Business Modeling for Engineers

So, you have a whiz-bang idea huh?  Working on that "business plan"?  Well, you are going to need a BUSINESS MODEL to go with that idea... and this little post will help you get started.   You can also download this little Excel .xlxs file I made that has the bare-bones of a Business Model for you.

A Revenue Model:

You are going to need a model for revenue.  Revenue is the top-line, what people pay you.  To create a model follow these simple steps:

1. Decide the "Value" of what you are selling (Product or Service).. in terms of your TARGET MARKET AUDIENCE.
2. Set a "Price" for your product that is less than the Value:
1. this might be recurring (e.g. monthly) or one-time (transnational)
2. Value has NOTHING to do with COST. (ignore cost).
3. Value can be calculated as either:
1. the price of an alternative +/- some premium (because yours is better/worse)
2. the sum of 'savings' that a user experiences with your product/service
3. the sum of 'benefits' that a user gets, in terms of a number of alternative products/services.
3. Now, figure out a Quantity you think you can sell.
1. Bottoms-up: Use some model of Customer Acquistion (like impressions->clicks->sales)
2. or Tops-down: Use some model of Target Market Size (like 1% market penetration in year 1 of your target market).
4. Now, simply multiply the monthly Quantity * the Price, and you have a Revenue Model.
5. Show some scale/growth in subsequent months according to some formula (like 5% annual growth or as a complex model with advertising causing growth)

A Cost Model:

Next, you are going to need a cost model simply:

1. Calculate the cost per unit by summing the cost of it's parts + the sum of the cost of the labor to 'produce it' (or in the case of a service, the labor cost of providing the service).
2. Multiply the monthly Quantity (above) with the monthly Cost, to get Monthly Costs.
3. NOTE: COSTS ARE NOT EXPENSES!!!  Costs, are purely the VARIABLE costs that it takes to produce a good/provide a service.

Gross Profit:

   This is simply Revenue - Costs

Expenses:

Estimate monthly expenses for operating the business....  here's a rule of thumb:

1. Use $4000 for rent, $2000 for Legal, $1000 for Misc.  (or do a better job than me at estimating your actual costs!)
2. Use at least 5% of Revenue as a Marketing Allotment (or do a better job than me at estimating your marketing expenses).
3. Scale expenses yearly to increase by 10%.
4. Any employees you have are also here as an expense. (yourself for example).
5. Use the monthly salary * 1.17 (for benefits/taxes)

Net Income:

Net Income is simply Revenue - Costs - Expenses.

(it gets more complex if you have loans and other stuff... but for now this is a simple model).

Cash:

Take your starting cash, then add your Net Income to it each month.

(this is not precise at all, but also not a bad model).

Done.  You have a model.

Enjoy!  Feedback/suggestions welcome!



* photo courtesy of: http://www.geograph.org.uk/photo/2824035

How to Brainstorm Effectively

Most people suck at Brainstorming.  Most companies suck at Brainstorming.  Through experience and study I have collected a set of ideas/methods that will teach you how to Brainstorm Effectively.

Brainstorming is the process of thinking up new ideas for a challenging problem or question.  Usually, the problem has already been considered for some time, but the answer is not obvious, or is out of bounds of some constraints.

Effectiveness in Brainstorming means that the number of ideas generated were high, and that at least one idea was selected as a good one, and that when implemented, the idea worked to solve the problem/question.

Here's my collection of ideas for how to Brainstorm effectively:

1. Choose a Diverse group with as many Experts as possible to help you Brainstorm.  People with Diverse backgrounds, diverse life experiences, and from diverse cultures will bring more unique ideas. Experts are people with 10,000 hours of experience in their field.  In business, at least one person with Marketing Expertise, and at least one person with Engineering Expertise is ideal.
2. Get in the right frame of mind: Have everyone on the team do something to try to get them into a creative frame of mind.  Stretch, go to a fun location, play a game, think like you are a kid... something.  BRAINSTORMING IS SUPPOSED TO BE FUN!!!  (Fun unleashes creativity).
3. First ask everyone to Brainstorm Individually.  Have them write at least 3 ideas and send it to you.
4. Now schedule a meeting (at least 2 hours, 3 hours is ideal; and have it span a lunch hour).  Plan to bring in food or go out as a group.  [this downtime is essential to the creative process]
5. Open the meeting with "THE BRAINSTORMING RULES"... (write them on the wall)

1. You MAY NOT Criticize ideas or even say "I like that"... save all comments till the end of the Brainstorming.  WRITE: "No Criticism"
2. However, you CAN AND SHOULD build on ideas that others have put forth.  Write: "Build on Ideas"
3. You SHOULD say many ideas, no matter how crazy.  Write: "Quantity and Crazy Desired"
4. Keep it "light" and Fun!  Write: "Make it Fun"
6. Start Phase 1 (out of two): 
1. Write some of the ideas that people had individually on the board.
2. For 30min to 1hr... ask the group to throw out ideas... and write them on the board.  If people get stuck, ask the question differently, or ask about a sub-part of the question... don't give up after just a few minutes.. force the team to give ideas for the full time.
3. Break for lunch...  [eat as a group]
4. Resume the Brainstorm for an additional 30min to 1hr.  (because of the break, there is likely to be another burst of good ideas!).
5. If the board gets filled... take a picture and clear some space and keep going.
7. Finish now with Phase 2:
1. Ask the team to vote for their favorite ideas...  let them pick three, put a * next to the idea for every vote cast.  During this phase, ENCOURAGE DISCUSSION about the ideas (but not about 'who gave what idea').  Remind the team that its not about 'who's idea is better'... only than that 'we' got to a good idea.
2. Now look at the board... what is the best answer?  Is it feasible?  If not, why?  Either brainstorm on how to make it feasible, or see if the 2nd best idea is better in light of considering Feasibility.

