Having talked to thousands of entrepreneurs over the last decade and a half, I’m still surprised by the large amount of companies that are still starting businesses without viable revenue models. In fact many entrepreneurs are starting companies without any revenue model plan whatsoever!
Granted, there are companies without revenue models that have sold for breathtaking bounties. Just this recent quarter, Draw Something sold to Zynga for $300 million and Instagram sold to Facebook for a whopping $1 billion.
How can I argue my point with such contradictory examples readily available for anyone to use as rebuttal arsenal? Well quite simply, these were acquired because they were generating enough traffic and interest that they were at risk of negatively impacting the revenue streams of the other companies who acquired them.
I need to make it clear, however, these are exceptions to the rule and the reality is that for every one of these fantastic ideas that are acquired, there are 100,000 others that won’t be!
More food for thought: If these fantastic ideas had viable revenue models built into them, and as a result healthy balance sheets, how would the above acquisitions have played out? Most certainly, the return on investment would have been double, triple or even more!
Now back to reality; for a few minutes let’s forget those few astronomical deals. After all, they are few and far between.
What is the most common revenue plan?
Most entrepreneurs will identify advertising as their primary, and often times, only revenue plan.
Why doesn’t it work?
Even if your website, mobile or social media application gains 1 million visitors each and every month, you need to realize that virtually all revenue off of advertising is earned by “click thru” rates. This means that you only get paid for ads that are clicked on, not displayed. In 1990, the average click-thru rate was 3%, but today it’s a mere 0.2%! That means, every 1,000 impressions you can expect 2 clicks! That amounts to roughly 2,000 clicks per million visitors or a revenue stream of $500 to $1,000 per month, hardly enough to even cover the costs of creating your online presence, let alone worth the time required for ongoing maintenance.
What should I consider instead?
Go back to the basics. Why would users use my online presence? What motivates them to return? How can I add value to their experience? What would they be willing to pay for?
Thinking about the revenue model is almost as much work as coming up with the original idea!
Once you’ve brainstormed all of your ideas for revenue generation, set up a panel of trusted colleagues and potential customers that you would like to sell to and present your ideas to them. Ask them if they’d consider paying for any of the deliverables you intend to create. Research… research… research!
How will I know if it’ll work?
I know you want re-assurance that your ideas will work and generate more revenue than the expense required to create them; unfortunately, there’s no guarantee. Your due diligence is your best primary weapon against failure.
The most important thing to consider is that once you’ve verified your idea, you need to execute. If you sit on the idea for too long, in a state of what’s known as “analysis paralysis”, someone else will beat you to the punch. It’s happened to me before, it’s a tough lesson to learn, you don’t want to be sitting in your chair mumbling “If only I…”
Oh and what was my idea that I sat paralyzed on? It was a mobile application that took advantage of the accelerometer, a 25 year old American entrepreneur beat me to the punch and made a cool $1.1 million revenue in the first 30 days. Believe me when I say, I speak from experience, analysis paralysis hurts… far more than you would ever imagine!
Once you’ve done your due diligence and have made the decision to take the risk, your perseverance will be the next tool you’ll need to see you through from inception to profits. Whatever you do, pick an idea that you will be passionate about. When you do something you love, it won’t feel like work and you’ll be more likely to excel even more and persevere better through both times of feast and famine.
I know what it’s like first hand to put my own money on the line to create something that didn’t previously exist. The emotions that are triggered as a result of taking a chance are incomparable to any other. Tremendous courage is required to take that first step. Once you’ve done your due diligence, double checked your calculations and assumptions and verified your idea with a panel of trusted colleagues, you’re in for the wildest ride of your life… get ready to learn more than all previous jobs combined would have taught you, in far less time than you thought imaginable! Oh and congratulations!
CEO, N-VisionIT Interactive