Basic unit economics of a business

Basic unit economics of a business

Every startup or business ultimately aims to turn a profit by providing a product or service with a higher value than the costs to deliver it. Whether you are planning to start a new venture or currently running one, it's important to understand the unit economics of your business.

Unit economics is defined as the direct revenues and costs associated with a particular business model expressed on a per unit basis. 

Understanding the unit economics of your business provide a way to measure its profitability. So let's start by identify the unit for your business. If you are selling a product like a glass of lemonade 🍋, that would be the unit. For those providing a service, the unit would be the customer or client.

Entrepreneurship is a skill, not a job title

Entrepreneurship is a skill, not a job title

When I was younger, most of my friends including myself aspired to be doctors, lawyers and teachers when we grow up. Those were the only professions we knew then so it made sense that’s what we wanted to be.

If you pose the same question to kids today, a lot of them would want to be entrepreneurs and be their own boss. They want to start businesses and change the world for the better.

Some would argue that entrepreneurs are different than small business owners. Both of them start businesses and companies but an entrepreneur disrupt industries and aims for exponential growth.

5 lessons for entrepreneurs

For those of you who are addicted to self-employment and solving problems to make a living, here are some interesting lessons and tips.

  1. Passion - We all know how important passion is as a driving force for anything you do. But your passion can also be your business greatest weapon. Jonathan Betz makes an interesting point where the founder's passion can make a huge difference.
  2. Find (and solve) problems that others have ignored - Quote from Intuit's co-founder Scott Cook in an interview about how they built Quicken and Quickbooks.  This should be obvious but it's worth reminding that unless your product solves a real problem, it's not a business.
  3. Test your idea first - It's very common for you to want to jump in and start working on your idea right away but you should test it out first. Test if there's a market and if anyone would pay for it. What Buffer app did to test their idea is something we should all learn from.
  4. Advertising isn't a business model for everyone - The idea of starting a site and slapping Google Adsense to make a quick buck sounds easy and attractive but it isn't viable for everyone. Advertising is only valuable when a user arrives at your site with an intent to buy/search for something. Read this post on how the position of your product/site in the customer's decision process makes a big difference. Ideally, you'll want to be first in the process like Google/Facebook/Twitter.
  5. Patient for growth, impatient for profit - Clayton Christensen said in his book, Innovator's Solution that there are good money and bad money. Businesses should become profitable before they become big. Raising money to grow and scale before finding a solid foundation for profit can be very dangerous. This is exactly what's happening with Groupon.
Personally, I've been trying to apply these lessons but hardest thing is to identify a problem that's worth solving. But when I do find it, I'm going to test it out by building a minimal viable product first.

Kung Fu Masters and Entrepreneurs

I'm a big fan of Kung Fu movies. Both the more realistic ones (Ip Man, Fearless) and those with supernatural powers like Storm Riders. (only the first!) Kung Fu Masters are basically the Asian version of superheroes. Like how we learned from Spiderman that with great power comes great responsibility, there's plenty of values and lessons entrepreneurs can learn from Kung Fu Masters.

  1. Motivation and Drive - It takes a lot to get up every morning and go through the same process over and over again. At some point, you are going to get bored hitting a wooden dummy but Kung Fu Masters never give up. They know that the path to success takes a lot of commitment and focus.
  2. Practice, practice, practice - Even after they master a technique, formed their own school and defeated the villain, Kung Fu Masters never stopped practicing. Practice is the only way to maintain your skill and focus. Life is a constant learning process and practicing is one way to learn.
  3. Many paths up the mountain - Kung Fu Masters understand that there aren't just one way to reach the summit of awesomeness. There are multiple routes you can take. Similarly, the journey to success for an entrepreneur isn't predefined in anyway. Part of entrepreneurship is to discover a whole new way to success.
  4. Experiment - It's always extremely cool when a Kung Fu Master reveals his new technique that will blow his enemies away. But how did he come up with it? He experimented! What do you think he was doing hiding inside a cave? Entrepreneurs should never stop trying and testing things to see what works. Eventually, you'll come up with your own special home-brewed technique to defeat your competitors.
  5. Calm & Wise - A Kung Fu Master is always calm and wise. They don't rush into things and always seem to have the wisdom to get everyone out of trouble. An entrepreneur is a leader for his/her employees. Similarly, an entrepreneur have to be a calm and collected figure for the employees and use his/her wisdom to guide the company. You don't have to be smarter than your employees but at least be smart enough to realize that.
  6. Everyone has a weakness - No matter how powerful a Kung Fu master is, there's always a weakness to exploit. An entrepreneur must realize that no matter how big or well-established a competitor is, there will be a weakness somewhere to take advantage of. Just remember that you too have a weakness.
  7. Marketing - A Kung Fu Master knows the importance of marketing. This is why they are so eager to show-off their strengths to others. You must however maintain a good reputation and standing among your peers. Make business not enemies.
  8. Disciples - When you are passionate about something, you'll want to share it with others. This is why Kung Fu Masters start schools/guilds and recruit disciples. Similarly, an entrepreneur must have the passion and willingness to share. You have to inspire others to follow your lead.
  9. Competition - This is a fact of life. There's always someone better out there but Kung Fu Masters use it as the drive to push the limits. Let the competition be your fuel for your journey.
  10. Lonely at the top - There are always sacrifices to be made in order to reach greater heights. Kung Fu Masters know that as you move up the ladder, things around you will change and people will start treating you differently. But no worries, there are 6 billion of us, so surely there will be a few great ones up there to welcome you.

