Archive for September, 2006

A business model is not a revenue model

September 3rd, 2006 by Cedric Savarese

(and vice-versa).

Paul Graham, in an interview on TechCrunch, tells founders to “focus on making something great, instead of worrying about how to make money”. This is the kind of statement that generates a fair deal of controversy because it goes against conventional wisdom. We should all know that the best business model is to charge your customers. Should you fail to focus on that, you are bound to repeat the errors of the great dot-com bubble. This is roughly the argument Russel Beattie makes when he proposes a simple test for a “real” business: “do they take my credit card?”.

Before I join ranks with Paul Graham’s supporters, I would like to make a semantic point. A business model is not a revenue model. A revenue model is a way to generate revenues, like charging your customers or advertising. A sound business model includes other important aspects, such as:

  • identifying and reaching out to your market.
  • creating value for your users.
  • building and maintaining a competitive advantage.
  • growing your user base.
  • and so on…

The revenue model has little to do with the reasons why a business will eventually succeed or fail. It is just one piece of the puzzle. Once you have managed to put all the other pieces in place, this one will fit right in.