The biggest factor in how lucrative a business venture is is the business model.
Yet this is the part most neglected.
People think about cool new products or services, fun branding, effective sales and marketing tactics, how to service customers, pricing and discounting, and all the other more forward facing elements of business first.
But if I were advising an aspiring young entrepreneur, I’d tell them to think roughly in this order:
- Market/segment
- Business model
- Unique value proposition
The caveat is that this assumes a desire to maximize for profitability. Very many (most in fact) entrepreneurs are chasing a curiosity, a passion, or a sense of personal mission more than max financial ROI. That’s perfectly fine.
But if you want to maximize the financial ROI, start with identifying a good market, then a good model, then figure out the ideal way to solve a problem for this market under this model.
It’s amazing how easy it is to sell something that there’s too small a market for. Or something with too small margins. Or a sales cycle that cripples cashflow, or kills predictability in revenue.
These all sound like boring accountant things to the starry eyed young innovator, but they can make or break the financial side of the business.
It doesn’t have to be all mercenary though. Most companies start with a big idea for a product, and that’s fine. But before sinking a lot into it, really think through market, model, and value prop.
Start with curiosity. Observe every business around you and ask yourself about their cost structure. What’s fixed and what’s variable? Ask about their revenue model. When do they get paid by whom and how much? When do they have to pay their vendors? What’s the margin between costs and revenues? What’s the ceiling to growth? What’s the ramp time for employees to reach full productivity? See if you can model it out on a spreadsheet. A lot of cool looking businesses are actually pretty brutal to be in. And plenty of unsexy ones are crushing it with brilliant models.
If young people regularly asked these questions, there’d be a lower failure rate for new companies.