Developing a profit-focused business model - sports and outdoors

Introduction.

As the saying goes, “It’s easy to sell ten pounds for five.” This couldn’t be more accurate. Many of us have experienced business years where it feels like everyone profits—except us. From my perspective, establishing a sound and realistic business model is non-negotiable.

Your cost of production is fixed in the short term and should align with a robust business model. If your production costs don't fit into your model and allow you to sell at the retail price required for profitability, you don’t have product/market fit.

Example: Many young businesses get this backward. They start with a buy price of X and aim to retail at 5X. When they realize they can't sell at that price, they lower it to 3X, hoping to make it work—but end up losing.

So, what should a solid business model include?

The Oxford dictionary defines a business model at thus:

“a plan for the successful operation of a business, identifying sources of revenue, the intended customer base, products, and details of financing.”

So, let’s cut the marketing crap from the internet and start there: Product/Customer/Profit & Loss/Cashflow

Business Model simplified.

First a short summary of each section heading.

1. Is yours a ‘painkiller’ product or service? You don’t want to have a ‘vitamin’ product. We’ll be diving into establishing this in February. For now, take it as the difference between pushing a rock up a hill, and pushing it on flat ground. ‘Must have’ is the only show in town. ‘Nice to have’ loses. And beware of confirmation bias when checking. We’ll get into more detail on product next month, and specific ways to help tell if yours is a painkiller using landing pages. Plus examples of the good, the bad and the ugly.

2. Customer - here, NEVER look at TAM - Total Addressable Market. It’s irrelevant. And you’ll be fooling only yourself. Take it from a fool that knows.

Outdoors Industry Association categorizes the Outdoors Industry value at c. $687 Bn / annum. This may well be, but it’s a TAM - and a huge percentage of it involves spending on travel. Which is irrelevant unless you’re in the travel niche. You need to go beyond this to the SOM - let’s check this for tents.

You can research the Amazon sales of tents (via Smart Scout) over the last 30 days.

Amazon = 40% of online sales (*approx.)

Online = 22% of retail sales (*approx.)

So the total tent sales over 1 month can be estimated for target market (USA)

Adjust for seasonality - e.g. from our experience November would be an average month, better than off season (because of BFCM) but below peak (June/July/August).

And bingo. You have a decent shot at a USA specific SOM. Much more real, right? Then you have to examine the customer demographics for the category. And you should know what your potential customer has for breakfast. Broad is not good.

Then what is the customer spend expectancy? It never ceases to amaze me when someone is happy to spend four or five figures on a watch, but don’t like spending on other things. This is a real thing - especially in the outdoor segment. There is so much cheap gear out there that people often baulk at spending big. We all hear about the likes of Yeti who bucked this trend. But what about the thousands that didn’t work?

3. Finance - Profit and loss When can you make profit? In a real way, with all expenses covered? This needs minute analysis. Down to the last monthly subscription. I hated having to raft through these. But we should all be intimately in touch with profit & loss (or income statement) on a monthly basis. Put it in your calendar.

4. And when will you run out of cash? This is a completely different proposition. And this is why a business modeler with a shit-hot cashflow projection is critical. As much as we, as entrepreneurs, may hate it. Otherwise, you will leave it to luck. Again, you’ll lose. Here is an example of what we use (which tees into our P&L categories for the most part). Note that we always compare projected to actual at month’s end - hence the double line.

Part 1 - Product.

Today, we’ll delve into the painkiller product part of the business model, and why it’s so crucial.

Firstly, if you only have a vitamin product, you will have to push all the time. There will be no pull demand. This means ads, and that in turn means an unsustainable business model - we tested this numerous times, and organic (non paid) website traffic was TWICE as likely to convert as paid traffic (at the time it was a conversion rate of 0.7% vs 0.32%) on an average basket size of c. $300. Organic = pull. Paid = push.

Mostly paid traffic means an unsustainable Cost of Customer Acquisition. We’ll plug this into the newsletter in 2 weeks (23rd) when discussing the P&L, and will show what it mean in real monetary comparisons.

Continued: I’m sure you’re getting the drift by now. ‘Must have,’ not a ‘nice to have.’ The annals of broken businesses in our sector is full of nice to haves. And you have to really critically analyze this, avoiding confirmation bias. I have launched multiple products without doing this and they were all mistakes. So the earlier in the process that you can check this, the better. And we discuss in detail how to in February. For now, suffice it to say that if your cost of customer acquisition goes up by $20, this would usually mean that your retail price needs to increase by something between $80 and $100, just to become sustainable.

Important - Stress Testing: Your business modeler cashflow should absolutely allow stress testing. That means seeing how a drop in expected revenue, or an increase in CAC will affect the business in the short/medium/long term.

Actionable 1.

It’s all about the product, baby. Get that right and the rest becomes so much easier. If you’re in third party retail, in this day of next day delivery, the same applies. How many ‘painkillers’ in your assortment? And, as importantly, can it be delivered at a price that is deemed acceptable by the potential customers. Next month is all about finding product market fit, primarily using Landing Pages, trends and discussion. For now, critically analyze your product or service, being aware of confirmation bias. Is it a painkiller? Or a vitamin? Then go out and speak to users - real users. If you have customers, arrange calls, or better still, to meet them. If you have an email list get people from that that are willing to discuss your product or service’s value proposition. Make sure you’re talking to people who are qualified to judge. Not Mom, Dad, friend, Golden Retriever. People that would be users and customers. Make sure your product or service has the edge.

Sample Questions for a customer:

• Where did you first hear about our product?

• What made you decide to purchase this product initially?

• Did we live up to expectations?

• Is the product or service a must have or nice to have?

• Have you told anyone about it?

• What did you like?

• What did you dislike?

• How could it improve - 1 or 2 aspects or features?

• On a scale of 1-10, how likely are you to recommend this product to a friend? Why?

• Have you tried similar products? If so, how does ours compare?

There is huge insight in getting truthful answers to the above from actual customers who have paid. They would have to be altered if asking someone who hasn’t. These would fall into 2 categories - those who you have sent product to for testing, without them purchasing. And those who are just answering theoretically - without testing.

The best and most accurate insights will ALWAYS come from paying customers.

Hint, if you incentivize them in some way, with will help 10x the replies in our experience. Maybe entry into a draw for product?

This is the start of our business modeling tool, currently under construction. (FYI We’re using Replit.com which is an AI tool. I’ll let you know how this goes and if it could be useful for you.)

Example output will be like this:

Discussion. Above I’ve used rounded percentages, and three varying SKU’s, to establish average unit economics. You can see here what even a $10 change in customer acquisition cost would make in all cases. BTW, in our experience, the CAC’s above would be good. Below is what First Page Sage has to say, with $67 average in our industry:

There is a lot to take in here. But to summarize, you can’t reply on paid. Please don’t try. The model doesn’t work. Step one is creating a ‘pull’ or ‘painkiller’ product that will bring traffic organically, either through the internet (SEO) or social media activity.

Next week we’re going to dive into part 2 above - the customer, or target audience part of the puzzle, and it’s place in developing your business model. The following week is P&L and the final week is accurate cashflow forecasting. Then on Jan 31st we’ll have the monthly video meeting to discuss and answer questions.