This is the second post in a series on developing a good business model for an early stage company.
Proof of Scale and Proof of Commercialization (at Profit)
Following POC, you want to prove that your concept can scale under a viable business model. Proof of Scale and Proof of Commercialization (at profit) work hand in hand as each is often dependant on the other. POS refers to the ability for a concept to scale in terms of sellable units in the marketplace and business growth requirements. POCP refers to the ability for the scaling product to be accepted in the marketplace at a price point that leads to company profit.
My business law practice is a lousy scalable business model. All I have to sell is my time. After my time capabilities are used up, I can only scale by hiring other expensive professionals who sell their time. Of course, each of them is capped by how much time they can sell. The only way to make more revenue is to hire more folks and make more sellable hours available. As a result, this increases my overhead and directly impacts POCP.
An example of a good POS model is business-to-business SaaS. In fact, this is one of the most scalable business models I have ever seen. For most B2B SaaS models, once the first version of the SaaS application is launched in the marketplace, the variable costs are tied directly to revenue. The ability to hit new customers is wide. Geographic boundaries are nearly non-existent – excepting language barriers. Additional subscriptions means additional revenue means more hosting and support costs – but these costs are directly tied into higher revenue.
The final proof is commercialization at profit. This is basic supply vs. demand meets cash flow analysis. There is no point in the expending the blood, sweat and tears (and expense) of scaling a business if there is not a profitable goal. At what point does the company break even? Are there profit steps, peaks and valleys or a consistent profit curve in the cash flow projection graph? How do you prepare for each? Some business models require huge customer buy-in before they can be cash flow positive. Others need very little. Which is yours?
See also:
Entrepreneurial Law – Developing a Good Business Model – Part I
Entrepreneurial Law - B2B, B2C and C2C
Good Metrics
SaaS Law - Market Growth
Proof of Scale and Proof of Commercialization (at Profit)
Following POC, you want to prove that your concept can scale under a viable business model. Proof of Scale and Proof of Commercialization (at profit) work hand in hand as each is often dependant on the other. POS refers to the ability for a concept to scale in terms of sellable units in the marketplace and business growth requirements. POCP refers to the ability for the scaling product to be accepted in the marketplace at a price point that leads to company profit.
My business law practice is a lousy scalable business model. All I have to sell is my time. After my time capabilities are used up, I can only scale by hiring other expensive professionals who sell their time. Of course, each of them is capped by how much time they can sell. The only way to make more revenue is to hire more folks and make more sellable hours available. As a result, this increases my overhead and directly impacts POCP.
An example of a good POS model is business-to-business SaaS. In fact, this is one of the most scalable business models I have ever seen. For most B2B SaaS models, once the first version of the SaaS application is launched in the marketplace, the variable costs are tied directly to revenue. The ability to hit new customers is wide. Geographic boundaries are nearly non-existent – excepting language barriers. Additional subscriptions means additional revenue means more hosting and support costs – but these costs are directly tied into higher revenue.
The final proof is commercialization at profit. This is basic supply vs. demand meets cash flow analysis. There is no point in the expending the blood, sweat and tears (and expense) of scaling a business if there is not a profitable goal. At what point does the company break even? Are there profit steps, peaks and valleys or a consistent profit curve in the cash flow projection graph? How do you prepare for each? Some business models require huge customer buy-in before they can be cash flow positive. Others need very little. Which is yours?
See also:
Entrepreneurial Law – Developing a Good Business Model – Part I
Entrepreneurial Law - B2B, B2C and C2C
Good Metrics
SaaS Law - Market Growth
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