I don’t know why people like to use the word “Startup” rather than plain and simple “Business”. I guess most people like the false sense of superiority since the media created a romantic notion for Silicon Valley Startups during the dot-com boom. The funny thing is even when you use the word “Business”, there are still a vast range of perception of what a business entails. Let’s define what I mean by business before we continue with our discussion. A business is a PROFIT seeking entity. It’s in it for the MONEY. Anyone who tell you otherwise is either insane or lying.
Now, since we get the definition out of the way. The Number 1 Startup Killer… wait for it, is being UNPROFITABLE. Most of the entrepreneurs or business owners got it all wrong, they simply doesn’t have the faintest idea of what’s their ultimate goal is. It’s almost comical how many businesses fail just because they are not set out to make money. Most of the startup story goes something like this: a guy dreams up an idea which he thinks is pretty cool and he rarely talks about it with other people since he is afraid that someone might “steal” his idea. He is usually a developer or designer who has the skills to implement such idea. He goes on to spend weeks, months or years refining his idea and creating the final product until he feels it’s good enough to be presented to the world – where of course, he think would be the next Facebook, Google or Apple. But the reality is, NOBODY CARES about his closely guarded idea nor his prized product. But why? He made a fatal startup mistake. He is living in his own head. Business is about exchanging value for money. And where does the money come from? ANYONE in the world but the business owner himself. So wouldn’t it make more sense to seek out what these people want for their money? Wouldn’t it make more sense to ask them what they want to pay for?
Let’s define our problem space for a profitable business:
1. It should be based on producing products in exchange for money.
2. It should be based on providing services in exchange for money.
3. The product price should be higher than the product cost.
4. The service price should be higher than the service cost.
5. The profit margin should be able to cover the research and development cost.
6. The profit margin should be able to cover the sales and marketing cost.
7. There must be enough cash flow to keep the business running at all time.
Your business should be designed as a solution to the above problem spaces. But what fun is it if you are not making a lot of money? Let’s add another problem space.
8. The business should be very profitable.
It’s all simple maths folks. You’ll be surprised by how many business owners fail kindergarten level maths.
Solving these equations individually is easy, but when you try to solve all of them in one go, it becomes more tricky. Let’s try to formulate the problem spaces into workable equations to find the “X” factor.
Product Price * N – R&D cost – S&M cost = Net Profit, where N is the No of unit sold.
R&D Cost should be fixed or in step increment. S&M Cost should be variable. The equation becomes:
S&M Cost can be expressed as No of unit sold:
S&M cost = S&M/unit* N
R&D Cost can also be expressed as No of unit sold:
R&D cost = Product Price * R
Product Price * N – Product Price * R – S&M/unit * N = Net Profit
(Product Price – S&M/unit) *N – Product Price * R = Net Profit
In order to have increase the Net Profit, we can do a number of the followings:
1. Increase Product Price(transaction size).
2. Reduce S&M/unit.
3. Increase N (No of transaction).
4. Decrease R (Production cost).
Since (Product Price – S&M/Unit) * N, increasing the N (no of unit sold) has an associated cost.
Wouldn’t it be nice to increase the difference between (Product Price – S&M/Unit)? The business owner can:
1. Increase Product Price(transaction size) by up sell, cross sell, one time offer to EXISTING CUSTOMERS.
2. Increase Product Price(transaction size) by selling more frequently to the EXISTING CUSTOMERS.
This falls into the realm of remarketing where the ROI (return of investment) is very favourable.
ROI = Profit Generated/remaketing S&M Cost, where remarketing S&M Cost should be substantially lower than than new customer acquisition cost.
Finally, we can reduce the S&M/unit, by optimizing the sales & marketing funnels.
1. Improving the quality of the leads by split testing traffic sources.
2. Increasing conversion rate by split testing and optimizing landing pages.
3. Productise sales and marketing materials.