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Posted on February 11, 2013 @ 06:07:00 AM by Paul Meagher
In my previous article, I critized the idea that you could claim to have a business model if it was not sufficiently well defined that you could run it as a computer program that
would estimate costs, revenue, and profit over time. I concluded by saying that I would reveal a runnable business model in my next article. Well, here it is.
I developed a script called monthly_growth.php which implements a business model that assumes you will grow your business by a certain number of new customers each month and those customers will each pay a monthly fee for your service. The revenues from new and existing customers each month is offset by two types of costs - a fixed monthly cost for "rents" and a variable costs associated with the cost of servicing each client. As the number of clients grows this servicing cost grows.
I run the script by pointing my browser at the url where it resides on my web server. If you host a site you probably have access to a PHP interpreter so could potentially run this script by saving it in a web folder on your site and then typing in the url to that file in your web browser. If you have the php module running in your webserver then you will see the table output below when you do so. I will also be making a web-based front end to this script in it's next iteration so that you can just run the model from this site by entering values in the input form. I did, however, want you to see the "guts" of what an implemented business model looks like so wanted to keep this version as simple as possible to make it easier to follow and modify for your own purposes.
Before running the script you need to review a few settings and change them to values that might be more appropriate to your situation. In this example, I'm assuming that we are starting from 0 customers, will add 10 new customers each month, and each of those customers will pay a monthly fee of $30. The monthly fixed fee, the "rents", is assumed to be $1000 a month and the cost of servicing each customer is assumed to be $10 a month. I'm interested in projecting out to 3 years into the
future. This set of configurations generates this business model output:
| Year | Month | # Customers | Revenues | Costs | Profits |
| 2013 |
2 |
10 |
$300.00 |
$1,100.00 |
-$800.00 |
| 2013 |
3 |
20 |
$600.00 |
$1,200.00 |
-$600.00 |
| 2013 |
4 |
30 |
$900.00 |
$1,300.00 |
-$400.00 |
| 2013 |
5 |
40 |
$1,200.00 |
$1,400.00 |
-$200.00 |
| 2013 |
6 |
50 |
$1,500.00 |
$1,500.00 |
$0.00 |
| 2013 |
7 |
60 |
$1,800.00 |
$1,600.00 |
$200.00 |
| 2013 |
8 |
70 |
$2,100.00 |
$1,700.00 |
$400.00 |
| 2013 |
9 |
80 |
$2,400.00 |
$1,800.00 |
$600.00 |
| 2013 |
10 |
90 |
$2,700.00 |
$1,900.00 |
$800.00 |
| 2013 |
11 |
100 |
$3,000.00 |
$2,000.00 |
$1,000.00 |
| 2013 |
12 |
110 |
$3,300.00 |
$2,100.00 |
$1,200.00 |
| 2014 |
1 |
120 |
$3,600.00 |
$2,200.00 |
$1,400.00 |
| 2014 |
2 |
130 |
$3,900.00 |
$2,300.00 |
$1,600.00 |
| 2014 |
3 |
140 |
$4,200.00 |
$2,400.00 |
$1,800.00 |
| 2014 |
4 |
150 |
$4,500.00 |
$2,500.00 |
$2,000.00 |
| 2014 |
5 |
160 |
$4,800.00 |
$2,600.00 |
$2,200.00 |
| 2014 |
6 |
170 |
$5,100.00 |
$2,700.00 |
$2,400.00 |
| 2014 |
7 |
180 |
$5,400.00 |
$2,800.00 |
$2,600.00 |
| 2014 |
8 |
190 |
$5,700.00 |
$2,900.00 |
$2,800.00 |
| 2014 |
9 |
200 |
$6,000.00 |
$3,000.00 |
$3,000.00 |
| 2014 |
10 |
210 |
$6,300.00 |
$3,100.00 |
$3,200.00 |
| 2014 |
11 |
220 |
$6,600.00 |
$3,200.00 |
$3,400.00 |
| 2014 |
12 |
230 |
$6,900.00 |
$3,300.00 |
$3,600.00 |
| 2015 |
1 |
240 |
$7,200.00 |
$3,400.00 |
$3,800.00 |
| 2015 |
2 |
250 |
$7,500.00 |
$3,500.00 |
$4,000.00 |
| 2015 |
3 |
260 |
$7,800.00 |
$3,600.00 |
$4,200.00 |
| 2015 |
4 |
270 |
$8,100.00 |
$3,700.00 |
$4,400.00 |
| 2015 |
5 |
280 |
$8,400.00 |
$3,800.00 |
$4,600.00 |
| 2015 |
6 |
290 |
$8,700.00 |
$3,900.00 |
$4,800.00 |
| 2015 |
7 |
300 |
$9,000.00 |
$4,000.00 |
$5,000.00 |
| 2015 |
8 |
310 |
$9,300.00 |
$4,100.00 |
$5,200.00 |
| 2015 |
9 |
320 |
$9,600.00 |
$4,200.00 |
$5,400.00 |
| 2015 |
10 |
330 |
$9,900.00 |
$4,300.00 |
$5,600.00 |
| 2015 |
11 |
340 |
$10,200.00 |
$4,400.00 |
$5,800.00 |
| 2015 |
12 |
350 |
$10,500.00 |
$4,500.00 |
$6,000.00 |
| 2016 |
1 |
360 |
$10,800.00 |
$4,600.00 |
$6,200.00 |
| 2016 |
2 |
370 |
$11,100.00 |
$4,700.00 |
$6,400.00 |
So what we have here are monthly estimates of cost, revenue, and profit over a three year period. We can see how our revenues grow faster than our costs and eventually starts producing a profit situation which increases over time. You might be saying "but the assumptions are too simple". You might argue that customers won't come in as regular blocks of 10 new customers a month but rather as a smaller number per month at the beginning and a larger number per month as your business
gains momentum. The beauty of providing you with the source code is that you are now empowered to change the business model so that customer growth follows, say, an exponential function or piecewise-linear function rather than a simple linear one. You can do that if you have access to the source code which is provided below (with lots of comments in the code that preclude the need for me to explain it much more):
There is more to be said and done on the topic of business models so
I may continue posting on this topic this week.
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