How to evaluate if your idea is going to work?
If you have an idea and about to start working on it, do these basic calculation first.
Have you ever thought why a lot of the startup fail? We can tell you that they are as passionate about their ideas as you are about yours, but still after sometime either they lose interest in the idea or don’t find it feasible anymore, or fail to secure money or can be number of other reasons.
We always encourage anyone who brings an idea to us to do this one simple business 101 practice on their idea before doing anything else about it. So, let’s see what that is first and later will follow with an example.
One of the most important goal of every startup is to make money as soon as possible. It’s essential for your survival and motivation, as not every startup will be able to raise funds. So, in order to calculate profit there is a universal very simple formula:
Expenses:
Make a list of two things under expenses:
- Fixed Expense
- Variable Expense
Fixed expenses: Some examples of fixed expenses are rent for office space, Software Subscriptions, Web Hosting and Domain Costs, etc.
Variable expenses: Some examples of variable expenses are Marketing and Advertising, Cloud computing costs, Research and Development Costs, etc.
You don’t have to be accurate about the above specially about the variable costs but having an estimate would be a good start. You can estimate it on a monthly basis so that you know on approximate I’ll be doing these many expenses.
Revenue:
Revenue depends on two things:
- Volume
- Price
Volume refers to the quantity or number of units sold. Some examples are No. of users subscribed, no. of in-app purchases, no. of items sold, etc.
Price refers to the amount of money that a customer pays for each unit of product or service. For example one subscription of your SAAS platform is $9.99 per month so that’ll become the price per unit.
We calculate Total Revenue = Volume × Price per Unit then same as before you can have an approximate estimation of your revenue per month.
By doing the above you will be in a position to better evaluate that if the idea you are going to work on is worth spending time and effort on as it’ll give you a picture of how much money you’ll be needing in order to get the idea in a profitable state or even a break-even state.
Using the above will also give you an initial understanding of how much you have to raise in terms of funding and what should be your burn-rate per month (meaning how much you need to keep your expenses cap on so that you don’t burn all the money you have before breaking even or profitability).
One last thing:
With the above in mind there is one more thing that you need to focus on and that is:
Keeping the churn rate to as minimum as possible
What the above statement means is “to reduce the rate at which customers or users stop using or cancel their subscriptions to your product or service”.
For an example of the above, say you have an AI startup that generate images based on prompt. You have a subscription pricing model i.e. user can pay monthly fee to use it. You are able to create a revenue model where your goal is say if I’m able to get 100 subscriptions per month I can break-even. But what if the users subscribing per month doesn’t continue the subscription for the next month? This means even if you had a great profitability, but your churn rate is high you’re bleeding and it’ll be a matter of time before you’ll run out of money.
These basic calculations are essential if you do them at start, as they provide a good estimation or set your mind towards the effort and money that’ll be needed. Then later you can always hire a more experienced product owner to take it to a more in-depth dive into it and focus on things like how to decrease churn rate etc.
This article provides a very basic business 101 kinda tool that we believe every person with a great idea should do before doing any other work and then create a plan accordingly. If you liked it, do share it with your network to help others learn and evaluate their ideas and press 👏 so that other people with similar interest can find it on their timelines too.
