The language of business is finance. For every ten words, you need one number. If you don’t, you’ll easily get fluffy. This notion rings true not only for listed corporations; it is just as valid for startups. I see many investor pitch decks that are impressive in their vision and the way that their innovative product solves a real problem. But often, the story falls flat when it comes to the numbers. When I say numbers, I am not just talking about the financial projections and forecasts. Investors are very skeptical of those anyway. What is more important is to display a deep understanding of your own business model, the dynamics of your model, and the key metrics in your model that drive the financial performance of your business. In other words: your business model economics.
A good starting point to understand business model economics is to first understand the concept of a business model. Many pitch decks have a slide titled ‘Business Model’ that merely show pricing. In reality, your business model is not just your pricing. This is explained really well in the book “Business Model Generation”. This popular book does a great job explaining all the key components of your business model, and how they relate and interact to drive specific dynamics. It provides the tools to help define, refine, and communicate your business model, which you can then leverage to start better understanding its economics, i.e. the key metrics that drive your model.
In the New York Times bestseller “The Lean Startup”, Eric Ries talks about Vanity Metrics. These are metrics that looks impressive, but tell you little about your business, and are not relevant in driving the financial performance of your business. But how to know which metrics are vanity and which are essential? It all depends on the economics of your business model.
Let me give you an example. I have worked with an entrepreneur who is building a powerful Cloud-based social learning platform in India. He was carefully looking at a wide range of metrics and focused on ‘# of page views’. But, when he looked closer, he realized this metric wasn’t driving up volume or price, so there was no impact on revenue. It wasn’t driving down cost either, so there was no impact on profitability. In his business model, page views were nothing more than a vanity metric. He soon found that what really mattered in his business model was the number of ‘learning actions’ that the visitors performed on the platform. This metric soon became the key focus for their customer acquisition strategy and user engagement strategy. The outcome: more value for the customer, leading to a higher willingness to pay, a higher price, and increased revenue.
Stay tuned if you want to find out more about business model economics, how you can tie it into your overall business plan, and how it can help you in defining the amount of funds you need as well as the uses of these funds.