This is by no means all that you can learn from Kung Fu Masters. I'm sure there are many more insights and teachings that can help you in your journey. Now where did I put my Ip Man DVD...

RPG and Entrepreneurism

My dad used to complain that I spend too much time gaming. But I always argue there's plenty of things to be learned from playing games. It turns out that if you play any RPG games like Diablo or D&D, you are learning important values and lessons to be an entrepreneur.

How you ask? Well let see what we can learn from the generic classes found in RPG games.

  • Tank: Take everything head-on and always be the first to get into action. As an entrepreneur you must be ever ready to lead the charge into the unknown. It's your job to protect those who decide to follow you on your adventure.
  • Rogue: Precision strikes. Execute with pin-point accuracy. Ideas are useless without execution and good execution can make a huge difference.
  • Wizard/Magician: Resourceful and knowledgable. To be an entrepreneur, you need to know more than just business or finance. You have to know a little of everything. You got to be able to do things that no one thought possible. You need to surprise people.
  • Healer: Realize that you can always recover from whatever that hurts you. What doesn't kill you only makes you stronger. The game doesn't end when you fail. Just resurrect and fight another day.
  • Bard: Ability to affect other people around you is crucial for an entrepreneur. Charisma is important if you want to inspire and recruit others to your cause. A bonus, if you can strike fear into the heart of your competitors.

So next time, if anyone complains about your gaming sessions, tell them you are preparing for your future business ventures.

After all, it pays to be well prepared and casting spells or slashing monsters are just too fun to resist. Just remember to actually do something after all that practice and preparation.

Starting out

Flexible working hours, minimal commuting and being in control are just some of the many perks of being self-employed. Increasingly, graduates nowadays are looking at self-employment as their first career of choice. Based on my personal experience, I believe you should try to spend a few years in your industry working for others before venturing to start your own business. Here's why:

  1. Connections - Working for others means you have colleagues, bosses and those working next door. It expands your social circle and creates new connections that might allow you do open doors that you never thought possible. Remember to never ever burn bridges.
  2. Knowledge of your industry - Get yourself involve in the entire process and be familiar with all the processes, practices and taboos of the industry. Nothing beats first hand experience. You might not like how certain things are done but you can't change something that you don't know. So understand it first before you attempt to improve anything.
  3. Understand the business model - The business model of the company determines what type of clients they have, how much they charge them and the amount they pay you. If their model is to treat you as a cog in a machine, you are getting minimal wage. This is important when you start your own company. Your business model determines the path your company takes.
  4. Realize the value of everyone and everything - Once you are familiar with who does what and why certain things are the way they are, you realize that everyone has a value to the company. There's always a mis-match between the value you think you have compared to the value your boss perceive from you. It's a matter of perception and knowing how to better portray your actual value is very important. Always know your own value.

You could start your own company and learn all this as you go along. But not everyone have that luxury and being in employment even for a while makes you a better boss.

It could takes years or decades before you think you have learned everything you need to know. And even then, the industry changes all the time and there's always something new. Learning is a life-long process after all.

Which ever path you choose to start with, make sure it's one that you will be able to learn from.

The need to create

I always wondered why people can devote so much time and effort into their hobbies. After all, to an outsider, it all seems just like a big waste of time. But after observing some of the hobbies, I've come to a conclusion that the hobbies that allow you to inject your own creativity and create something are the ones that's most addictive and time consuming. In Warhammer, players get to assemble and paint their own army. For Magic: The Gathering, you get to design and pilot your own decks. Hobbies like these gives you the opportunity to accomplish something.

I think in general, all of us have this need to create something of our own, be it in your working life or your leisure time. As a programmer, I can fulfill this need by coding applications. For those that feel they can't accomplish or create something in their career, they might seek to do this in their hobbies instead.

The best case scenario for this would be to be able to create something and make a living out of it. That is basically what entrepreneurs do. If you can somehow align your need to create with the demands of others, you got yourself a business right there.

Raising kids to be entrepreneurs

This an awesome talk by Cameron Herold at TEDxEdmonton about why we should encourage kids to be entrepreneur. I love his insight on allowances for kids. He argues that allowances train kids to expect a steady income like a paycheck. It trains them to get a job instead of starting their own venture. Instead of allowances, he tell his kids that they can look for tasks and jobs they want to do to get paid. Then they negotiate the price for the job. This teaches them about how to look for opportunity and improve their negotiation skills. Half the profit is then channeled into a bank account and later used to invest in stocks. They are taught the importance of savings and investments at such early age.

I wish I was raised this way. Every parent out there need to watch this.

What would you do if there is no speed limit?

Recently, I read this article by Derek Sivers about an advice given by his music teacher, Kimo Williams. He told Derek that there's no speed limit in life and taught him a few semesters worth of materials within weeks. Derek went on and graduated from college within 2 and half years. Most systems (e.g. education) are designed so that everyone can keep up. And by that definition, meeting expectations simply means you have succeeded in being average. What if you are more motivated and driven than the average person?

The good news is, you don't have to follow the expected pace and speed. You can go as fast as you can. There are many shortcuts you can take in life and you should raise your expectations as high as possible.

Now armed with this insight, how would you live your life? Will you start do anything differently?