Prototyping with Numbers: The Entrepreneur's Secret Weapon

Published on
May 24, 2023

Let's talk about a concept that might initially seem counterintuitive but, once understood, can become a secret weapon in your entrepreneurial toolkit: Prototyping with Numbers.

Take a breath. I know 'numbers' can sometimes seem daunting, but trust me, they're more like friendly little signposts guiding us toward success. And who doesn't love a helpful signpost?

What is Prototyping with Numbers?

Prototyping is a process we usually associate with product development. It involves creating preliminary models, or 'prototypes,' of a product to test and refine it before final production. But what if we applied the concept of prototyping to the realm of numbers, specifically to our business models and financial predictions?

That is the essence of prototyping with numbers. It's about creating financial prototypes of your business idea. This involves mapping out your expected revenues, costs, and profits, creating a numerical representation of your business.

Why Should Entrepreneurs Use Prototyping with Numbers?

So why should an entrepreneur bother prototyping with numbers? 

Here are a few key reasons:

Reduce Risk : In product design, a prototype is a preliminary product version that lets you test a concept before you invest lots of time and money into producing it. Similarly, 'prototyping with numbers' involves creating a preliminary financial model of your business idea to test its viability.It provides a quantitative evaluation of your business idea. Prototyping with numbers allows you to assess the risks before you invest significant resources into a new business or product.

It’s why I especially encourage underresourced and historically underinvested founders to practice and use this method.

Understanding Assumptions: Every business plan relies on certain assumptions. This may involve making assumptions about your pricing strategy, the cost of acquiring new customers, or your anticipated growth rate. Prototyping with numbers forces you to make these assumptions explicit and examine their impact.

Securing Investment: Investors don't just want ideas; they want numbers. A financial prototype can demonstrate to potential investors that you understand your business model and its potential.

Enhancing Decision Making: Prototyping with numbers can guide your decision-making process. It can help you identify where to focus your efforts, where to cut costs, and where to invest for growth.

How to Start Prototyping with Numbers

Ready to start prototyping with numbers? Here are a few steps to guide you.

Define your business model: Start by clearly defining your business model. What are your revenue streams? What are your costs? How will these evolve as your business grows?

Make your assumptions explicit: Identify the assumptions underlying your business model. This could involve assumptions about your market size, pricing strategy, or customer behavior.

Create a financial prototype: Map out your expected revenues, costs, and create a numerical representation of your business ( we'll walk you through that belwo)

Test and refine your prototype: Like a product prototype, your financial prototype should be tested and refined. This involves adjusting your assumptions based on feedback and market data and seeing how these adjustments impact your financial outlook.

Let's delve a little deeper into prototyping with numbers by taking an example of a hypothetical business - let's call it "Tiny Kitchen," a subscription-based service for personalized healthy meal plans. As someone in an almost Stockholm syndrome relationship with Delivery takeout apps, I have dived back into the world of meals . 

Meet our completely fictitious brand: 

Step 1: Define our business model

First, we need to outline the business model for Healthy Habits. It's a subscription service, so that the primary revenue stream would be the monthly subscription fees from customers. The key costs include the cost of meal ingredients, packaging, delivery, and platform maintenance.

Step 2: Make our assumptions explicit

Next, we need to make some assumptions. Let's assume an average subscription fee of $50 per month. We expect to acquire 100 subscribers in the first month and aim to grow our subscriber base by 10% each month. We're assuming an average cost of $30 per meal plan for ingredients, packaging, and delivery and a fixed price of $2000 monthly for platform maintenance.

Step 3: Create a financial prototype.

Now, let's prototype with these numbers.

 For the first month, we expect revenues of $50 * 100 = $5000. 

Our variable costs would be $30 * 100 = $3000, and with the fixed costs of $2000, our total costs would be $5000. So for the first month, our prototype predicts neither profit nor loss.

Step 4: Test and refine your prototype.

Next, we need to test our prototype against reality. Let's say after the first month, we only managed to acquire 80 subscribers but found the average cost per meal plan was just $25. We'd adjust our prototype for the second month accordingly, which would now predict revenues of $50 * 80 = $4000 and total costs of ($25 * 80) + $2000 = $4000, again breaking even.

In addition, our growth rate of 10% was too optimistic. Based on our first month, we adjusted our growth rate to 5% for the next month, leading to a new subscriber prediction of 84 for month two.

This table represents the initial prototype (Month 1), the adjusted prototype based on actual data after the first month (Month 2 Actual), and a projection for the second month based on adjusted assumptions (Month 2 Projected).

By prototyping with numbers, we can not only set our initial expectations but also use them as a guide to modify them and our business strategy in light of actual data. You can better steer your business toward success by continually improving our financial prototype.

No need for fancy dashboards or complicated excel formulas just yet.

Remember, the assumptions we started with are just assumptions. The key to successful prototyping with numbers is being open to refining those assumptions as you gather more data about your business and your market. And always remember that the goal is not to predict the future with perfect accuracy but to create a flexible tool that aids understanding and decision-making as your business grows and evolves.

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