4. You want to have an insanely profitable business model.

You all have seen books and articles about business models; the only problem is that nobody ever bothered to define what one was.

We define a business model as a brief, concise description of why your business makes money.

A business model is a brief concise description of why your company makes money.

It should be understandable to anyone because you are going to hire very average people. If your business ever gets big, average people are still going to be executing the model, so it needs to be easy to understand.

As soon as your business becomes complicated and your business model is no longer understandable, you will lose money.

We have had bitter, tearful experiences of overcomplicating our business model.

We had a business in which we made direct sales to corporations. We had retail, we had catalog sales, and we had Internet sales. In our catalog we offered 37,000 SKUs, which are independent items. Can you imagine offering 37,000 items when we are a training company? It was too complicated for any human being to manage. I know, because I was managing it!

You want to keep it as simple as possible and insanely profitable.

Let me give you an example of a business that I ran. We used to have a training program in Japan where we would train executives. We would charge them $16,000 a year for 12 sessions in which I would teach them all the things I am teaching you now. We upped the price over time to $30,000 a year for these twelve monthly sessions, one day a month. The sessions were held in my living room. We paid the salespeople 30 percent of the value of the sale for making the sale. So, I would get $21,000 for every person who came, for one day a month in my living room. How do you lose money doing that? It can’t be done. If one person signs up I make the rent for the whole year. Everything else is gravy.

You want to have an insanely profitable business model, a model that is set up so that it just automatically makes money.

Many financial services businesses are insanely profitable. If you go to the financial district in your city and look at all the largest buildings in the highest rent area and find out who owns them, every single one of them will be owned by a financial services company. That is something to think about.

I used to think about it when jogging in the morning in the Otemachi business district in Tokyo, and I realized that it was a business that I needed to get into.

You might have a business that makes only a little bit of money when the business is going really well and that loses money when it doesn’t go well.

You do not want to be in such a business.