Writing a traditional business plan – like the one every bank and business development centre in the country wants from aspiring entrepreneurs –is a waste of time, if you ask me.
The problem is that your business plan is based on one assumption stacked on top of another. If your first assumption is flawed, then the whole thing is useless.
Back in 1996, I wrote a business plan for an audiotape magazine. My idea was every month, to give subscribers a new audio recording of an interview I had conducted with a well-known entrepreneur (sort of like today’s model of podcasting). I decided to charge $99 for an annual subscription.
My business plan called for 10,000 subscribers in the first year, which amounted to a run rate of a cool $1-million in annual revenue. I had no idea what it would cost to acquire a new subscriber but I figured $10, or about 10 per cent of what I was charging them, seemed about right, so I calculated that it would cost $100,000 to get to my 10,000 subscriber base.
With only $17,000 saved up to start the business, I assumed I would finance the acquisition of subscribers through the $99 prepayments of my new customers. I calculated the cost of mass-producing 10,000 cassettes (this was long before iPods) and the cost of mailing the cassettes to my 10,000 subscribers each month.
I invested months in writing my business plan, and, when it was complete, I felt ready to start running my million-dollar business.
My first step was to put together a top-notch first edition befitting of a million-dollar business. I rented studio time at a professional facility and hired an announcer from a popular morning show in Toronto and a producer from a local radio station. By the time I had my first edition finished, I had invested roughly $5,000 of the $17,000 I had saved up to start the business.
Next, I went to a printing company and had a four-colour logo and package designed for my tape series. Each colour added a little bit more to the cost of the tapes, but I justified the fancy graphics to myself because, spread across the 10,000 subscribers my business plan called for, the cost of each extra colour was negligible.
I then created a fax-back subscription form (yes, this was well before ecommerce-enabled websites) and set up a fax machine in my parents’ basement.
To get my 10,000 subscribers, I printed brochures and started handing them out anywhere that entrepreneurial people gathered: trade shows, small-business development centres and so on.
The first morning after handing out the brochures, I rushed downstairs to see how many orders I had received.
I checked the paper cartridge. It was full. I picked up the receiver to ensure there was a dial tone, and sure enough, the fax machine was working. I tried to remain optimistic, figuring people were still returning to their offices from the trade show, and told myself I’d have orders the next day.
The next morning I went downstairs again in anticipation of the floodgates opening. Still no orders. The next day, none again. I became increasingly depressed with each passing day of not selling a single subscription.
By the time I ran out of money and had to shut the business down, I had sold just 82 subscriptions in three months.
As I think back on the experience, the business plan I had spent months on was useless. It didn’t matter how much time I spent modelling out a million-dollar company because the house of cards was all based on one wobbly assumption: my guess that it would cost $10 to acquire a subscriber.
I had no basis for this assumption. I just made it up which, of course, is the problem with the business plan of most start-ups. It’s all fiction until you get into the market and start selling.
Instead of developing a business plan, I needed to know what it would actually cost to acquire a customer. Instead of fussing over which announcer would have the right voice to conduct the interviews, I needed to know my cost to acquire a customer. Instead of obsessing over the logo for my new tape series, I needed to know my cost to acquire a single customer.
A person starting a business typically plans to bring something new to the market (either a new thing, new twist on an old thing or something old to a new market). And this means that getting comparable data on what it costs to acquire a customer is difficult and requires assumptions.
Don’t waste months tinkering with a spreadsheet on your computer. The only way to get data is to start selling.
It’s too long ago for me to remember specifically, but let’s assume I spent about $10,000 of my $17,000 in start-up money printing brochures and advertising my subscription. That means I had a cost per subscriber of $122 ($10,000 divided by 82). That means, at a rate of $99 a year per subscription, it would have taken me more than a year to cover the acquisition costs of a customer, let alone paying to make and distribute the tapes.
To get to my 10,000 subscribers, I would have needed more than a million dollars. That was money I didn’t have.
My business plan looked good. It had graphs, charts and spreadsheets that would have impressed anyone who read it. But it was not worth the paper it was printed on. Instead of that lengthy business plan, what I needed was some real data written on the back of a napkin to know the business wouldn’t fly as I had planned it.
Tomorrow: The alternative to writing a business plan
Special to The Globe and Mail
John Warrillow is a writer, speaker and angel investor in a number of start-up companies. He is the author of Built To Sell: Creating a Business That Can Thrive Without You, which will be released in April.