One of the best presentations on making money that I’ve seen comes from David Heinemeier Hansson. I’m constantly amazed at the number of startups I meet who have an advertising based revenue model. Especially now that ad rates are dropping. You have to do an insane amount of traffic to generate enough PVs to make CPMs effective. There are other models like CPC, which eats your inventory (witness the crappy ads on Facebook or Yahoo), and CPA, where you absorb the risk hoping that your advertisers are converting. What I don’t see as much of is businesses who solve a real problem for a real person, and then charge money for it.

The good news is that in a down economy, there are lots of problems to be solved. Can you make life easier for someone? Can you make them more cost effective? Can you help them find things they’re looking for? If you can solve a problem and get someone to pay you for it, you’ll be fine.

The challenge then for you as an entrepreneur becomes finding the problem to solve. There are two things to look for when you’re solving a problem. How many people have this problem? And how much would they be willing to pay to solve it? If both of these numbers are big, you’re in good shape and your profit calculation is easy:

(# of people with problem) * ($ they’d pay to solve it) – (your cost of solving the problem) = Profit

Of course, you could always follow the lead of the Underpants Gnomes…

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