For developers: How to build a business model and prove your idea is awesome in 10 minutes

So you have an awesome idea and you know it’s going to make a lot of money, but for some reason not everybody believes you. Well, first of all, that good since you don’t need everyone on your side. You do however want to make a good impression on potential investors, team members, advisers, etc.

That’s why building a quick business model is not such a bad idea. Especially if you can start by doing making a first version of it in about 10 minutes. These are the steps you need to take:

Step 1 – Market Sizing: If every potential user in the US (or the world) used your product how many user would you have? (The goal is to have a very rough estimate.)

Example: Let’s say you are building a social running app (Getyog), we start with everyone and narrow it down. There are 350M Americans. The relevant age group is people between 15-35, so that gives us a 20 year range. The average life time of people is about 80 years.  So if we assume somewhat even distribution we get that ¼ of the total population are in the relevant age group. That give us 350M*1/4 = 85M. Ok, now let’s assume 10% of the people are runners and we get a total of 8.5M

Step 2 – Narrowing Assumptions: To be a bit more realistic let’s add some additional constraints, for example all our potential users need to have a smartphone. Later we can get the exact number for now let’s say 50% of our age group has one.  That gives us a total of 4.3M potential users.

Step 3 – Our piece of the pie: Not everyone is going to use our product so let’s say 10% will (which is optimistic, but can be done). This means that if we succeed we will have about 400,000 users.

Step 4 – Revenue Sources: How much money are we going to make per user, here goes another market sizing and assumptions setting exercise. Our goal here is to move from number of users to a dollar figure. So, how are we going to make money.  For simplicity let’s say we charge the users $2 a month to use our product and we put ads that will give us an additional 0.1$ a month per user. So in total we will make $2.1 a month for each user (which gives us $25.2 a year).

Step 5 – The total: So under this quick scenario calculation our total revenues will be 400K*$25 = $10M a year. Now is that enough?

Well… it depends. $10M isn’t a huge number, but it’s a good starting point and initial insight into your business plan. From here there are several additional steps you can take to continue evolving your plan such as understanding your cost of acquisition and validating the data above. This quick calculation also help us understand what levers we can pull to increase revenue.

There is much more information about this topic, which I will point to and add in the future. My goal here was to show that an initial calculation can be done in 10 minutes and is actually a good step forward in making your business a reality.

2 Responses to For developers: How to build a business model and prove your idea is awesome in 10 minutes

  1. Natwar July 23, 2011 at 2:33 am #

    Intresting and practical idea.

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