Part II · Find Value — Chapter 12
Select the simplest viable business model
A business model is the full route from customer value to collected cash and retained ownership. Choose the route whose risks you can see and whose proof you can afford.
Two companies each report ₹10 lakh of monthly revenue. One collects before delivery, serves repeat customers with flexible costs, and owns the customer relationship. The other waits ninety days for payment, buys inventory up front, depends on one platform, and must replace every customer next month. The top line is identical. The machines are not.
Draw the four flows
A business model connects four flows:
1. Value: the result delivered, to whom, and why it matters. 2. Revenue: who pays, for what unit, at what price, and how often. 3. Cash: when money is collected relative to acquisition, delivery, tax, support, and supplier payments. 4. Control: who owns the customer relationship, critical rights, data permissions, channel access, and residual upside.
If you describe only the product, you have omitted the business. If you describe only the revenue mechanism, you may miss the cash gap. If you omit control, you may build an excellent operating layer on rented ground.
Write the engine in one sentence:
We deliver [result] to [specific customer], charge [payer][price/unit/timing], fulfil through [key activities and partners], retain [contribution and rights], and earn the next purchase because [repeat mechanism].
That sentence should reveal the payer, unit, timing, delivery burden, and reason the engine continues.
Choose a model by its hard part
Every model moves difficulty; none removes it.
| Model | Early advantage | Hard part to prove |
|---|---|---|
| Advisory or project service | Fast contact with a paying problem; low initial capital | Capacity, scope control, and founder dependence |
| Productized or managed service | Repeatable scope with learning close to the customer | Standard delivery, utilization, and exception control |
| Model | Early advantage | Hard part to prove |
|---|---|---|
| Subscription product | Recurring access and potentially low marginal delivery cost | Activation, retention, support, and the cash cost of acquisition |
| Unit sale or commerce | Tangible exchange and clear purchase event | Inventory, returns, quality, working capital, and repeat demand |
| Marketplace | Can coordinate fragmented supply and demand | Liquidity on both sides, trust, leakage, and take-rate durability |
| Licensing or royalty | Leverage from valid intellectual property or process | Rights, enforceability, licensee performance, and concentration |
| Advertising or sponsored access | Users need not be the payer | Attention quality, advertiser demand, privacy, and platform dependence |
A service can be a good laboratory for a first-time founder because it shortens the distance to a customer and exposes edge cases. Repeated work may later become a productized service or software. That path is conditional. Some products require investment before delivery; some services remain excellent services; some physical and regulated businesses cannot be tested casually.
Choose complexity only when customer requirements and evidence pay for it.
Make the unit tell the truth
Define a unit that matches the business: a customer, order, seat, location, transaction, room-night, delivery day, or machine-hour. Then trace the unit from acquisition through service and collection.
At minimum, know:
- • collected or collectible revenue per unit;
- • direct delivery and support cost;
- • transaction, return, warranty, and failure burden;
- • attributable acquisition cost;
- • contribution before fixed costs, stating whether acquisition is included;
- • time to recover acquisition cost;
- • repeat rate or retention, by cohort where possible;
- • cash paid before cash received;
- • fixed capacity the unit consumes.
WORKED ARITHMETIC · ASSUMPTIONS SHOWN Worked example · a productized service
Assume an offer is priced at ₹60,000. Direct delivery and support cost ₹22,000, and attributable sales cost averages ₹8,000 per new customer. Contribution before fixed costs is ₹30,000 per customer.
At ten customers in a month, revenue is ₹6.0 lakh and contribution is ₹3.0 lakh. If fixed operating costs are ₹1.8 lakh, the provisional operating surplus is ₹1.2 lakh before tax, financing costs, depreciation, and other omitted items. That is an illustration, not audited profit.
Now add timing. If only 50% is collected at signing while most delivery cost is paid immediately, the first cash receipt is ₹3.0 lakh even though the month’s contracted revenue is ₹6.0 lakh. A workable unit can still create a cash gap.
Lifetime value is useful only when retention evidence is credible. Early founders often multiply a hopeful monthly margin by an imagined lifetime. Start with observed cohorts and show the assumption. A customer who has stayed for three months does not prove a three-year life.
Judge the quality of revenue
Recurring revenue can be weak. One-time revenue can be excellent. Ask what sits underneath:
| Question | Stronger evidence |
|---|---|
| Does the customer stay by choice? | Usage, realized value, renewal, and referral—not contractual captivity alone |
| Can the price support responsible delivery? | Positive contribution after support, rework, and acquisition |
| Is collection reliable? | Clear terms, deposits where appropriate, low dispute, and controlled receivables sur |
| Is revenue concentrated? | No single customer, channel, or payer can casually break vival |
| Can costs adjust if demand falls? | Obligations do not remain fixed far beyond cancellable revenue |
| Does growth improve the machine? | Learning, lower unit cost, better retention, or stronger distribution is visible |
Duration matters. Long, non-cancellable obligations funded by short, cancellable customer revenue create fragility. A lease, permanent hire, minimum purchase, or debt payment should be compared with the duration and certainty of the cash expected to support it.
Use the model-selection gate
Choose the model that can answer yes to most of these now, with a plan for the rest:
1. Can we reach a paying customer before committing irreversible capital? 2. Does the unit create positive contribution, or is there credible evidence for how it will?
3. Can we finance the gap between paying and collecting without hidden borrowing? 4. Can we deliver the promise safely at the expected volume? 5. Does the model match how the buyer wants to purchase and account for value? 6. Do we retain enough customer access, learning, and ownership to improve?
7. If demand falls sharply, which obligations remain and for how long?
The simplest viable model is not the smallest dream. It is the least complicated machine that can produce trustworthy evidence while meeting the customer’s required standard.
· EF pp. 26–29, 84–87 · TABLE pp. 17–29 · GE chs. 11, 17. Mechanisms paraphrased; figures are a labelled worked example with stated omissions.