The worst entreprenurial sin

In my opinion, the worst entrepreneurial sin is building a product without a revenue stream. Sure there are strategies to build a web application, go viral and sell to GoogFaceYahooSoft.... but most of my readers live outside of the reality distortion field of Silicon Valley and must actually build a business that makes money.

A business is

A business is defined as the exchange of a good or a service for a profit. If you do not know who will give you a profitable sum for your good or service, stop what you are doing right now and go figure it out.

By figure it out, I mean get some real details. For example, advertising is a choice for a revenue model. Advertising can be a successful strategy and it can also be the lazy man's version of revenue planning. If your monetization strategy is "Advertising", you should get a good understanding of your value as an advertising partner. Some things to think of:

  • Who will sell your ads?
  • Will you do it and if not, who in your company will head up the sales of advertising?
  • If you plan on using a commercial service, what price can you get for your ads?
  • Are they pay-per-click?
  • What type of ads will target for your content?
  • Do you know what the price yield is for those sorts of ads?
  • What percentage user attrition can you expect when you located ads on your content?

Our Business Model

With ChallengeWave, we chose to charge businesses a fee for our service. Did you know unhealthy workers are 7-12 times more expensive in terms of Medical Insurance Expense, Worker Compensation Expense and Lost Workdays? A business can save a substantial amount of money by increasing the health of their employee population. While another monetization strategy for ChallengeWave would be advertising, and we assessed the valuation of ads across a targeted market of self-selected health conscious individuals, we chose not to pursue advertising revenue because it diluted our business offering and because we can not control the price of advertising. Having a revenue stream at the control of another party was a risk we did not want to bear.

The point is, we did our homework in finding a viable revenue stream for our company BEFORE investing a ton of resources. We also validated that revenue stream with actual customers so we could fine tune our offering. You should know your product and know intimately the details comprising your chosen revenue stream. A business with no revenue stream is a hobby.

Play with the rules

In closing, once you have your validated revenue stream for your business, you can then start to make optimized strategic decisions. Each revenue model has it's own set of rules and when you know the rules for your revenue model you can choose maximal tradeoffs. You know which ends of the decision triangle are most important. Is it content over user privacy? Is it features over liability?

Your job as a founder is to balance resources and effort against reward. If you do this correctly, your business will grow. When you make mistakes, your company will contract.

-Agree/Disagree? Let's talk it out in the comments

If you are interested in a demonstration of ChallengeWave for your organization, let us know.

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7/1/11 1:32 PM # Posted By Joseph Burchett

It's amazing how many of these really popular start ups even though are getting millions of dollars worth of investment are not actually making any money. I mean is it really smart for companies to keep doing this? I completely agree with what you said... People keep saying that the next bubble is right around the corner with all this cash being tossed around. Hm, I guess all we can do is wait and see.

7/4/11 6:41 PM # Posted By Qasim Rasheed

Well said and it is so true that a good majority of IT products/software fail because someone failed to recognize the business side. However there will always be exception to this rule. Inventions like Penicillin/Crazy Glue were spontaneous and there was no specific revenue stream recognized up front.