive to the customers.
4. Businesses have both ethical and legal restrictions on what data they can collect and share. Today, privacy is a
growing concern among consumers and an important issue for businesses to address.
Lesson 8: Merchandising
 Goal: In this lesson, you explore behind effective merchandising. They learn about needs versus impulse items and how
product placement within a store can affect sales.
 Objectives: After finishing this lesson, you should how an understanding of basic merchandising strategies and their
affect on sales and profits. You should understand the difference between needs and impulse purchases and implications
for product placement in stores. You should also understand the affects of placing complementary products together.
You should show a proficiency in the use of the Merchandising screen to arrange products in your store.
 Notes:
1. Merchandising, often called product “placement,” is one of the four P’s of marketing. Merchandisers must decide
how to allocate space to products given the available merchandising space.
2. Certain products may be placed in such a location as to encourage shoppers to navigate through different parts of the
store than they otherwise would.
3. A store will generally increase sales of impulse items by placing them along heavily trafficked aisles or at the pointof-purchase.
4. Complementary products will generally sell better when placed near each other in related merchandise displays.
5. After implementation of a new store layout, observing customer traffic patterns and product sales will usually
indicate if you have chosen an effective layout.
Lesson 9: Advanced Promotion
 Goal: In this lesson, you explore how storefront customization, ad design, and different psychological pricing strategies
can be utilized as effective promotional strategies.
 Objectives: After finishing this lesson, you should show an understanding of how storefront customization can help
draw customers into a store. You should understand the basics of good ad design. You should understand and be able to
utilize “loss leader” pricing. You should also show proficiency in the use of the Ad Designer form.
 Notes:
1. The storefront is the first physical impression a potential customer has of a store. It should be neat, attractive, and
inviting.
2. Advertisements should be simple, easy to read, uncluttered, and contain strong offers (such as products on sale).
3. Often stores will advertise very compelling offers on particular products on their storefronts. When these offers
include a special price at or below cost, it is called a “loss leader.” The store’s strategy is to lure customers into the
store, away from competitors, and sell them other goods at a profit.
4. When a business intentionally fails to stock enough of a product on sale and runs out, it is referred to as “bait and
switch” pricing. Customers become very angry of “bait and switch” tactics, which are generally considered
unethical and may even be illegal in some cases.
Lesson 10: Security
 Goal: In this lesson, you learn about a major factor in a retail store’s profitability—shrinkage from shoplifting. You
learn how some goods are more likely to be stolen than others and that proper placement of goods can reduce or even
eliminate losses from theft. You also discover the importance of physical inventories in a retail business.
 Objectives: After finishing this lesson, you should understand that losses from theft impact a business’s profits. You
should understand why physical inventories are needed to assess the impact of shoplifting. You should be able to
implement merchandising tactics to reduce shoplifting.
 Notes:
1. Shrinkage refers to the value of lost, stolen, expired, or damaged goods.
2. Shoplifting is the prime cause of shrinkage. It is a crime and a serious concern to all retail businesses.
3. Security systems, cameras, and electronic tags are all used to deter shoplifters.
4. A simple but important element in deterring shoplifting is the placement of products within a store.
5. Products placed within obvious visible range of employees or, even better, behind the counter, are almost never
stolen.
6. Items that are most likely to be stolen are those that are small and of high value.
Lesson 11: Supply & Demand
 Goal: In this lesson, you compute the capacity of a town to support stores. You then predict how many stores will
survive a shake-out. Eventually supply (number of stores) matches demand (what the town’s population needs).
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Objectives: After finishing this lesson, you should show an understanding of what happens when supply exceeds
demand and how, over time, equilibrium is reached between supply and demand. You should be able to predict, at a
rough level, whether there is oversupply in a particular market.
 Notes:
1. Consider how many convenience stores are in Olympia. What determines this number?
2. If there were only one store, it would make a lot of money and others would probably start-up. If there were 10,000
stores, few stores if any would make money and some would eventually go out of business.
3. It’s possible to estimate how many stores an economy can support if you know the costs of a typical store and how
much customers want to buy.
Lesson 12: Financial Statements
 Goal: In this lesson, you learn to read financial statement information to understand the health of a business. Your
specific task is to match 4 sets of financial statement information to 4 stores you see operating in the simulation.
 Objectives: After finishing this lesson, you should be able to read financial statements and understand what the numbers
mean about the business. This includes income statement items like gross margin and balance sheet items such as
inventory.
 Notes:
1. Financial statements are not just for accountants. Managers can use them to understand the strengths and
weaknesses of a business.
