This unit is only required for Senior Division teams, who will submit a business plan. However, Junior Division teams are encouraged to follow along with this unit to gain a better understanding of business development.
In this module, you will learn how to…
- Develop a revenue model
- Evaluate operational costs
- Determine profit projections
How to Develop a Business Model
Businesses are successful when they are able to make enough money to support themselves and generate a profit. To achieve this, you’ll have to do some planning and develop a business model, which explains how you plan to make money (revenue). This is different from your business plan, which is includes much more information about how you’ll start you business. You’ll need to think about all of the costs of the different activities, resources, equipment, and materials that are needed to keep your business running and how it will make a profit after you pay all your bills. There are different ways to set up your business, as you saw in Business 1—there are nonprofits, for profits, social enterprises, and many more. Think about what type of classification you would like your company to be while you start building your business model. Remember, no matter what kind of business you are in, revenue is needed to generate the long-term sustainability for your company.
There are a lot of different pieces to a business model, but we are going to stick to 4 main parts:
- Starting capital (seed money): initial money that is invested in your business to start your business
- Revenue model: a plan to receive money for your goods and/or services
- Operating costs: these include both variable and fixed costs you incur while operating your business. Things that you need to pay for that are constant are called fixed cost and things that change depending on other factors are called variable cost.
- Profit projection: the money you have left over after paying bills— how much you make in total. This “extra money” left over can also be reinvested (i.e. hire people, expand your workspace, etc.) back in your business so that you can grow it.
You’ve got a great app idea that you’re developing and you’ve got a great brand. Now you’ve got to think of a way to make money and get your business started!
You’ll have to start looking for investors to help you raise money (or capital) to get your business started. This is also called ‘fundraising’. Investors would be making an investment in you and your product, and in return you would get money to start your business. Once you’ve gotten your business started, investors expect to get their money back plus an additional amount (or partial ownership of the company) for giving you the starting capital. This is known as a return on investment, or ROI.
There are many ways to raise capital for your startup. Here are a few examples:
- Crowdfunding - a large group (crowd) of people give small funds that amount to a large sum. It gives a unique opportunity to get regular people to directly invest in them, but it’s not recommended for long term funding. It is also helpful if you have a large social media base to tap into.
- Angel investor - very wealthy individuals who invest their own money early on in the business, but expect equity in exchange. Equity is like partial ownership, based on how much money they put into the company.
- Venture capital - a group of professional investors (also known as a firm) who understand investing opportunities and risks in startup businesses. They do a lot of research to try and invest in startups that they think will become successful in the marketplace. The money they invest comes from a variety of sources.
All of the different types of investors accept a certain amount of risk with the hope of some reward over a certain period of time. This is the reason for their investment in the first place. They want to put in some money so that their money can grow through your business, but there is a possible outcome that they don’t get that money back. When you are developing your business plan, think about how you might use investors to build your plan, or if you'd want to use any crowdfunding resources to get your business off the ground. Keep in mind, this is optional!
Food Cart Example
Let’s think about a food cart business as an example. If you wanted to start your own food cart, you would need funding to get started. You could ask your parents to be investors in your business. When you ask your parents for the money, your parents will want to know:
- How much money do you need?
- What you are buying with the money they are giving you?
- How much will they get back and when (return on investment, ROI)?
When you talk to investors, you will need to be prepared to answer some important questions. At the very least, they will want to know how much money you would need, understand how you will put that money to use, and what they will get back. This is where your business model will be important. Your business model should be able to answer their questions and more.
Let’s get started on your revenue model to start answering some of these questions!
Before figuring out how much money you could make using your revenue model, let’s think about how much it takes to get there. This is where we have to determine the cost of all the things that are needed to run your business, or operating cost. There are many different kinds of costs that are involved. You’ll need to think about what costs you’ll have when you develop your app, which can include a variety of things that range from app store fees to a product you might sell through your app.
You can download our worksheet that you can use to get started. You might not need all the items listed and you can also try to cut some costs; for example your office space might be somewhere you can use for free.
A revenue model is a description or plan of how your business will earn money. Revenue is the money that a business raises from its normal business activities, usually from selling products and services to customers. You will have profit once you subtract your costs from your revenue, which is the money you have earned and get to keep.
[Revenue] - [Operating Costs] = [Profit]
There are many ways to create revenue models, but for mobile apps, there are just a few options.
We've given a few examples below, and you can click on the icons to find out more!
