A few thoughts on two business models

Business models are also about what kind of work you want to do yourself. I prefer businesses where I make a big effort at the start, build something and can then gain more customers without costs following revenue krone for krone. I realised that when I received an email about a partnership that sounded exciting but still didn’t really fire me up.

These are a few thoughts from a late evening in Delray Beach in the summer of 2010. It’s getting dark, everything is quiet and I’ve just been checking email. The dog needs feeding shortly, but first I want to share the thought.

An exciting project that didn’t really fire me up

A guy emailed me about a project in South America. He had a team of SEO people, a call centre and some other things underway and wanted to know whether I’d like to do something with him.

He expressed himself well. It sounded like he had interesting people and good ideas, and certainly something that could make money. Developing intelligent solutions in countries with lower costs and selling them elsewhere can be a good idea.

We use 1902 in Manila ourselves to develop many things at Amino. I’m sure Peter over there makes good money from it. And I’m happy too, because I make good money from what he builds for us. So there’s nothing wrong with that kind of business.

That’s why I wondered why the offer didn’t appeal to me more. Only when I thought about it could I see the common thread in the businesses I’ve built myself. You’ll find my own entrepreneurial story in Iværksætter til jeg dør.

Two business models with different costs

Take Amino. If twice as many users arrive, I don’t automatically have twice the costs. The server has been bought. The software has been programmed. We have salespeople selling banners and people working on the solution.

If we’re going to double revenue or have twice as many users, perhaps we need another salesperson, another server and another programmer. But that doesn’t mean the entire cost base needs to double.

That’s something I like: We’ve built something more people can use. More users do require more work and capacity, of course, but not an equivalent increase in every expense.

SPAMfighter as an example

I think the same way about SPAMfighter. We have servers, salespeople, programmers and operations staff. Having one million or two million customers doesn’t have to make an enormous difference to costs.

A million extra customers might require three to five extra support staff, a couple of servers and more bandwidth. In the video, I give a rough estimate that it might cost an extra 100,000 kroner a month.

At the same time, I use 150 million kroner in extra revenue as a hypothetical example of the value of a million more paying customers. It’s an illustrative calculation, not a set of accounts I’m presenting. The point is the difference between possible extra revenue and the extra resources needed to serve customers.

The common thread in my businesses

I can see the pattern in almost everything I’ve done. There’s lots of work and expense at the beginning. But once you reach critical mass, you don’t necessarily have to put in proportionately more money for every new user.

In a community like Amino, users also entertain and help one another. The value doesn’t only come from me personally supplying another hour to each individual.

My rather blunt way of putting it is that if I go on holiday for a fortnight, I want to come home richer. I want to have built a business that can keep creating value while I’m not at work myself.

When you sell hours, the hours also have to be delivered

In a consultancy business, the connection is different. Every time someone buys an hour, an hour also has to be delivered. If I run the company and employ consultants, others can work for me, but the time still has to come from someone.

If revenue increases by 500 kroner, for example, perhaps 400 kroner of costs follows. That’s another simple example of the difference I’m discussing.

I’m not saying consulting is a bad business or that I’d never consider it. It simply doesn’t appeal to me as much as the other model.

I want to build the machine first

I compare it to building an aeroplane and filling it with fuel. Once it’s there, you can put more people in and fly back and forth. More passengers require something extra, but you don’t need to build a new plane for every person.

That’s an image of how I think, not a precise calculation for airline operations. I like building something where a large part of the effort goes into getting it established and many people can use it afterwards.

Never say never. But that’s the kind of business I most enjoy working on. Which model suits you is something you need to decide yourself.

Should I spend 3 years on a machine that can "make money by itself", or build a business where costs "follow" revenue? Well, that’s up to you, I’d say 🙂 If you’re bored in the Danish summer, get a little inspiration here