How Is Your Startup Going to Make Money?

Four questions founders need to ask right now.

I swear. It’s the most important question I ask — the most often — which returns the least specific answer.

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How is your thing going to make money?

I mean, it’s not like I ask the question and get blank stares back. In fact, it’s the opposite. I usually get a wry smile and a rehearsed explanation about product-market fit, TAM, and disruption models. But that’s not what I mean. Here’s what I mean.

1. A thing has a price, but that’s just a suggestion of what the people who sell the thing think other people should pay for it.
2. A product does a thing, but that thing almost never justifies the price on its own.
3. A market has money, but how money will be made from that market is almost always glossed over by the people selling the thing.

I know. Those are a lot of words that seem random.

But somewhere within that word salad, money has to be created. Yeah. Out of thin air. This is what separates products that make money from really cool products that fail.

Just so you don’t think I’m making this up, here are some simple examples of how money gets created out of thin air:

1. The thing replaces one or more necessary things at a fraction of the cost, creating new money that can be used to buy the thing,
2. The thing saves time, and people who value their time more than the cost of the thing will use that time to create new money.
3. The thing produces a benefit, and when that benefit can be quantified, it can be haggled into new money.
4. And, usually in a B2B sense, the thing generates revenue, and the margin on that revenue is new money.

BUT…

Just because you can envision your business selling a customer a product, that doesn’t mean they’ll create new money with it. At all. And if they can’t, they’ll never buy it. At least not the price you’re charging them.

Even when you’re lucky enough to get a product into a customer’s hands, if they can’t generate new money with it, you’ll be creating an army of unhappy customers, which leads to bad word of mouth, which eventually reduces the value of the product to zero over time.

Here are the most popular ways I’ve seen this play out:

1. Software and apps that do really cool things but have no business justification.
2. Programs and services that lack a customer onboarding and engagement path.
3. Marketplaces that bring customers and vendors together without adding any value to the transaction.
4. Subscriptions that don’t increase in usefulness the longer they’re held.

All of these examples are shortcuts to an actual business model. Technology for technology’s sake. Things that exist because they can, not because they’re necessary.

At the end of the day, I’d rather have ugly software that does very little beyond what the customer needs. Or a product that is perceived to be expensive, rather than break that price into monthly installments.

So how do you get past this? Ask yourself these four questions:

1. Would I feel comfortable charging three times the price for the same product?
2. What’s the actual dollar amount of new money creation I would guarantee as a minimum to any customer?
3. If my competitors (or vendors in a marketplace model), cut their prices by 50%, would my customers stay with me?
4. What happens to my customer if I take my product away?

And if you’re comfortable with all your answers to these questions, I implore you to start asking your customers or potential customers the same questions. If their answers match, your thing is going to create tons of money.