In order to get started and make some of these revenue calculations, you’ll have to refer back to the consumer research you did in the Market Research unit. Think about the kind of users you’ll have and decide whether or not they would pay additional money for the features you are developing for your app. Will you want to create revenue through selling the app, selling ad space, in-app purchases, or a combination of these?
When developing your revenue model, you’ll also want to include the pricing of the things you are asking for. How much is your app worth to your target customer (i.e. demand or appeal)? Or the ad space? Or each of the in-app purchases? How much do competitors charge for their app? Work with your team to decide what works best for your app. You can also refer back to the competitor analysis you did in the Market Research unit to help you answer some of these questions.
Study revenue models of similar apps to get a better idea of how you want your revenue model to be. A good thing to keep in mind is that a study in 2013 showed that most apps are free. They mainly rely on selling goods and services through in-app purchases. For example, in order to download the Minecraft app you have to pay a fee, but you also can buy extra items to play the game. Your revenue model can be very simple by selling your app only, or can be complicated with multiple ways of making money (these are also known as revenue streams).
Try to think about all of the complex situations that might happen when you have customers buy or pay for things in your app. Will you make enough money to support your business? If your operating costs are more than your revenue over a period of time, your business will not be able to make a profit and keep it running. Ask a mentor and/or work as a team to make these important decisions. For more ideas on different revenue streams for mobile apps, take a look here or here.
And if it’s a little confusing, let’s review what we learned with our food cart example.
Here’s a video on the different types of revenue streams if you are interested to learn more!
Food Cart Example
You would need to decide between one of the following options for how you would want to generate revenue for your food cart:
- Paid app models sell each food item for a set price, and decide on the price
- In-app purchases give away food, but sell condiments and larger plates at a set price
- In-app ads give away free plates of food, but sell advertising space on the plates
Here are some resources that you can consult to help price your product:
- Sequoia Capital: Pricing Your Product Sequoia Capital is a well-known venture capital firm that invested in Apple, Google, PayPal, Stripe, YouTube, and Instagram
- Mashable: HOW TO: Determine the Right Price For Your Mobile App
- iBrainBursts: Google Android Revenue Model
- Quora: What are some of the most successful mobile app revenue models?
The last piece of your business model is the profit projection. First, let’s break this phrase down. Profit is the money you have left over after paying all of the bills you need to pay. Projection is an educated guess as to what you will have profited after a certain amount of time. Generally, the profit projection is the sum of all the calculations you had in your revenue model minus your total operation costs. You’ll calculate it by adding up the revenue and subtracting all the operation costs. Here's the equation as a reminder:
[Revenue] - [Operating Costs] = [Profit]
Remember, typically non-profits do not make profit, but they do make revenue to support their operating costs. If a non-profit makes a profit, that is likely to be invested back into the company.
In order to develop a projection, you’ll have to decide on how your business will grow. Do you expect more users buying the app? Or do you expect more users buying your in-app purchases? You’ll have to determine what factors will increase over time, or you’ll need to additional revenues from other sources. How much do you expect to make? There is a lot of uncertainty. Every business that is formed carries risk and uncertainty even after you have done your research and evaluation.
Here are a few guides that help you:
Create a Business Model
Now it’s time to put together your startup capital, revenue model, and operating cost to develop a business model. As a reminder, use the equation below to calculate your profit:
[Revenue] - [Operating Costs] = [Profit]
You can download our worksheet to use, or you can develop your own! Remember, your business model is only a very well educated guess on how you think your business will operate financially.
Your business model is done. Congratulations! We’ve learned a lot of new terms in a unit. Let's review some of the key terms you’ll need to develop your business model:
- Startup capital - initial amount of money that helps you get started, typically through different types of investors
- Revenue - total amount of money you get from your business activities (like sales)
- Revenue model - a plan on how to make money, or income
- Operating cost - the money you need to spend that is needed to run your business.
- Profit - the money you have left over after paying bills
When it comes to entrepreneurship, there are a lot of complicated things to think about-- and sometimes you don't even know the answer. Sometimes it takes educated guessing to get it right and to think on your feet. Here are a few questions to consider after you’ve accomplished your business model:
- What needs to happen so your business is successful?
- How much money is required to get your business started and generating revenue?
- Did you think about more features to add to your app for your profit projection?
- Why did you choose the revenue model you did?
- How do you expect your business to grow?
Now you’ll be able to put your business model to work! In the next unit you’ll develop your business plan, where the business model will be a key part.
- App Lab: What revenue model should you choose for your Mobile App?
- Analytics Academy: App Revenue Models with Google