Thursday, May 21, 2009

The Elevator Door Test: Show me the money!

Creative brainstorming is definitely a gift of the entrepreneur. An inability to 'think outside the box' is, in the context of business start up, much like trying to sprint a hundred metres with weights tied around your ankles.

It doesn't take the likes of Usain Bolt to plead this case; even uncle Bob, Pete or Malcolm could tell you that one. Lack of creative jive makes it hugely difficult to attract exceptional staff, hard to convince financiers to jump on board, and importantly, it makes it tough to enter into ANY market, be it baby bottles or garden gnomes.

"The market is like a 7ft basketball: either bring some fancy moves, some speed
or creative buoyancy, or face the threat of rejection!"

But creativity is not enough. For any measure of real success, your product needs to be met with a simple and viable revenue stream. How will you get the money from your customer into your pocket? Show me the money! Seems easy enough, but in practise it's surprisingly tough. This is what separates the boys from the men.

Have you ever heard of the elevator test? If not, in brief: it is raised in reference to pitching you business idea. Coined by Chris O'leary, it refers to the ability to pitch your business idea within the confines of an elevator ride- that is, about 30-45 seconds. Guy Kawasaki, the founder of Garage Technology Ventures (a prominent venture capitalist firm) refers to this elevator pitch principle with favour:

"From Chris's mouth to God's ears. If only entrepreneurs would follow Chris's advice, I wouldn't be losing my hearing and I would have more time to play hockey."

When it comes to identifying a revenue stream, believe it or not, it's even more serious. Let's call it the "Elevator Door Test". Meaning, you need to be able to identify the exact way your business will make money before the elevator door closes. Seem extreme? It is. But it needs to be. Business is tough. Survival of the fittest is not only applicable to biological evolution. Now I'm not saying y'all need to go out and get a bad comb-over and sit in a board room with a pink tie repeating the words "you're fired!", but when it comes to how you make your money you need to be super clear... like water.

If you are a retailer or wholesaler or some form or distributor, then your revenue is generated by a markup. Buy low, sell high: the secret to life... how profound. Does this guarantee profitability? Far from it. The simplicity of the revenue stream allows for easy entry into the market, but this means increased competition and the necessity to differentiate. But the revenue stream is simple, and often this margin is obtained by buying in bulk- simple enough. How do you get the customers money into your pocket? Usually it involves a cash register. K-chink!

What about a service-based business? Here the revenue stream is simple also, it's usually a fee for service. For example, let's say your own Jimmy's Accounting Services and specialise in tax return assistance. You would charge, perhaps, a flat fee or a fee calculable on the proficiency of your services. So what's the catch here? Entry into the services industry is more difficult as it requires "skills" often obtained by a formal education or certification, be it an affiliation with a professional organisation or a degree of some sort. Practically speaking, you might send an invoice out to customers which is payable within 30 days. On the other hand, you might offer credit card payment or bank deposit options. The money point here is a little more complicated, but still pretty basic. A fee might be per hour, of if you are in the legal professional, it might be in six minute increments. How are you going to make your money? How will you get the money from your customers pockets to your own?

Revenue identification for retailers and service businesses is relatively easy. Why? there are only two parties: the buyer and the seller; or, the service provider and the customer. But what about when you are a middleman or sorts? For example, a large proportion of advertising and broking seeks to profit from bringing buyers and sellers together. Think about a mortgage broker for a moment. Who is the customer? The individual seeking the loan? Or is it the bank or financial institution who is offering the loan? Both parties want something. Who is the customer? Where do you make your money? Not so easy now is it...?

In the online marketplace, content-based blogs and information hubs seek to develop an audience, or more specifically, a niche market. Once this is created, businesses are approached to sell either directly or indirectly to this 'market'. So essentially, there are two customers, a consumer seeking information, as well as a business seeking a target market from which to profit. So as the host of the site, how do you make your money? Do you charge a monthly fee to advertise on your site? Do you have a cash-per-click arrangement. Do you charge the information seekers for the information they are receiving? Can you see it's a little more complicated here? Maybe you can make money on both sides. Is this wise?

Who is the customer... and how do you get the money from their pocket into yours?

Elevator door is closing... how are you going to make money?

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