Video: Understanding Key Business DriversCopy

In this lesson, Professor Hachikian highlights some key business drivers and their importance. 

You may watch this tutorial by Linh Dinh for more insights on creating a financial model and calculating key business drivers.

https://youtu.be/nCfO2SqegUw

Transcript

So, when you’re working through unit economics as I said, this is really critical because it can really help you identify key business drivers; key business drivers include market size and addressable market. You want to know, you know, really frankly, if you sell all these units; is there a big enough market that if you sell enough units you’re going to be able to make money as a company? It can help you think through technology development costs, customer acquisition costs, which is, you know, if you have a two-sided market, you have to think about customer acquisition on both sides of that market. And, it can help you think about customer lifetime value. This is especially important to use this analysis to validate some of the assumptions, you know, for example, if you get in there and you’re really in your, you know, you’re looking at your marketing costs that you’ve identified and outlining how the marketing costs that, you know, that you’ve modeled out in your spreadsheets is compared on a per customer basis compared to your lifetime value and you’re finding that, you know, (the) what you’ve budgeted for marketing costs isn’t going to cover, isn’t. If it is going to cost you more to acquire a customer than you’re going to make from that customer, well, that’s a big problem that’s not going to make for a very profitable business.

So, it helps you sort of look at; you begin to think about the key business drivers. It helps you zoom out from all those numbers in a spreadsheet to really understand is your business going to be profitable? And, what’s going to drive that, and this is again in some ways, when you communicate to investors about your business and about its, you know, attractiveness for investment; one of the really critical things is actually less about all those assumptions you’re making in your model which are just assumptions. It is really about your understanding of whether of how your business is going to make money; that’s what investors often are really looking for. Oh, yeah they’re looking for a business that’s going to make money.

If they’re going to invest, you know, um their capital but they really want to know that you as the entrepreneur actually understand how this business makes money; that’s way more important than that hockey stick slide that we saw earlier because they know if you understand what makes money in your business you’re also going to understand how to keep track of whether you’re making money. To make sure that you pivot; if you are finding that the key business drivers are changing kind of, in as you build the business so really communicating that you understand what drives your business. Actually, more important in my opinion than that your business will make money; you wouldn’t be out there talking about your business if you didn’t think it was going to make money. So, just having that big hockey stick; everyone has that slide, but you need to. What difference might differentiate you in talking to investors is that you can really communicate the underlying economics of your business and why those economics are positive