The Art of Startup Finance: Business Processes – Your Business Model Formula

Kauffman Founders School, Bill Reichert, TheArt of Startup Finance, Business Processes: Your Business Model Formula>> The engine of your business is your business model.

In the business model you develop yourstrategies and your tactics for making money as a business.

Here now, what we're goingto talk about is how to convert those strategies and tactics into financials.

First, a quickreview of your business model.

At the core of your business model is your value proposition,right? Your value proposition is what benefit do you offer to your target customers.

Thereshould be an economic analysis that says that customers receive a certain quantifiable benefitfrom your value proposition.

Anita Newton talks about your value proposition and yourpositioning statement in her wonderful series on entrepreneurial marketing.

The key to thesuccess of any business is to have a competitive advantage over all the other products outthere.

That enables you to convince your customers to buy your product instead of a competitor'sproduct.

They might even be willing to pay more for your product.

So understanding theeconomics of your competitive advantage is key to things like your pricing.

The other thing you have to understand when you're thinking about your competitive advantageis, what are we going to have to spend to keep that competitive advantage.

We're goingto have to keep investing in our product, in our technology, in our people, in orderto sustain that competitive advantage.

What's it cost for you to make the product, to servicethe product, then to sell the product, and support the product?So the next obvious thing is your price.

Your revenues are a function of your price timesthe number of units that you sell.

Now when you think about other elements of your businessmodel, you think about things like your marketing strategy and your sales strategy.

And we thinkof those as, you know, strategies tactics.

But all of them have a financial impact.

Howmuch are you spending on marketing? What is the return on your marketing dollars spent?What are spending you on sales.

How much does it cost to acquire a customer?So after you pull your business model together you need to translate the elements of yourbusiness model into a business model formula.

Your business model formula translates yourbusiness model into financials.

So for example, we sell this product or service to these targetcustomers.

The reason our customers buy our product is this compelling benefit.

We havean advantage over our competition because of this sustainable competitive advantage.

We will be become profitable in the inth quarter of 200X by selling so many systems or licensesor units or subscriptions, whatever it is your selling, to so many customers.

We'regoing to sell through these channels or partners.

Or we're going to sell directly at a priceof X per system or license or customer or unit.

With a cost of X dollars for each customeryou acquire.

At that point our revenue run rate will be X million dollars on an annualizedbasis.

Now we've been talking about your businessmodel and your business model formula as if it's a fixed static thing.

But it isn't.

Thereality is, these things are changing all the time.

So the trick is for you to get outthere in the marketplace, quantify what's really going on, and bring it back and incorporateinto your business model formula.

So you might think initially the cost of acquiring a customershould be this.

You go out to the marketplace; it turns out it takes longer, it costs more.

You've got to bring that back, build it into your business model.

The point being thisis a constantly changing process.

Investors want to know that you really understandmore than just the strategies and tactics of your business model.

They want to knowthat you understand how to translate those strategies into how you make money.

They aregoing to want to know that you have a financial understanding of the implications of everythingin your business model.

So for example, what is the sales cycle in your business? Are yougoing to be able to sell each customer in 45 days? Or 90 days? Or is it going to takea year? That has serious financial implications.

Or if you're in a consumer business, what'sthe conversion rate for consumers that come to your web page? Or for consumers that clickon an offer? So you need to know these financial metrics.

That's what I mean by translatingyour business model into a business model formula.

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