How often does an idea for a business pop into your head but you’re just not sure whether it’d be popular or whether it would make you enough money to support a nomadic, location independent lifestyle?
Did you know that there is a tried & tested method of figuring this out – which is slightly more scientific than basing your business on a gut feeling?
It’s not a fancy new tool or whizz bang online app, it’s the good old spreadsheet-based business model.
But before your eyes glaze over (as mine often do when faced with rows and rows of dullardio numbers), here’s what building a business model can tell you about your idea:
- Whether it is ever likely to make you enough money
- What your earnings targets are – and whether it’s realistic to be able to hit them or not
- How much setting up & running the business is going to cost you now & in the future
- Whether it’s worth your time, effort & financial investment in the short, medium & long term
Sound good? Here’s what you do…
1 – Gather Costs Data
Gather all the data you have about the costs that setting up & running the business will incur. For our business, these include:
- Ad hoc office/equipment purchases – printer paper, stock photos
- Monthly service subscriptions – invoicing, domain names, web hosting, autoresponder service, ebook platform, memberships
- Cost of goods sold – we put supplier/outsourcing costs here
- Staff – virtual assistant, marketing research
2 – Define Income Targets
If this is a new business idea, you need to identify the different sources/types of income you will be generating – and then define a monthly target income for each income stream. For our business, these include:
- Product sales (ebooks & digital program)
- Affiliate income – from each different website/blog
- Consulting & Marketing services plus Graphic & Web Design services
3 – Define Assumptions
The important part now is to test your assumptions around your income. It’s great to set yourself targets but how do you know whether you can realistically achieve these, particularly if you have no existing sales data to go on? Here’s where you get creative…
You have to make some sensible assumptions about your business. For example, some of the assumptions we make about our costs might look something like this…
- The COGs (cost of goods sold) includes outsourcing fees which we estimate at an average of @ 25% of a project value.
- We purchase on average 3 x stock images for every project @ $1 per image.
- Staff: we generally use the equivalent of 1 part-time VA & 1 part-time marketing assistant every month.
Whilst we don’t always know the exact costs of everything, we make some assumptions around what we expect our costs to be on a month to month basis.
Size of target markets:
Two of our target markets for our website & blog services are life coaches and personal trainers/fitness professionals. Basic research indicates that there are approximately 5,000 life coaches in the UK and around 25,000 fitness professionals (it’s likely there are more but it’s safer to be on the conservative side than over-estimate).
Of those 30,000 people, some will work in gyms/training facilities/companies rather than being self-employed so are unlikely to need a website/blog to promote themselves (e.g. 40%); some of the 60% who are self-employed may already have websites or blogs (e.g. 30%). We can put a guesstimate % on each of these groups and reduce the size of our addressable market accordingly.
So of 30,000, 60% are self-employed and might need a website = 18,000 people are self-employed and might need a website/blog.
Of those 18,000, 30% may already have websites which means 70% don’t = 12,600 people don’t have a website/blog already.
So the size of our addressable target market = approximately (and conservatively) 12,600
Average value of purchase:
We know that most people go for our Advantage website package, the value of which = £695
Frequency of purchase:
Our assumption is that most people in that particular target market will need only one website or blog – and are unlikely to get several built in the same year, so the frequency of purchase per client = 1
Is your Target Income realistic?
Now if we look back at our target income, we might have said that we’re aiming to make £2,000 per month from the websites/blogs side of our business.
Reviewing our assumptions shows us that:
In order to make £2,000 with an average sale of £695, we need to sell approximately 3 projects every month = 36 projects a year.
Selling 36 projects a year (3 per month and less than 1 per week) to a target market of 12,600 means we only need to win about 0.3% of the market to achieve our target income. Does that feel achievable to us? You betcha!
On the other hand, if we’d said we want to make £20,000 per month selling our web/blog services to that target market, we’d have to win 348 projects a year (29 per month and 7 per week) which is 3% of the overall market which is a fair amount (despite it sounding a tiny %), if you consider the multitude of web design competition out there.
So is your idea profitable?
Now if you consider our monthly costs for this part of the business, they might total approximately £200 per month, which leaves a monthly profit of £1,800 from this side of the business – and an annual profit of £21,600.
Let’s imagine however that our costs for this business were £1,000 per month. This would mean our actual monthly profit would drop to £1,000 and our annual profit would only be £12,000. If we want to increase that, we need to either reduce the costs or increase the income.
We can go back to our assumptions around income and determine whether we’re likely to be able to achieve the additional income we want by either increasing our prices or winning more of the market.
If we build our model based on these flexible assumptions, we can run several scenarios through the model and see exactly what the impact is on our bottom line.
But is it enough to support a nomadic, location independent lifestyle?
There’s the $1m question…but the beauty of the location independent lifestyle, is that it can be had for far cheaper than most people think.