Business Model Assumptions

As long time readers of this blog will know, I am a big believer in a "business model" as a means to develop a new business concept, evaluate an existing business or manage an operating company. This is the main theme in HUTM--the Hacker Universal Theory of Management, which simply put says "focus on the growth drivers in the revenue model of the business".

To achieve a well developed business model, one needs to articulate the assumptions that underlie the business model in three areas:

1. the Revenue Model
2. the Pricing Model
3. the Sales and Distribution Strategy

(More background on these three key concepts is here.)

Steve Barsh, a professor at Wharton, has a good post-- "Want A Better Valuation? Decrease Your Assumptions"--which ties in well with my own thinking on business model. Barsh states:

"I generally find that most businesses / ideas are based on 3 - 7 key assumptions that represent the highest risk factors that will determine the likelihood of success.  This applies to both new and ongoing businesses."

His advice to business managers:

"As you are thinking through your business, business model, new product, or new service, make sure to ask yourself and your team:

    * What key assumptions are we making?
    * How can we figure out if our key assumptions are correct and do it quickly and in a capital efficient manner?"

The points to take away from Barsh are:

1. You have to identify the key assumptions in the business model
2. The assumptions represent the risk in the model
3. The more confirmation of the assumptions the better the valuation of the business...(Hacker--AND THE MORE LIKELY YOU WILL BE FUNDED)
4. Spend intellectual capital to confirm assumptions before you spend cash!

Go HUTM!! If you need a good laugh, read this post--HUTM Goes Viral--from October 2007.