Speaking to experienced entrepreneurs, they often seem to have a magic sense for whether a business idea will work based on some quick back-of-the-envelope calculations. When I first got started in marketing, this seemed like some sort of wizardry. How could you possibly know if a decent-sounding idea was going to be feasible so quickly?
For a long time, my understanding was if you had a new business idea, the best way to test it would be to take it through the lean validation gauntlet by validating the problem, market, product (by building an minimum viable product (MVP)) and willingness to pay. Here is a great guide on lean for those unfamiliar.
But there’s a step before all of that. While a seven day startup is a huge improvement in failing fast compared to what entrepreneurs had to go through thirty years ago, there is an even faster way to crash test your ideas before you commit time and energy to them.
Lean is still the gold standard for validating new business ideas, and you should definitely use it. It’s a fantastic way to shine a light on the uncertain areas that often kill a business in it’s early stages, and it’s the best tool out there for helping find product market fit.
But getting through all four stages of lean can be frustrating, especially when it’s your sixth idea that’s failed at the final stage of willingess to pay. Lean forces us to be honest with ourselves and to “kill our darlings”. It requires us to invest time in researching markets, talking to users, building MVPs, and building landing pages.
While this is happening, we become more emotionally attached to our idea, which can be a dangerous path. This leads to a build-up of hope in order to motivate ourselves to get the validation out of the way so we can begin working on our “million-dollar idea”.
Don’t get me wrong, you should still definitely use lean. But It can be easy to think lean is all you need, and as a result overlook a faster way to kill your ideas (before you get attached), that is also an essential step somewhat left out of the lean methodology.
Before you dive into lean, you first need to know if your product is going to be able to support itself financially.
While it’s impossible to know for sure what your numbers are going to look like 12 months, that shouldn’t stop you from modelling it with some estimates.
This spreadsheet covers key metrics that are so important to running a business such as Customer Lifetime Value (LTV or CLV), Customer Aquisition Cost (CAC), Marketing Campaign Costs (MCC), as well as estimates for traffic, conversion and revenue that will be essential to seeing if your business idea has legs.
(Check the resources section at the end of this article if you need a refresher on what some of these metrics are all about).
If you use a simple modelling tool like this one:
By ignoring these simple pre-validation calculations, you run the risk of building a problem solution for your users, with no financial ability to deliver it. You can have willingness to pay, but if it doesn’t match the running costs of the business, the business is dead in the water.
Play around with all the different numbers, and this will eventually give you an idea of what benchmarks you’ll need to hit in order for your business to be profitable in the long run.
Why is the second product multiplied by 0.2?
The reasoning for this is based on the idea that 20% of your buyers pool will convert to the higher-selling product. This isn’t necessarily accurate, but I’ve based it on Perry Marshall’s 80/20 Rule. Feel free to change this if you have a different idea of what rate your upsells will occur.
I don’t like your CLV / LTV calculation.
It’s not perfect and necessarily so. It is a basic and simple method of calculating just so you can get an idea of the numbers of the business. Remember these numbers are all made up. As long as a simple formula is in place to help you get an idea, that’s all that matters.
Make a copy of the spreadsheet for personal use by going to File > Make a copy. Follow the instructions above to test some of your ideas
Feedback is welcome! Let me know if I’ve overlooked something here or your thoughts on this.
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