I hope this helps in your Brainstorming!  Let me know if you try this and it works?  Also let me know what you do, if it's different than my ideas here.

How Intel Corp. Won my Heart as an Employee

Have you ever had that feeling that "work sucks"?  Ever felt 'stuck' in a job and wishing you had a better boss, a better role, a better pay, etc.?   Now, when you changed jobs... ever wish for the old days?   I can tell you unequivocally that I have felt both feelings, but my time as a Chip Designer and Chip Architect at Intel Corp. was most decidedly different than any job hence.

So, what was it about working at Intel Corp. that won my heart?

I began working at Intel in Oregon in 1999.  I quickly learned 3 things: 1. Intel takes training seriously.  2. Intel cares a lot about their employees.  3. Intel truly does believe in culture.

The New Hire Orientation at Intel was extensive and serious.  They taught you all about the Intel Corporate Values and the Intel Benefits and such...  It was 3 days of serious reading, lecture and work... all well organized and seemingly useful.  I had serious doubts about Intel's supposed "Values" however.... did companies really do that?

Well, I was wrong. Intel takes values very seriously.  Not only did they pass out a badge with their values on the back, hang signs everywhere, and talk about their values constantly... but also:
    1. their 360 feedback process for raises and evaluation was centered primarily on our adherence to Intel's Values.
   2. The training didn't end.  I was required to take 1 or 2 courses from "Intel U" every quarter...and sometimes more.
   3. As I proceeded into more management type roles, I was required to take a course that stuck with me to this day: 7-Habits of Highly Effective People.  An excellent course, from Dr. Stephen Covey himself.

And then I realized suddenly, I was LIVING Intel's Values:
   1. I was taking smart risks at work, and getting rewarded with promotions.
   2. I was helping keep Intel a great place to work, participating in and organizing company-sponsored events and joining the Emergency Response Team.
   3. I was involved in Intel organized community events and "clean-ups".
   4. I was focused on Quality and Innovation.
   5. I was keeping open and direct in my communications.

Wow, this culture of Intel had invaded my soul... and everyone around me, from my coworkers to my bosses to Executive VPs were doing the same.  All on the same page about what makes Intel Great.

So now, as I reflect on those days, I realize, what made Intel win my heart was simple... they really meant those "core values" they preached to us in orientation.  They LIVED by those values, and so did I.  It felt good to be part of something "real"... that was just what they said it was: they practiced what they preached: and that's how they've kept a lead on an industry for more than 50 years.

Facebook vs. Google. Direct Internet Marketing (Advertising)

Which is better for Advertising?  Facebook or Google?  Hell if I know!  What is better anyways?  Different... would be a better way to explain Facebook vs. Google, so here goes how I see them as different from a Direct Internet Marketing perspective.

Here is the main difference: The Targeting is Different.

• Facebook lets you target Age/Gender/Location/Likes, and more,  because it knows "who it's users are".
• Google lets you target Location and "Search Term Keywords" only.

From a direct marketer's perspective Facebook might seem better. Marketers usually think of segmentation in terms of "demographics" and "psycho-graphics', and with Facebook's tools, you can really target a "market segment".

The problem with Facebook Targeting is that you have no idea of "buying intent".  You don't know if they are interested or care about your offer.

For Google, you target the key words that a person is searching for AT THAT MOMENT.  There is some kind of intent implied in the act of searching.  While this doesn't jive with Marketers view of segmentation, it certainly does have an impact on relevance to the user.

The difference in the CTR and CVR between the two platforms shows what I mean.

• "Averages" from some of my own Facebook campaigns:   CTR: 0.025%   CVR: 0.012%  (yes a tenth of a percent)
• "Averages" from some of my own Google Adwords campaigns:   CTR: 0.6%  CVR: 0.06%  (yes 6 tenths of a percent).

Meaning Google is between 20x better at click-through-rate, and at least 6x better at CVR.

Another big difference is the "Ad Frequency" settings of the two tools.

• On Facebook, the ads are shown in smallish quantities until one of the ads in an ad group takes off... then the others get virtually no traffic.
• On Google, you can SET the system to show ads evenly (when you are A/B testing, this is really really important).

So doing A/B testing on Facebook is almost impossible... (I havn't figured out a way to do it in a statistically meaningful way).

Instead, on Facebook, I do "Survival Testing"... ads that Survive (get impressions and seem to keep working at a decent rate) go into my "good group"  and ads that do not get enough testing, stay in the testing group until I have enough data to "kill them".   It's a very slow and tedious process.

I'm sure there is more differences as well... what differences do you think are key?