Part 2: Do The Numbers Work? The $100/day Business

01Dec09

(This is the second in a two part post.  You should probably start at part one which contains a framework for thought.  Part two contains recommendations and my philosophy for first-time entrepreneurship).

The most basic principle of business is that profit is revenue minus costs.  Try considering all fixed costs as a rate — especially a daily or hourly rate — and then look around you.  You’ll find you have more insight into existing businesses or the potential of new ventures to succeed. 

And you’ll find that some business ideas simply don’t make sense.

Don’t plan on building a business by selling a product for $2 that takes an hour of time to produce unless you’re superhuman and don’t need sleep.

Don’t franchise a mobile RV arcade for “between $89,000 and $200,000″ a year which can fetch “$300 to $350 for a two-hour party appearance” without carefully considering the math — that you’ll need to book somewhere between 250 to 650 clients just to break even on your initial upfront investment.  I don’t know too many kids who have birthday parties on Monday nights..and there’s only so many hours in a weekend and only 52 weekends in a year.  You’re might be paying off these costs for eternity…and the high tech games will certainly have become stale by then.

And please don’t build an SMS mobile coupon company on an assumption that you’ll get a salesperson to hit up every local business selling your $10 service (so cheap that nobody will say no!).  As mentioned in my article about SMS coupons, an entry level salesperson earning $50,000 a year is a cost of $1000 a week or $200 a day or $25 an hour.  Make sure a sales person would earn more than they would cost.  If the numbers don’t work, your business won’t work.

But wait!  It’s not all gloom and doom. Thinking in terms of daily sales can actually be really inspiring for a first time entrepreneur:

If you’re quitting a job to start your own company, consider what it will take in daily earnings to replace your salary.  Better yet, consider how much you honestly need to be ramen profitable.

Most recent college graduates in NYC working a full time job are probably earning somewhere between $35,000 – $80,000 depending on industry and skill set.  Consider that $100/day for 365 days is $36,500 annually.  This is a livable wage for most scrappy 20-somethings (assuming you don’t have a family to support and you’re not drowning in school debt).  Consider that $200/day is a rather comfortable annual salary of $73,000.  (And yes, these numbers are based on working 7 days a week.  And they don’t take into account the unpaid time you’ll put into an initial product launch.)

If you need inspiration to get started, never forget just how ‘small’ a start can be: just get to $100 a day.  Consider it milestone number one for your first entrepreneurial venture.  Let’s say you have a product idea that you think would sell for $20 with a 50% margin.  Ask yourself: “Can I sell 10 per day?”  Consider that again: 10 per day.  Consider that there’s six billion people in the world,  is it really so hard to find 10 customers each day?  Or if you’re working with a partner, 20 customers?

So consider David Heinemeier Hansson’s amazing advice (that I have echoed above) and stop thinking about your next billion dollar startup.  I believe first time entrepreneurs (of which I am one myself) should start small.  Go for the lowest bar of success: the $100/day idea.  Once you’ve conquered that, go for the $100,000 idea, then the million dollar idea, then the billion dollar idea.  Along the way you’ll meet fantastic people, gain skills and confidence, and maybe even have some fun.

Now if only my 2c could be put towards rent…

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Filed under: Analysis, Apple, life, Metrics, Startups   |  9 Comments
  • http://jehiah.cz/ jehiah

    well said

  • JimmyD

    great post. I love the concept of rates–and this is a great reason why everyone should know a bit about calculus. (Integrating your rate curve for total profit FTW).

    A wrinkle to this would be products that have highly variable and or infrequent rates (or worse, both).

    Your iphone app probably sells at a fairly constant rate (when you're not spiking on press releases due to initial launches and upgrades). So if we take your assumption on rates (and your $100/day bench), and say you sell ~25 apps per day, I'd imagine that rate to be fairly constant. i.e., day to day flex of say 0 min to 25 max, with weekly variances of +/- 5 or 10% week/week. So you've got a product that sells frequently and consistently, and can think in pretty clear terms of daily rates.

