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Recently I had several conversations with different people about the concept of a business model and several common questions were raised: what is a business model? why do I need a business model? and how can I demonstrate it or prove it?

These are all good questions and I have noticed that there is a lot of confusionĀ surrounding this topic. So here is my take on this simple but very crucial part of any business.

Essentially, a business model is the way you intend to turn your proposed solution into a cash machine. Specifically, when you have a business idea, usually you come up with a solution to a market pain or a common problem. After you figured out your brilliant solution, your next challenge is to figure out how to ask people to pay for your solution. And even more specifically, you need to find a way to make people pay more than it costs you to supply or provide them with your solution. Once you figured that out, you have a business!

Next, obviously you need a business model because without it you don’t stand a chance of surviving. In the business world it goes no cash = no life.

Finally, the simplest (and probably best) way to demonstrate your business model to potential investors (but also to yourself) is to show very simply that there is a significant difference between whatever it costs you to acquire a customer (or CAC) and what an average customer is willing to pay you (or LTV for Lifetime Value of your customer). In a simple formula it would look like something like that: IF Customer Acquisition Costs are LESS THAN Revenues Per Customer, THEN you have a business. The greater that difference is, the better. Note that often you will have to factor overhead costs to that formula. Click on the image below for a great blog post on this issue.

make sure that your business doesn't look like that

Click on image for a great post with more detail about this issue