Do You Have a Solid Business Model or are You Building Your Castle in the Air?

It can be tempting to think that you’ve got it all figured out; that your business is ticking like a Swiss clock, or that your new idea is the best thing since sliced bread. Falling in love comes naturally to us humans. But as in Shakespeare, so in business, love has a way of distorting proportions. That’s why we must be careful when flirting with muse and hold up a mirror once in a while to make sure that we’re not being misled.

While many factors contribute to the value of your business model, the bottom line is your bottom line: Profit.

This Doesn’t Apply To Me

Before we start, you know what they say: evasion is often the first sign of a problem.

No human being is infallible or omniscient. We all have something we could learn, and any one of us is capable of error.

If you think you’re out of the woods simply because you’ve managed to secure funding or go into operation and it’s only the young and the inexperienced that fall prey to elementary mistakes—think again.

One needs look no further than Pandora's tell of woe for an example. Here’s a company that’s been around for some 10 years, whose earnings and operations run up millions of dollars, who’s got a great service everyone has raved about at one point or another...and yet, who still hasn’t made it out because they cannot become profitable (more on this later).

It’s not an isolated case either. Recent history is full of companies that went up and under, all the way back to the dot com bubble. So it never hurts to re-examine your math. A reality check now can save a lot of heartache later.

One Golden Rule: Profit is Fundamental

People can go into business for various reasons: thirst for challenge, need for a diversion, scratch an itch, or simply to put the kids through college. These are all equally valid from a personal standpoint. But economically, a business can only have one purpose: to turn in a profit. Anything else, by definition, is not a business.

Investors’ money will do you no good if, at the end of the day, all you can do is spend it. The term ‘investment’ presupposes a return, as distinguished from a ‘charitable donation’.

So look carefully at your business model and ask yourself how it’s going to be monetized. Make sure that your strategy is viable. The best idea or innovative service will be worthless if you can’t make it profitable.

Take Groupon and the social buying concept. It sounds like a great idea on the face of it, but the numbers tell a different story. Sure, some such ‘new ideas’ can generate enough hype and sell for millions of dollars even without having the right foundation—fulfilling their originator's dreams of early retirement—but that sort of scheme always depends on a ‘greater fool’ to come around.

If your goal is to build a long-term sustainable business that would bring real value rather than start passing a hot potato around, you can’t do it without profit.

This might sound elementary—but it’s been the breaking of many enterprises, large and small.

There is no ‘New Economy’ where the old rules no longer apply

This comes up time and again in different manifestations. The basic idea is that some new technology comes around, or a new environment is created, and people start thinking that all previous knowledge is irrelevant. But that’s just typical pragmatism.

Fundamentals are Fundamental. They do not change with new fads any more than the laws of physics alter when you adopt a different style of architecture.

What held true in the past will hold true today—otherwise, that knowledge isn't fundamental.

For an example of this today, look at the App Store Gold rush. Here’s what author and independent telecom consultant Tomi T. Ahonen had to say about it in his blog:

"The free apps hysteria is totally a repeat of the previous tech bubble, the dot-com bust of year 2000-2001. Suspending all market realism, believing that magical billion download numbers of free content somehow have created an alternate economy where normal rules do not apply."

It’s easy to fall into this trap, especially with pressures mounting all around to stay relevant and get noticed in our increasingly virtual world. But unfortunately the first thing out the window in this case is profit.

Growth CANNOT Substitute Profit

The notion that ‘Growth’ can substitute Profit was particularly popularized during the dot com bubble, and still persists today.

Back then, as the internet grew popular and online presence peaked—a new objective emerged: to garner new users. Companies came up with dozens of free schemes, products, and services aimed at attracting new customers, with not a thought given to how this mass of users will be converted into a profitable bottom-line. The implicit idea was that, once users have been accumulated, profit would somehow magically appear (not unlike the half-naked Indian in the movie ‘Wayne’s World’ saying ‘If you book them, they will come’—perhaps just as hallucinatory)

Today, with the popularity of social platforms and the heavy investment in online marketing, it’s perhaps more important than ever to keep this in mind. Sure, you want to have presence and get noticed—but not if it's going to cost you your arms and legs!

The goal of marketing isn't to cripple your business but to ultimately promote your well-being.

This is not to say that building a strong base of dedicated users can’t be a powerful auxiliary on your way to realizing wealth, only that you must have a clear idea of how you’ll manage the conversion.

Earnings vs. profit

It’s also easy to get lost in figures. In order to really evaluate the health of your business, it’s not enough only to look at your earnings. It’s important that you factor in all your costs and expenses to ensure your bottom line remains profitable. In fact, not only profitable, but profitable enough to realize your long term personal and business goals.

If you look at Pandora, their business model did account for revenue streams by incorporating ads into free accounts and offering ad-free premium accounts. But, according to SoundExchange spokeswoman Laurie Anderson as quoted on Cnet, they miscalculated the ratio of the revenue generated by this scheme to their operating costs (primarily the per-spin copyright license fees), and failed to make growth count. That is, to translate ‘more users’ into ‘more revenue’. This suggests a flaw with their initial business model.

Conclusion

So whether you’ve just began exploring a new idea or already headlong into running your new venture, it’s never too late or too early to re-evaluate your plan. Just like a navigator keeps consulting his charts with an eye on the horizon, so you'd be wise to do keep rechecking your course if you're to arrive at your desired destination.

Did you account for viable revenue streams? Are they enough to get you profitable? Did you get caught up in the rush to subscribe new users and forgot to cover your own bases?

These are just a few of the questions that can help you stay on course.

If there’s one thing history has taught us is that it tends to repeat itself, and perhaps the fact that it does means some of us can’t learn even that. But you can avoid this vicious cycle by simply learning from the past.

Good luck!

Related Posts:

1. Mobile App vs. Mobile Web: Which is Right for Your Business?

Labels: app store, business, business model innovation, creating a business model, groupon, growth vs profit, hosted pbx, pandora, profit, solid business model, virtual PBX