    However, I know the Atlantic Avenue section you're speaking of well, and you can take a look at some of the dress shops there that have like 10 dresses on display in the whole store. These guys probably sell 5-6 dresses a month for $1000 each. Clearly trying to think of this rate on a daily basis will do you no good (I'm selling .2 dresses/day!). You're limited in using the rate to plan cash flow, because a bad month could mean you're operating in the red, while a good month means you're way, way in the black. To cope with one extreme, you've got to keep a lot of cash on hand to cover dry spells–hurting your ability to invest in new products. On the other, you're faced with an inventory issue–if you do sell 500% more dresses in a month, will you be able to find supply for that demand?

  • http://www.twitter.com/dremoran dremoran

    The math makes sense. As always, your granular analysis merits praise. However, the biggest risk to a startup is to assume it will be very easy to sell 10 per day. While just 10 per day sounds conservative, often times it is optimistic. In my VC days I never saw a company hit its projections as first presented to me, regardless of how conservative the entrepreneur claimed those projections to be. If instead of 10 widgets they only sell 7, they run out of money pretty quickly or do not see an uptick in valuation next round.

    Otherwise, why not start a soda company in China? Just 1% of that market is 12 million people.

  • ameyer32

    Actually, your numbers on living in NYC don't make sense. The $100/day number is probably reasonable, having lived in NYC for 5 years, I can attest to that. However, a $35K/year salary won't cover it. With city/state/federal/sales/etc taxes, in NYC you probably pay around 50% of your income in taxes. That makes the math easy, to afford $100/day, you need to make $70K.

    Of course, that's just basic living expenses. You don't live in NY to sit in an apartment and look at 2 square inches of sky every day. There's $50 binges at the bar, Hampton's or Jersey Shore weekends or skiing holidays. Additionally, New Yorkers are pretty social and sexual, so there's going to be plenty of dates. Keeping a date under $100 is a battle.

    That is one of the real downsides of living in NYC, it almost doesn't matter how much money you make, you're being sucked into bankruptcy.

  • http://iamnotaprogrammer.com/ Colin Nederkoorn

    I try to approach costs in terms of unit costs rather than the lump sums…

    For flights – how much per hour of flying am I paying? It makes a 23 hour flight to Bali that costs $950 right now look pretty good!

    For utility items – a cup of coffee, takeout rather than cooking. What is my time worth and the cost to make it myself. Sometimes if I'm busy it's worth it. On the weekends when I'm not earning with my time, it isn't.

    I think it's great to look at businesses in the same way. You avoid getting yourself into a situation like paying $54,000 a month for rent to sell hot dogs! http://www.huffingtonpost.com/2009/08/08/hot-do…

  • http://blog.jwegener.com Jonathan Wegener

    Sorry for the delay, I was starting my soda company in China.

    But seriously, you make a very good point. Sales projections are tough and they almost always fall short. And the first sale can often be the hardest since the product is unrefined and you have no brand or previous happy customers to point to. Thanks for the comment.

  • http://blog.jwegener.com Jonathan Wegener

    Thanks for the comment. You're right, there are a lot of taxes to layer on top of anything (although many entrepreneurs can consider their rent/metrocards etc as a business expense). And you're right, $100 a day isn't a glamorous lifestyle. It certainly doesn't leave much room for Jersey Shore weekends, skiing holidays, bar binges, and lots of expensive dates. But if you're bootstrapping a startup, this probably isn't the lifestyle you're living. Maybe you've even moved abroad… http://spreadsong.com/bootstrapping_abroad_why_… (fantastic article)

  • http://blog.jwegener.com Jonathan Wegener

    Sorry for the delay, I was starting my soda company in China.

    But seriously, you make a very good point. Sales projections are tough and they almost always fall short. And the first sale can often be the hardest since the product is unrefined and you have no brand or previous happy customers to point to. Thanks for the comment.

  • http://blog.jwegener.com Jonathan Wegener

    Thanks for the comment. You're right, there are a lot of taxes to layer on top of anything (although many entrepreneurs can consider their rent/metrocards etc as a business expense). And you're right, $100 a day isn't a glamorous lifestyle. It certainly doesn't leave much room for Jersey Shore weekends, skiing holidays, bar binges, and lots of expensive dates. But if you're bootstrapping a startup, this probably isn't the lifestyle you're living. Maybe you've even moved abroad… http://spreadsong.com/bootstrapping_abroad_why_… (fantastic article)