In my previous post, part one of building a business, we examined a restaurateur who had visualized a new approach to home delivery. In that example there was scant mention of building a model for profitability prior to implementing that vision. Such an approach was not problematic in the example since we were dealing with an existing business where low risk experiments such as the one described can in fact be used as the basis for building a profitability model. The same can be true of entirely new businesses, provided that the level of investment to perform the first experiment is manageable. In fact, it is generally preferable to test a vision under real-life circumstances in order to ensure that the idea not only resonates but that people are willing to pay an adequate amount for the product or service. Let’s use an example of an individual who decides to start an online store for selling sunglasses. This individual has a vision for selling a product that not only blocks harmful UVA and UVB rays, but also believes eye wear should block more light from the top and sides of the frames and designs a product accordingly. Given the ease of offering such products for sale on the Internet, this individual launches an informative website and a supporting store on Amazon along with a blog explaining the virtues of their product. The cost for all of these components is very modest, totaling only several hundred dollars ($300 for our example). The larger investment is in the individual’s time as well as in an initial production run of the envisioned sunglasses. Let’s say the initial production run for 1,000 pairs of glasses costs $5,000 – $5.00 per pair. If the fledgling business owner subsequently spends $4,000 promoting and eventually selling all 1000 units then the profit is $700 excluding the value of the individuals time. This is a great start, as the initial experiment has demonstrated demand for the product, a willingness of buyers to pay a certain price, and a level of profitability. At this point it is possible to build a model reflecting the experienced costs and revenue expected as selling efforts continued. It may also be beneficial for the seller to experiment with different price points to determine if profit margin is being left on the table.
Up next: Scaling up.