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Most people have great startup ideas

But a great idea doesn’t make a great BUSINESS

Questions you need to ask to determine if your idea will make $$$:
1/ USERS vs. CUSTOMERS

Is your business User-driven or Customer-Driven?

• USERS spend time on your platform

• CUSTOMERS pay you for products you sell

Example:

Facebook doesn’t charge its users anything

Its customers are companies who advertise on the platform
2/ VALUE

What is the exchange of value between your customers and your company?

Value comes down to 2 things:

1. Money
2. Time
Are your customers paying you MONEY for a product you sell?

Are your customers/users spending TIME on your platform?
(i.e. you’re capturing attention)
3/ FREQUENCY of TRANSACTIONS

How often do customers pay you for your product/service?

• Is it recurring?
• Is it one time?

Recurring revenue is ideal because it makes your revenue predictable
4/ SALES FLYWHEEL

How do you get customers to KEEP BUYING from you?

One-time transactions aren’t bad but you have to create a system that encourages people to KEEP buying
Example: Gillette Razors and Razor blades

The Razor ➡️ One-time revenue

Razor blades ➡️ Recurring revenue
5/ INCREASE SALES

How can you increase sales?

Is your product something that is volume-driven or price-driven?
Every company must make a choice:

1. Do we sell more stuff?
⬆️ Volume

2. Do we charge more for our stuff?
⬆️ Prices

You increase your sales by using either (1) or (2), or both
7/ COSTS

What are the biggest costs in your business?

• For software startups, it’s the initial cost of building the product

• For service businesses, it’s the people (i.e. payroll) that deliver the service

• For eCommerce businesses, it’s Cost of Goods Sold / Inventory
6/ REVENUE vs. CASH FLOW

• When do you book revenue in your company?

• When do you collect cash from your customers?

These two events are not the same thing

Failing to understand this, can kill your business

Here is a thread that breaks this down:

8/ HOW TO ADD CUSTOMERS

How do you get new customers?

Regardless of how great your idea is, you need to KEEP ADDING customers because some customers may leave or stop buying

Do you need to invest in:

• A sales team?
• A customer support team?
• A marketing team?
9/ CUSTOMER CHURN

How many customers will stop buying your service or product every year?

You need to know this
The number of new customers you add every year needs to make up for:

• The customers you lose and then some
10/ COST OF ACQUISITION

How much money do you need to spend to get a new customer?

In order for you to have a sustainable business model:

Your REVENUE per customer should be higher than your COST OF ACQUISITION
Example:

If you’re spending $10 in sales and marketing to acquire a customer, they need to buy something from you worth more than $10

If not, you’re losing money on each customer

You won’t be able to keep doing this for long
10/ VARIABLE COSTS vs. FIXED COSTS

Not all costs are created equal

Variable costs fluctuate depending on how much product you sell

These are things like:

• Cost of Goods Sold
• Commissions
• Shipping
Fixed costs are incurred regardless of how much product you sell

These are things like:

• Rent
• Payroll
• Utilities
11/ GROSS MARGIN

Your Gross Margin is how much money you make after you pay the cost to make or deliver your product

Gross Margin doesn’t take into account fixed costs
Example:

For an eCommerce business, Gross Margin is calculated as:

Revenue – Cost of Goods Sold
12/ UNIT ECONOMICS

Every good business owner knows how much Gross Margin or Profit they make by selling a SINGLE unit or their product
They understand:

• Revenue per unit ➡️ Price
• Cost per unit ➡️ Fixed + Variable

If you don’t know this about your product, your business won’t survive for long
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Great thread Ali