Stripped down business models: Why

Posted: November 1, 2011 | Author: | Filed under: tools | Tags: , , , , | Leave a comment »

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A good first step in discussing a complex business is articulating a simple business model, not a complex one.

Despite the fact that conventional wisdom, the KISS principle (keep it simple, stupid) and host of other heuristics would lead one to this not-so-earth-shattering conclusion, it amazes me how difficult it can be to actually keep it simple and avoid the trap of piling on complexity.  Building a stripped down business model is a great exercise in sticking to the basics and describing the business idea at its economic core.  It also creates a powerful, accesible visual communication tool for promoting an idea.

In an informative post on how consumer internet startups make money, Steven Carpenter uses a downloadable set of financial models to focus the reader on the key drivers of various startup business types.  These are not complex discounted cash flow models; they are simply 5-10 lines of text that describes the various drivers and associated values that plug into a very basic algebraic equation.   That’s all.

Very rarely does one have the opportunity to interact with people (in business and in life) who know exactly what one is talking about.  Starting from the most accessible set of relationships, concepts and figures is a solid approach.  But its not nearly as easy as it sounds.  Taking the time to write out (in a spreadsheet, on scratch paper, in the dirt with a stick, etc.) a stripped down business model is a good habit. It encourages good communication and a simple, elegant organization of thoughts.