2. Good managers can get a visual sense of a business just from studying the financial statements.
3. You will match sets of financial statements to stores you see. Key tings to look out for are: inventory levels, prices
and margins, revenue and customer traffic, and promotional spending.
Lesson 13: Turnaround
 Goal: In this lesson, you takeover the management of a business with specific problems. Your task is to work as a team
to solve the problems to solve the problems and restore the business to profitability.
 Objectives: After finishing this lesson, you will be able to identify problems present in a retail business. You should be
capable of developing a plan to fix business problems and executing that plan. You should also show proficiency in
using several Report screens and Action screens.
 Notes:
1. You will now have a chance to control all aspects of a store. However, it is a store with three major things wrong.
It is your job to find them and fix them.
NEW STORE PROJECT
During the New Store Project you start a store and work to make it profitable. As your profit increases, you move to new levels of
increasing difficulty. You uncover new challenges and build a business plan (product) as you progress through different levels. This
project may be used as your CHS Culminating Project as a Senior.
[1] Proposal—see handout; timeline: 1 week
[2] Product—Business Plan
o New Store Project—Level 1
 Goal: In level 1 you will start a new convenience store from scratch. Your goal is to guide that store to profitability.
Specifically, your store must have a profit greater than $5000 a week for eight consecutive weeks. If you reach the goal,
you will move to the next more challenging level of difficulty. Before beginning, you will prepare Section 1 of the
business plan. After finishing, you will revise your assumptions in section 2 of the business plan based on what you
learned. Note: as you complete each day and each level, save your simulation under a new filename. That way if you
go out of business at the next level, you can always return to your starting point for that level.
 Notes:
1. Location is extremely important—especially in a retail business! The main avenue (running from upper left to lower
right of your screen) has more traffic than most of the streets but rent can be high on an avenue.
2. The buildings around your store will affect the type of customers most likely to shop with you. This will affect what
you need to stock and what hours will be busiest. Locate right next to a dormitory, and you can expect a lot of late
night traffic. Use surveys to understand who lives where and what you need.
3. Remember the fundamental tension in setting prices: too high and demand drops, too low and no profits.
4. If your backroom is empty, you need to purchase more inventory to satisfy customers. Check for expired goods
periodically and adjust purchasing accordingly.
5. Check for lines and customer comments to see if you need more cashiers.
6. If during the simulation, you run low on cash, get a loan or pay your suppliers a bit more slowly. If your store goes
out of business, simply restart the project or start over from your last saved point.
o New Store Project—Level 2
 Goal: In level 2 you will face four new competitors. Your store will need aggressive promotion to draw in customers.
The merchandising and other factors will need to be optimized to produce a profit. You will probably need to move your
store. You complete this level and move to the next level when your store or stores have 16 consecutive weeks with
profit above $10,000 per week. You may open a second store at this level.
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Notes:
1. Remember the nature of free enterprise. Particularly, that when a business is quite profitable, competitors will often
move in to “take a piece of the action.” This is what happens to you in level 2. Four new competitors have opened
in the city and they’re out to take business from you.
2. Remember your options if cash runs low. You can pay suppliers later or get a bank loan. It is better to get a loan
while your business is still healthy.
3. Remember the importance of good merchandising in a competitive environment. Good merchandising can increase
sales per customer by increasing “impulse sales.” It can also reduce shoplifting.
4. Use more sophisticated promotions such as coupons offering great deals on “loss leaders” that draw customers into
the store.
5. Take advantage of good promotions in storefront signs. It’s free!
o New Store Project—Level 3
 Goal: In level 3 you will experience large swings in the population of your city. First the population will decline during
a major economic downturn. Your challenge is to survive the downturn. Eventually the economy will recover, and you
will have a chance to open as many stores as you like in an effort to capitalize on the strong business environment.
There are no specific profit targets at this final level.
 Notes:
1. You will now face an economic downturn. Customers are leaving their city. This will be evident by buildings being
razed. Your challenge is to survive the downturn so that you can expand when the economy recovers.
2. You can open as many stores as you like at this level.
3. Ways to conserve cash during a downturn are: reducing staff, reducing purchases, and paying suppliers late
4. You can close a store if you own two and one is losing money.
5. For times of economic growth, starting several stores around town may be more cost effective than doing expensive
promotions to draw customers from all the way across town.
o Multiplayer Competition
 Notes:
1. A computer will “host” the competition. Everyone will compete in the same simulated city. There will be 6 teams
per competition. You may compete individually or in pairs. Each team can open only one store. Your team name
will also be the name of your store.. You can click on the Scoreboard button on the main toolbar to see how you are
doing.