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  8.12. Step 1: Validate the Remaining Sections of the Business Model Canvas (5 min.)

Now that you have nailed the customer pain and are in the process of truly nailing the solution and the go-to-market strategy, you should be concerned with identifying, testing, and validating all the other sections of the Business Model Canvas. You can use the same methods that you used to nail the pain and the solution to complete the other sections. This will ensure that you have nailed the entire business model before you launch your product and start scaling your business.

Two of the sections of the Business Model Canvas we haven't yet touched on, but bear significant importance are "Cost Structure" and "Revenue Streams." The financial model will be one of your final hypothesis-testing activities before you launch your business in full force. In this class, we won’t explain how to build pro-forma financial statements or the details of building forecast models. Many excellent resources on the finances of new businesses provide excellent advice and go into more detail. Instead, we will simply emphasize that you need to take the time to sit down and model all your assumptions, putting numbers on each of them, and determine if the business still makes sense. You can use a variety of metrics to evaluate the financial model. However, here we emphasize just a few that are particularly important: fixed versus variable costs, margins, customer acquisition costs, break-even, and sensitivity analysis.

Fixed and Variable Costs: For most startups, variable costs are good and fixed costs are bad. Fixed costs require major cash outlays and decrease your flexibility while variable costs allow you to have more cash up front and provide flexibility to scale up or scale down, if needed. So when building out your model, take a close look at fixed costs and variable costs and try to move as many fixed costs over to variable costs as you can. Borrow office space, avoid equipment purchases, keep it cheap, and keep it variable.

Margins: Pay attention to your gross margin (product revenue minus product cost) as well as your net margin (gross margin minus the cost of everything else). Generally you want your gross margins to be high (hopefully around 50% or more) because everything will cost more and take more time than you originally thought.

Customer-Acquisition Costs: One of the most overlooked metrics is the cost of acquiring a new customer. Customer-acquisition costs refer to all the advertising, marketing, and promotion costs of acquiring a new customer to use your solution. Some entrepreneurs we’ve met have no idea what these costs are, but failing to understand them can absolutely kill your business.

Break-Even: Break-even, or the point at which your revenue matches and then exceeds your expenses, is a central metric in your business. The sooner you can break even, the greater your freedom. Be sure to look at all your costs and determine the time to break even. If you need to raise money to get to break-even, we suggest you give yourself plenty of extra time (at least double what you expect).

Sensitivity Analysis: Sensitivity analysis is a fancy way of asking, “What does the financial model look like if things don’t go the way we expect them to?” When you build your financial model, it is important to look at how your model holds up when things go well, as expected, poorly, or terribly. Is your model robust in some rough water? If so, you should move ahead, but if not, you may want to rethink the viability of your business. As we have pointed out, things always end up differently than you plan in a new venture, so be sure your financial model can handle less than optimum conditions.

(See Nail It Then Scale It, pgs. 161-166)