I would have liked it better if you had actually talked a bit about business. A lot of people who hang out here are engineers / developers who don't get a lot of exposure to that side of things.
Start by explaining a business 'model' which goes like this:
Its a sad bean countery topic, but really its not that hard to see that if your revenue is less than your burn rate you die. And your revenue has a 'unit', whether its widgets or users, each 'unit' brings you $X in revenue. And somethings are dependent on 'units' (how many servers you have, how many customer support people you need, how many twitter tokens you buy, ...) those go into your Gross Revenue calculation, because growing revenue means growing those costs and Gross Margin remains 'constant'. Then there are things like salaries for engineers, rent on the offices, replacing laptops or servers every 3 years, maintenance, janitorial, lunches. Those stay the same regardless of your revenue so your Net Margin starts low and then gets bigger as you get more revenue.
A business "model" takes the Gross Revenue, and then fractionally allocates it to those other expenses. Maybe 20% of the GM is engineering, 10% is is marketing, 10% is sales commissions, 5% is facilities, 3% is swag/giveaways, maybe 10% goes into a bonus pool that you divvy up among your best performers. The remainder is 'net revenue' or 'free cash flow'.
If you're a C-level executive and you don't know what every single number on your tax return means, you're running the risk of having a problem staring you in the face that you never "see". If you're an engineer and you see a bunch of patched together spaghetti code that is poorly documented you "see" that there is a huge amount of technical debt that is going to have to be paid before you can move on to V2.0 or what not. If you're looking at your taxes and you see that you're depreciation costs are of the same magnitude as your revenue you need to be able to "see" that a cliff is coming when you're going to need new gear and you'll have no money to buy it.
The biggest challenge of "pricing" is that sometimes you realize that you can't sell your product for what it is going to cost you to produce it. You have a choice, either innovate around the costs to make it, or put on a really good show and try to sell it to someone before the truth is out. Hard place to be but knowing your costs will inform you on whether or not your pricing makes sense. The 'best' situation is when you can sell it and your costs scale fractionally with users. That is a very good business to be in.
Agree with most of your point Chuck. However, I think most people on HN are in the startup phase. They are doing customer discovery/development to find something that is actually valuable. This post is really optimization in the execution phase. It is normal for most of the engs/devs to not understand the business side.
Agreed, but if you're the founder, even if you're just one guy and an idea, you need to be able to evaluate your options.
Example, founder says "We launched and got 100K users in the first weekend!" That is fabulous, shows that they have really connected with their target market, but do they know how much money each user has to generate to pay for their expected burn rate? They should. You can say "We're build X for Y, and we're looking to monetize the landing pages with advertising." So what "CPM" do you need? (clicks per thousand) What RPM (revenue per thousand) do you need to make that work? Are there other businesses that have similar CPM/RPM numbers?
We're fortunate that a lot of folks can and do share their numbers with this community. I'm just encouraging founders to keep the whole equation in their thoughts between costs + engagement + revenue so they can think about ways to test against their models.
The three questions every founder has to wonder; Can we build it? Will people use it? Can we convince them to pay enough for it to sustain it?
I did make some assumptions about people understanding the core parts of any viable business model but the way you explained it here adds some great points.
As you mention, it's hard to know what your costs are going to be when you're just starting out so it's really important to be flexible enough to change your pricing / value prop to your customers as you grow in order to cover your costs and provide room for further growth.
But, briefly, the transactional model is one in which you require some customer communication in order to close the deal and is typically closed via inside sales reps. Enterprise deals are larger, cost more and typically require on the ground reps and a lot more customer facetime in order to close deals.
That's interesting. In the freight, and oil services industries, transactional is often used to describe spot market arrangements versus contractual ones. I think that makes sense, but I need to think about it a bit more as it relates to rivalrous goods.
