As part of the fundamental process in designing and building a company, one of the first critical tasks is modeling the potential revenues and costs associated with a project. To model the costs, we require a solid understanding of the business and/or application that we are to build. Herein lies the rub. Without having a basic business scope or a comprehensive list of desired features and functionality, how do you determine how much the whole company or product will cost to build?
There is a very efficient and cost effective means to jumpstart this process – the Competitive Analysis. At Startup Army, we typically gain our understanding of a business through a robust competive analysis. We analyze the business case (e.g. membership, member activity, revenues, and costs) and aggregate and compare the feature sets in order to become experts in the business we are building. Once we have an understanding of the desired feature sets and a raw understanding of the costs behind those features, we are then in a good position to easily brainstorm ideas for the types of revenue we actually need to cover our costs (much less be profitable). The goal of this exercise, post analysis, is to come up with enough revenue opportunities to cover all the costs using this rough-cut approach. Once we have completed our research, we have a thorough understanding of the competitive landscape, the high-level revenue opportunities, and a ball-park estimate of the costs to develop these features.
The key to putting together a viable business model using the Competitive Analysis process is to combine the startup’s feature sets (from small to large) with the potential revenue that each feature can drive. If we can scope the features to small, medium, and large-scale implementations, and scope the potential revenue schemes to small, medium, and large, then we can group and compare different sets of features and revenue opportunities to see where there are quick wins or optimal paths for deployment of the business’ key objectives (minimal cost, maximum market saturation, profitability).
If the cost numbers skew on the large side, we go right back to the client and say what types of big deals or partnerships they may need to close in terms of sponsorship, investment, or something of similar scale. These largers deals take the longest to close, and we need to know if the client can actually deliver on these deals. We also create a Risk Mitigation spreadsheet to track the concern that revenues may not cover costs. It’s a big risk, and one that should certainly be revisited at the beginning and end of each iteration of the project until the issue is resolved once and for all.
If the cost numbers are in the ballpark (usually the case), we continue on with our normal company building process.
Let me know what you think. There are many ways to model costs and revenues. I prefer using the Competitive Analysis because you also get a head start on your list of functional requirements. By creating a list of features, functions, gadgets and widgets and by taking tons of screenshots and pictures as you do the analysis, you accelerate the company building process. Two-for-ones rock!
-=John
Related posts:
- Analyzing Your Company’s Viability
- An Inside Look at How Startup Army Builds Companies
- Running Your Startup: How to build your team
- 10 Keys for Startup Success
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I think is a good method with traditional businesses or at least those business that have an equivalent”competition on the market. However, this approach will not apply on startups active in new emerging markets or markets that don’t have yet a business model or even an idea on how they will will generate profit. I am thinking to web 2.0 startups mostly looking for buyouts or exits.
I completely disagree, Adrian. We are currently designing a company that has no perceived direct competitors in their market space. However, when analyzing the business concept and target market, we determined no less than 60 other Web sites and applications that were similar in form, functional, brand, or identity to the concept.
If you are in a startup and you think you have no competitors, you are deluding yourself. Your business is in significant risk. You cannot possibly convince me that your idea is so new that nobody is doing it.
Do you have any examples? Perhaps we can discuss…
-=John
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