A Clever Business Model

By Alex Hillman on Wednesday, September 7th, 2011 in business, coworking, indyhall with 5 Comments

One of my favorite interactions to have with coworking inquiries is about our business model at Indy Hall.

My answer is always the same.

We make more money than we spend.

The answer is usually met with either confused silence, or laughter. But I’m dead serious. Our business model isn’t clever. It’s simple and sustainable. We make more money than we spend.

When we make more money, we have more money to spend. When we need money, we look for ways to earn more of it. But the business model remains simple.

Oh, you mean PRICING!?

Pricing is another story. Pricing isn’t your business model, though it can be an element of it. Pricing, unlike the simplicity of our totally un-clever business model, can be quite tricky. Pricing is your opportunity to get clever, if you’re so inclined. But the methods for getting to your pricing aren’t rewarded by their cleverness, they’re rewarded by getting it right.

Jessica Hische’s article on “The Dark Art of Pricing“ does a nice job explaining the litmus test for checking your pricing:

IF THE CLIENT WRITES BACK IMMEDIATELY and says “These numbers look great! We’ll send along a contract for you to go over in a few days!” It probably means your prices are too low. If they write back and try to negotiate you down a little bit, you were probably pretty spot on, and if they write back and say that this is well beyond their budget, you get to decide whether or not you want to figure out a way to work within their budget or whether you want to walk away and take one for the team.

If you’re obsessed with being clever, come up with creative ways to determine these reactions by interacting with actual customers in your market before you have a product. Prices are an attribute of your market and their value of your offering, not the other way around.

And if your pricing precludes you from being able to make more money than you spend – no matter how “right” you got your pricing, your business model is still broken.

 

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  • Yardboy

    On pricing, you know you’ve hit the sweet spot when the client grimaces and says “that’s a lot” as he pulls out his checkbook and starts writing it out.

  • http://iandavis.com/ Ian Davis

    When people ask what’s your business model, they’re not asking about pricing. They’re asking who you’re charging and why. Making more money than you spend just defines a business, not a model.

  • http://www.dangerouslyawesome.com alexknowshtml

    I’m glad that’s the answer you’re looking for when you ask that question, because I’ve found that more often than not, that’s not the case. 

    Beyond that, more startups are concerned with the cleverness of where the money comes from than making sure they bring in more than they spend. Without that, the model doesn’t matter because, as you point out, they’re not going to be a business much longer.

  • Nick

    Perhaps the problem is that people are asking you the wrong question. If your beer buddies are wondering how you’re going to achieve profitability but incorrectly use the term “business model”, then your answer is fine.  However, to anyone who’s been around the block, “business model” is a term of art that has a very specific meaning.  Providing such a glib answer either insults them or showcases your ignorance.

    Besides all that, your answer doesn’t make sense.  Okay, so your expenses are less than your revenue.  But how do you expect to get your first revenue if you never incur an expense?  Maybe your solution is to make strategic investments with an expectation that the revenue will follow.  Sounds good, but what happens when a competitor enters the market, buys up a supplier that you depend on, and doubles your prices?  Oops… now your forecast is out.  In keeping with your mantra, now you need to slash expenses.  So start firing employees as that’s the largest expense of most businesses.  That means you can do less, but it’s okay since you’re making more.  But now your capacity is similarly reduced and your revenue further plummits.  Keep firing people until you have no business left.  Well done, genius.  At least your “business model” worked for you.

    A proper business model would have at least considered such things.  A glib “make more than we spend” does not.

  • http://www.websiteop.com/ freelance seo consultant

    If pricing conveys value that no one else is offering, then people will pay more