Entrepreneur, Thou Art Toolish, part 2   August 26, 2011

August 26, 2011

don't fail this bad, ladies and gentlemenDirectly on the coattails of my previous post, I am ready to call out another common failure point for entrepreneurs.  Major mistake #2 is approaching your web developer / partners / bank / focus group with baseless (or undetermined) pricing.

As a web developer with loads of startup experience, it is my job to give entrepreneurs direction with their web presence, but I am still amazed at how many people ask me “how much should I charge? or should it be free?” at the beginning of the project.  Don’t get me wrong, I very much enjoy the process of helping people derive a dollar value for their service based on their expenses.  It’s actually quite fun and gives me unparalleled insight into how their biz will operate both logically and financially.  I rarely build two web apps that operate in a similar manner or industry and, so, I hardly ever have “all the answers” at the point when I initially engage with a client.  Therefore, that process is necessary.

But the part of this process that is silly is why am I the one that is instigating it?  When entrepreneurs are deciding whether their idea is financially viable, the core part of the exercise should be computing operating expenses (especially marketing — which everyone neglects — e.g. “I’ll send out emails to all my friends” … ugh).  Weigh cost of operations against startup capital to see how long you can last in the negative.  Now you know if you need a primary revenue stream (advertising, for example) and whether you can afford to offer a free service.  Generally, after about 15 minutes of work, entrepreneurs see that they cannot support a free model.  And even better, it’s pretty clear how much needs to be pulled in each month.  Divide that by the number of users you are going to have.  Now divide that by 10 because that is the REAL number of users you are going to have.

I don’t expect enterpreneurs to come to me saying, “We need to bill $3.14 every three weeks”.  I expect lots of gray area.  However, sharp entrepreneurs should really be asking me the questions that allow them to refine their costs.  Like, how much is hosting?  How many servers do I need and what will they cost and can that be amortized over X months?  These questions indicate to me that the entrepreneur has determined that his model is at least somewhat financially viable.

Worse than this, however, is the client who tells me that pricing should be $9.99 per month “because it sounds good”.  I’ve heard it way more than two or three times.  To this day, I still can’t prevent my jaw from dropping when a prospect says this.  Next time, I should probably tell them that their project will cost a flat $69,500 … and when they ask why … wait for it … oh, hell, you complete the joke yourself.

Anyway, fon’t be a tool; run through this process and be hugely conservative when it comes to the number of advertisers, users, and revenue streams you’ll have.

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