About half way through the semester, the fear of getting a bad grade in the class motivated Johnny, Maverock, Abe, and Joe to work more diligently on their project.  They held an emergency meeting one-day and split the work amongst them.  Joe, who majored in marketing, was going to develop their marketing strategy.  Abe was in charge of building their financial projections.  Maverock was going to research the technology required.  Johnny was going to evaluate the demand from the local restaurants in the community and do the competitor analysis.  That was how they got started. 

Johnny planned to meet with each owner as the co-founder of the Bullfrog Card.  In fact, he even decided to approach the merchants with the intent of convincing them to sign a “non-binding letter of intent” to join the Bullfrog Card program.  Even though they didn’t yet have a program, the letter was a document he typed up in the computer lab and it meant nothing, but it required restaurant managers to show they were interested in participating.  They had to either “sign up” and save their spot or decline. 

At the time, Johnny felt a signature, even in a non-binding document, still conveyed an important message.  A signature would indicate a more sincere interest in the program, because people usually think twice before they sign something.  If enough restaurants were willing to attest to their “interest” in such a concept, it was a huge vote of confidence for the idea.    

Johnny presented all prospective merchants with a folder that cost him $0.50, which contained his business card and the “Non-binding letter of intent” document.  It was followed with his verbal pitch, which sounded something like:

“[Mr. or Mrs. Merchant], we’re trying to set up a restaurant meal plan to compete with the school’s cafeteria program.  With our meal plan, students can eat at the local restaurants rather than at the cafeteria.  So, rather than parents paying another $2,000 a year to the school, so that their kids can eat 21 meals per week at the cafeteria, parents will pay for their kids to eat at your restaurant instead.”

Johnny was trying to drive home the unique benefit for them in simple language, no jargon.  He would continue:

“Look, it could be better for the students because it’s better food, better value, and unlike the cafeteria, any money they don’t spend will be refunded back to them.  What’s important for you is that this could represent a big pool of money and new customers you never had before.  We’re trying to take the business away from your biggest competitor, the school cafeteria program.  If we’re successful, it could mean a lot of new business for you.  Are you interested?”

From the merchant’s perspective, their main competitor was the school cafeteria.  By siding with the merchants against the cafeteria, Johnny looked like the hero.  It turned out the merchant community had quite an axe to grind with the University.  Not only did the school cafeteria compete with the restaurants, but the University also owned most of the commercial properties around campus, and the merchants complained that the school charged a hefty rent. 

By offering a way to compete with the cafeteria, Johnny managed to strike a chord with the restaurants.  As soon as Johnny got his first signature, he brought it with him to the next merchant, and demonstrated that others were interested in the idea.  Once Johnny gathered 10 signatures, he had enough credibility to get almost everyone.  Admittedly, there was a bit of a herd mentality among vendors to be involved together. 

Not every meeting was exactly the same, however.  Probably the strangest meeting Johnny had was with the owner of a local 24-hour Philadelphia cheese steak restaurant.  In this establishment, all of the grill men wore pagers, and Johnny didn’t think it was to help them deliver cheese steaks.  The owner’s office was in the back of the restaurant.  Johnny entered the room and he sat behind his desk with a police officer-- fully attired with gun and badge-- standing behind him to his left.  The cop didn’t look like he had any intention of sitting (there was no chair), and the owner of the restaurant barely acknowledged him. 

The meeting started when the owner pulled out a gun and put it on his desk directly in front of Johnny.  The piece hit the table with an ominous thud.  Having the cop in the room didn’t make Johnny feel any safer.  The owner said, “What can I do for you?”  Johnny managed to ignore the gun, and start his sales pitch. 

Johnny finished his pitch and handed the owner the folder with his business card and the document.  The owner pulled out a pen and signed it on the spot.  He muttered back something about screwing over the school and that he liked it.  He went on a tirade about how much business his restaurant already did.  With each point, the cop shook his head and agreed for emphasis.  It was a little intimidating, but Johnny left with a signature nonetheless.

Within a week or two, Johnny had letters of intent from 20 restaurants, and was in telephonic talks with the corporate offices of several large chains.  Working by telephone was a blessing for him, because no one ever requested to meet him.  That was convenient because Johnny didn’t have an office.  It would have been pretty awkward to set up a meeting with the regional manager of McDonalds at the local coffee shop. 

There was one question that kept surfacing among restaurants, which Johnny skillfully deflected.  “How much is this going to cost me?”  The group spent some time discussing how much they should charge the merchants.  Abe had crunched the numbers, and the business just didn’t work at a per transaction fee of 2-3% like VISA and MasterCard.  A transaction fee of 4% like American Express didn’t get them into the black soon enough either.  They estimated they needed to charge a transaction fee of 10% from the merchants to adequately profitable.  Johnny thought it sounded ridiculous.

The good thing about academic projects is that you can make lots of unrealistic assumptions and footnote them.  The real world never works like that.  The group reasoned that if they truly were providing merchants with new customers, they should be highly compensated.  Maverock looked at a typical restaurant’s profit margins and wanted to use 12.5% as their per transaction fee. 

The group ultimately decided to test a proposed per transaction fee of 11.8%.  They reasoned that merchants were accustomed to giving 10% discounts for special promotions, so 11.8% might not be out of the question.  They speculated that 12% would be the breaking point for the merchants, so they picked a price point just below it.  Johnny’s job was to go back to the merchants and see if they’d accept it.  If they threw him out of their stores, then the group needed to change the business model or determine it couldn’t work. 

In order to justify the fee, Johnny came up with the “incremental business” argument.  Since restaurants had 50% - 65% gross margins (or more), they had plenty of room to pay the fee and the restaurant meal plan idea could massively increase spending volume at each restaurant.  For the restaurants, the economics were not much different than offering a 10% discount, but the potential for new business was huge.  Johnny also reminded everyone that it took a big investment to fight the school cafeteria system, but it would be well worth it for them in the long run.

Johnny’s first restaurant to sign the agreement was a local sushi shop named Genji.  It’s not a big surprise when you consider that most college students couldn’t afford to eat out at sushi restaurants, so the owner was ecstatic about the program.  When Johnny saw the manager take out a pen and sign his name, agreeing to the 11.8% fee, he was shocked.  Johnny walked out of the restaurant and showed the signature to Maverock whose jaw almost hit the floor.  He couldn’t believe it. 

As Johnny went around campus talking to restaurant owners, he held the signed agreement as “proof” that other merchants thought the fee was reasonable.  It was also helpful that many of the restaurant owners knew each other, and discussed the program together. The Bullfrog Card began to get some very good word of mouth, which gave them momentum, and helped to convince more restaurants to join the program.

As successful as Johnny was, his hit rate was not 100%, and not every restaurant agreed to the 11.8% fee at that time.  There were some conservative owners that either didn’t want to embrace change, or needed to see the program running for a while before joining.  Fortunately, there were enough interested restaurants to offer a meal plan that was “good enough.” As more students participated, more restaurants would join, which would lead to more students and so on, or so they hoped.