Founders sometimes come to developers with a “great idea” for a new app, but with no idea of how to make money from it. Here are five concrete steps to avoid this common pitfall.
As the devs behind a lot of cool entrepreneurial tech concepts, the one thing we often feel is missing is a clear path to profit (or sometimes even income altogether). We often advise founder-clients that to build a solid business from their initial ideas they need to do five things:
1. Get it on paper and ask four key questions
Just write down the concept. Then ask four questions: “how will the idea be packaged for sale?”, “who will promote this package?”, “what has to happen to actually pay for this package?” and “how will I re-invest in this business”. When you are ready to answer these questions, then you can define how you can turn a concept into a viable business that can weather a real-world storm. Only after that can you start to spend the time and money to build it.
2. Now answer the question “How will the idea be packaged for sale?”
To remain a going concern your new idea will need to make more money than it costs – at some point. It’s ability to do that will define whether it is worth doing in the first place. Before you can answer the question here you need to know who is buying. Many people feel that if they can solve a problem for someone, that person is willing to pay them. Reality shows though that most internet and app services make their money by getting paid by sponsors who wish to advertise to habitual users of the service. Thinking about exactly who will pay you will guide your creativity in redefining your initial concept to appeal to either sponsors, corporate end-users or individual consumers. Draw out the concept on paper and see if it is something you would buy as a user. If not, would you use it for free? If so, would you spend your company’s cash on advertising to a bunch of people using it for free? In the end, you may choose to use a service that posts banners on your site for cash. If this is your choice, make sure you build your site or app in such a way that people click on the banners. Essentially you will be running an ad service, just like the local newspaper. Once this is done, you just have to come up with a way to promote what you have built.
3) Answer “Who will promote this package?”
You now have a notion of what this thing will look like and who or what will pay you for the priveledge of using it. Now you need to find out how you are going to get them to the point of wanting to pay you. People (and/or companies) need to be approached, solicited or otherwise made to know of and demand your package before they make the decision to pay for it. Many entreprenuers miss this important point: clients always have a choice to buy from you or not to by from you. Founders should never assume that if their start-up offers something it will automatically have bidders waiting. If you do the promoting yourself, you will need to be in the position to get some “low hanging fruit” through the door. Otherwise, be prepared for a torrent of rejection or a long wait before you convert enough to make your business feel worthwhile. Alternatively, it might make sense using others who are better placed to promote than you are. Hire a sales person or two. Negotiate a contract with a promo company. These intermediaies will take a cut and or a flat fee. Some might even take the concept itself and pay you a cut. All will dictate terms that could affect the eventual design and application of your business idea. By and large all of this is okay – changing the initial concept is for the better if it is done with overall profitability in mind.
4) Answer “How will customers actually pay for this?”
Okay, now you or your marketers have found a willing payer. How do they actually pay the money to you? This seems like such a simple question, yet it is often overlooked. To convert all your potential income, you may need to automate the sales admin process. Many companies with great tech concepts, brilliant interfaces and outstanding promotions fall flat at this point. Many rely on email confirmations, phone calls and some even on snail mail paperwork. These are all barriers to conversion. Some industries are required to ask buyers to fill out regulatory forms or subject transactions to “cool off” periods. Ask “what can I do to make sure my sales process can be completed despite the hurdles?”. Note here that if you are posting Google Adsense banners on your site or app as the only source of revenue, you have virtually removed the issue of wondering how you will be paid. However, if you look at the opportunity costs of selling to sponsors directly, you might see that Google is actually charging you a rather large fee for the convenience. That is fine, but you will at least need to acknowledge this and set you revenue expectations realistically.
5) Answer “How do I re-invest the profits?”
In our experience as developers, we rarely see entrepreneurs come in with a finance-linked growth plan. Usually, people think:
First idea, then finance, then build, then money, then ride off into the sunset!
In reality it is not so linear or conclusive. Its more circular, more like
First idea, then finance … then …. build, money, idea, reinvest, build, money, idea, reinvest (repeat)
Note that the word “idea” occurs over and over after each mention of money in the cycle. This is because there needs to be ideation involved with the process of improving from one earnings cycle to the next. Ask “how can I invest time and money to constantly level-up my business at each cycle?”. We advise web and app entrepreneurs to leave as much as 80% of their initial capital free for upgrades and tweaks. A highly profitable concept may be able to leave less in the bank, but if you are expecting not to make profit in the short term, you will need to have that start-up cash available to react to your market’s preferences.
In year one, a typical founder should have the cash-on-hand to upgrade their web or app ecosystem every 45-60 days. This might mean a less dramatic initial launch then one that uses closer to 100% of the start-up capital. However, it might mean that the business will still be around in a year to celebrate.
Parker Lake, is an experienced digital consultant and Director of Business Development at Certatim in Miami Beach, Florida. He works with entrepreneurs and brands to make web and app technology simple, effective, scalable and within budget. Connect with Parker @parkerlake or on LinkedIn.