Brass Tacks: A good business model can make the start-up road a lot less bumpy
Q. I’m reading more and more about the importance of having a good “business model.” I’m in the process of adding a new product line, and I’m not sure what “model” I should be shooting for. How can I determine if my “model” is the right one for me? A. Essentially, what the proponents of sound business models are saying is that a start-up entrepreneur — or the innovative proponent of a new direction in an established company — must have a sound premise for, and a realistic expectation of, creating a continuing flow of revenue. In addition, there must be a reasonable hope of ultimately retaining a chunk of it as - to use another well-worn “buzzer” - a “bottom line.” Simply stated, a business model is a depiction of your customized arrangement and use of tangible and intangible resources in a manner that offers your existing or prospective customers a unique value. Importantly, this orchestration must feature customers who will want - now and in the future — what you offer at price levels that will afford your firm a reasonable operating margin (the difference between what your product or service costs you). This spread between cost and price must be of a magnitude that enables you to aggressively sell your wares, to more than cover the costs of running your shop, to take out a little bit to live on and to put something aside to fuel the growth of your business and enhance its value. In essence, the model should validate a venturer’s premise for producing profit. But since entrepreneurs are, by nature, eager, impatient, optimistic and supremely self-confident creatures, they are too often inclined to a “ready, fire, aim” approach when it comes to chasing their dream du jour. They jump to implementation before their dreams and desires can be translated into a conceptual prototype that can be adequately pre-tested. The folly of this oversight is reflected in the experiences of the many dot-com swashbucklers who swaggered into disaster with only hype and a hope. To be sure, there’d be many more happy faces in Silicon Valley today if every venturer had just paused to consider: • The top line: Every worthwhile business concept must be able to demonstrate there is - or, with proper, feasible marketing effort, will soon be — a sufficient, continuing stream of revenue to energize it. Unfortunately, many entrepreneurs erroneously assume that this important headwater will be available to them because they “know” they have an irresistible proposition for the consumer, because they “believe” they have a “better” alternative and because they have a “great” idea that really excites them. By examining a model of your intentions prior to acting, you’ll be forced to answer some important questions and thus minimize the risk of your undertaking. • The margin: Can you charge a price that makes sense? Will your pricing afford you a continuing, positive spread between what you charge and what it costs you to produce the good or service you are selling? Remember, a lowball introductory price strategy generally results in continuing low margin levels. • The in-between lines: There are a lot of hungry “mouths” to feed on the journey from the top line to the bottom line. For example, the costs associated with getting and keeping good salespeople and technology mavens can be enormous, especially if you are taking them on a bumpy journey. You also have to finance the tangible and intangible assets that are needed to devise and deliver value. • The bottom line: Will you be able to match all the above-mentioned lines in a way that eventually - and on a regular basis — produces more cash than you require to sustain and grow the business? Can you generate enough cash flow soon enough - and long enough - to make this venture worth the candle? If you come up with more than a couple of unanswerable questions, unmeasuraeable gaps, incalculable estimates or instances of wishful thinking, go back directly to the drawing board and do not pass “go.” Paul Willax is a professor of entrepreneurship and chairman of the Center for Business Ownership Inc., Amherst, N.Y. He also is the author of the book, “Brass Tacks Tips for Business Owners,” available at barnesandnoble.com. If you have a question or suggestion for his column, or to receive a free, weekly e-mail newsletter, “Brass Tacks BrainFood,” write to Willax@TheBrassTacks.com.