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How do you make money? – There has to be a money plan
Here’s what they mean…
Startups exist to be acquired by corporate companies to solve their problems, but they are also meant to make money! You need to have a clear revenue model. How do you make money? is a question that gives you your chance to tell the VCs how your business makes money.
Let’s pretend that you are Gillette. You would say that you give the razors away for free and charge for razor blades. You would then explain the cost of the razor and then the huge margins that you get on the razor blades. You would explain how people will keep buying the razor blades and you ergo make a lot of money.
Think about any successful company you know of. My bet is you can explain how they make money simply, right? There aren’t 15 different ways. Something makes most of the money. So for SaaS that’s recurring revenue. For eCommerce is a margin on selling things. For a consultant, it’s selling time per hour. For an affiliate, it’s by selling others’ products.
I’m always dubious of people saying things like ‘data’. You need such a huge amount of data to make money. The same thing goes for eCommerce apps that do CPL/CPA. You need a min of 5m users last time I did an analysis.
It is best to address this question by explaining your business model, and how smart it is. Read this to get smart. It will teach you the fundamentals of strategy and business models. It’s a long read but you are screwed if you don’t have a real business model.
What you need to say
“Whilst Dollar Shave Club did not invent their business model, we were inspired by them. They sold for $1 billion which is not too bad!
Subscription is powerful, so we adopted the same key principle. The market for shaving is, of course, large, but the market for beauty product discovery is even larger.
Every month we send our customers a box of five pointless products. Since they are totally pointless, we will never run out of pointless things to send. So on a recurring basis, we charge our customers $39. For our first full year cohort, we have a 73% retention rate.”
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