I have a graduate degree in entrepreneurship. But before you consider how that might help me know or understand things, let me highlight that I started and worked in several startups before ever getting it. I got the degree because it was interesting and because I thought I might want to lecture. But not because I wanted it to help me run any of my startups.
My point to all of this is that I've been in the exact same spot you've been in. I've had ideas for products. I've wanted to start a company.
And I've had no idea what to do next, or how to talk to others about it.
And no undergraduate degree helped me. And no masters degree helped me.
Fortunately, I spent time with friends who liked Excel. And while I tried to add value in other ways, those friends worked on our business models.
And then, one day, after looking at another one, I realized I understood them. And liked and appreciated them. And was no longer scared of them.
Wouldn't it be nice to have a plan?
I don't know if you watched the SuperBowl this past weekend, but let me tell you something I absolutely know to be true.
Both teams showed up with tons of skills and training. Both teams showed up with talent. And most importantly, both teams showed up with plans.
These plans, in the football world, are plays – plays they've evaluated and tested.
All that's left, when the game starts, is the matter of execution.
And for us, that's mostly true in any of our business efforts – it's always about execution.
But imagine, for just a minute, if you showed up on the field and the ball was hiked into your hands, and you had no idea what your team was going to do.
Imagine a game where you had no plan. Nothing that you could all reference and use to guide you.
That would be a painful and frustrating experience, wouldn't it.
Business Models have two parts
Every business model I know has two parts. Simply put – one part is the hypothesis of how money will be made. The other part is the hypothesis of how money will be spent.
If you do it right, and I sure hope you do, you earn more than you spend.
Most of us have no trouble imagining all the money we'll spend. We know our cost model. We know the costs of our staff, ourselves, our supplies and our facilities and other overhead.
No, for most of us, the cost model isn't the challenge. It's the revenue model.
Revenue models can be scary…
We stress about revenue models because they feel like they ask for a lot of data – none of which we feel like we have a handle on.
- How often will someone purchase?
- How much will they purchase?
- How long after a purchase will they purchase again?
- Who will leave or stop paying us?
Without answers we start freaking out at a blank Excel spreadsheet. So we push the modeling exercise to others (or until later, which may never come).
But they don't have to be…
So I decided to shoot a quick video (below), and show you how you could create a revenue model without too much work.
After watching it, you may think my business modeling skills suck – because you disagree with my numbers. Or you want to challenge my assumptions. Or you decide that I've missed a major component.
If you have any of those feelings, know this: that video wasn't for you.
It's for the folks that really have no clue how to get started, and as such, it should be helpful to them.
Context for the Model in the Video
If you're wondering about the context of the video, I was exploring the potential market for a new product (and business) that was announced this weekend called VelocityPage – a new on-page drag & drop layout editor for WordPress.
My sense ended up suggesting that 75,000 decisions quarterly were being made. With a 1% win rate, and at a blended rate of $120 for product revenue, it suggests a potential $30,000/month revenue stream for them. That's not bad.
The Whole Point of a Business Model
Again, you may read that, or consider my simple model and suggest that I got it all wrong. I'm ok with that. But here's the whole point of having a model.
It's a living document. Something you adjust. But it's a plan. Something to use as you consider decisions. Something that helps you evaluate where you're at.
And it helps you talk about your business intelligently because you've modeled the key assumptions (assumptions that used to only exist in your head) onto paper (or software).
And trust me when I tell you, getting some sunlight on those assumptions is the very best thing you can do for your business.