How much money is this business going to make? – 4 Key Pitfalls to Avoid

So, you have a winning idea and a great plan to monetize this idea and start a powerhouse internet business.

Inevitably when you craft your business model you will start working out some figures for this new venture. So you sit down and start throwing around imaginary numbers.

A certain number of people visit the site, so many sign up, another number purchase and then probably you do some calculations, a x b x c = whaddya know you are going to be rich!

But there is a catch… Until you have actually started doing business these numbers are totally and utterly fictional. It is OK though, because even if you were a seasoned entrepreneur they would still be fictional.

The truth is until the doors open nobody really knows how successful a business is going to be. There are no sure fire hits.

The trick is refining your guesses so that the chances of your overestimating the vast profits you will be making are about the same as your chances of underestimating.

Here are four key pitfalls to avoid when “calculating” your expected revenues:

Pitfall #1 – Overestimating Your Market Size

When we started, I can remember thinking “There are 1 million Flash users, if only 1 in 10 of them is interested in our product that is 100,000 customers” …

But just because there are X million people who might possibly fall into your market, does not mean that your market size is X million people. In reality our market for FlashDen was people who use Flash in their work, who purchase off the internet, who speak English, who … etc.

That is our real market and it is a lot smaller than 1 million. To give another example, if you were selling shaving products, you could say that your market is well… Men, so thats 2.5 billion people right? Easy money!

Pitfall #2 – Forgetting Your Costs

Whenever I go into a restaurant and look at the prices on the menu, almost always in my head I think something like “Well cucumbers cost $1, tomatoes cost $2, this salad costs $10… gee these guys are making a killing!”

Now anyone who has ever been in the restaurant business will tell you its one of the hardest around. There are many hidden costs that I in my infinite wisdom reading my menu am forgetting, like marketing, rent, personnel, insurance, wasted materials, non-food materials like the menu I am holding and so on.

Assuming that all the costs that you can think of really are all the costs is a fatal assumption. Even if you think you have adequately thought of every conceivable cost, throw in another 25% for good measure, because there will always be things you hadn’t thought of until you actually are there running the business.

Pitfall #3 – People Will Pay

However you price your product or service, whether it is a one off sale price, a subscription price, a donation amount, an advertising price or some other price, you are assuming that people will be prepared to pay that amount.

Unfortunately pricing is often done through trial and error, going up and down to find what the market will bear, what people will be prepared to pay and what they won’t.

There are no magic ways to guess this one right, you can go by industry norms if there are some, you can go by what you are prepared to pay, but inevitably you will have to make a leap of faith and guess, so try to be conservative – that way if there are surprises they will hopefully be happy ones.

Pitfall #4 – Once its Built, the Hard Work is Done

Assuming that the product development – whether its programming some software, getting a web storefront ready or writing that ebook – is all there is to it is another fatal mistake.

Maintenance, marketing, sales, ongoing development, bug-fixing, advertising, administration and support are all huge parts of any business. I recall telling a friend about our web business and how much work there was to do and he said “But the website’s built, what else do you have to do?”

Perhaps there are businesses where you just build it and leave it, but I’ve never come across one. Nine times out of ten the build is the easy part, it has fixed constraints, you can work out what you need to do to build something.

After the build there are hundreds of variables, lots of things that could go wrong, that will need doing, competitors that pop up, marketing campaigns that turn out to be ineffective, support for things you didn’t expect to have to support, administration that takes a lot longer than you expected and so on.

Just keep it real

At the end of the day it’s common sense: think it through, don’t jump to conclusions and be conservative.

But in the excitement of new business it is all too easy for things like common sense to go out the window as you sit and calculate out just how you will spend those millions that are wait for collection.

About Collis Ta'eed

As cofounder and CEO, Collis Ta’eed leads Envato, one of the world’s most thriving digital marketplaces and creative educational blog networks.

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