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 BLOG >> Recent

Implementing a business model in PHP [Business Models
Posted on February 11, 2013 @ 06:07:00 AM by Paul Meagher

In my previous article, I critized the idea that you could claim to have a business model if it was not sufficiently well defined that you could run it as a computer program that would estimate costs, revenue, and profit over time. I concluded by saying that I would reveal a runnable business model in my next article. Well, here it is.

I developed a script called monthly_growth.php which implements a business model that assumes you will grow your business by a certain number of new customers each month and those customers will each pay a monthly fee for your service. The revenues from new and existing customers each month is offset by two types of costs - a fixed monthly cost for "rents" and a variable costs associated with the cost of servicing each client. As the number of clients grows this servicing cost grows.

I run the script by pointing my browser at the url where it resides on my web server. If you host a site you probably have access to a PHP interpreter so could potentially run this script by saving it in a web folder on your site and then typing in the url to that file in your web browser. If you have the php module running in your webserver then you will see the table output below when you do so. I will also be making a web-based front end to this script in it's next iteration so that you can just run the model from this site by entering values in the input form. I did, however, want you to see the "guts" of what an implemented business model looks like so wanted to keep this version as simple as possible to make it easier to follow and modify for your own purposes.

Before running the script you need to review a few settings and change them to values that might be more appropriate to your situation. In this example, I'm assuming that we are starting from 0 customers, will add 10 new customers each month, and each of those customers will pay a monthly fee of $30. The monthly fixed fee, the "rents", is assumed to be $1000 a month and the cost of servicing each customer is assumed to be $10 a month. I'm interested in projecting out to 3 years into the future. This set of configurations generates this business model output:

YearMonth# CustomersRevenuesCostsProfits
2013 2 10 $300.00 $1,100.00 -$800.00
2013 3 20 $600.00 $1,200.00 -$600.00
2013 4 30 $900.00 $1,300.00 -$400.00
2013 5 40 $1,200.00 $1,400.00 -$200.00
2013 6 50 $1,500.00 $1,500.00 $0.00
2013 7 60 $1,800.00 $1,600.00 $200.00
2013 8 70 $2,100.00 $1,700.00 $400.00
2013 9 80 $2,400.00 $1,800.00 $600.00
2013 10 90 $2,700.00 $1,900.00 $800.00
2013 11 100 $3,000.00 $2,000.00 $1,000.00
2013 12 110 $3,300.00 $2,100.00 $1,200.00
2014 1 120 $3,600.00 $2,200.00 $1,400.00
2014 2 130 $3,900.00 $2,300.00 $1,600.00
2014 3 140 $4,200.00 $2,400.00 $1,800.00
2014 4 150 $4,500.00 $2,500.00 $2,000.00
2014 5 160 $4,800.00 $2,600.00 $2,200.00
2014 6 170 $5,100.00 $2,700.00 $2,400.00
2014 7 180 $5,400.00 $2,800.00 $2,600.00
2014 8 190 $5,700.00 $2,900.00 $2,800.00
2014 9 200 $6,000.00 $3,000.00 $3,000.00
2014 10 210 $6,300.00 $3,100.00 $3,200.00
2014 11 220 $6,600.00 $3,200.00 $3,400.00
2014 12 230 $6,900.00 $3,300.00 $3,600.00
2015 1 240 $7,200.00 $3,400.00 $3,800.00
2015 2 250 $7,500.00 $3,500.00 $4,000.00
2015 3 260 $7,800.00 $3,600.00 $4,200.00
2015 4 270 $8,100.00 $3,700.00 $4,400.00
2015 5 280 $8,400.00 $3,800.00 $4,600.00
2015 6 290 $8,700.00 $3,900.00 $4,800.00
2015 7 300 $9,000.00 $4,000.00 $5,000.00
2015 8 310 $9,300.00 $4,100.00 $5,200.00
2015 9 320 $9,600.00 $4,200.00 $5,400.00
2015 10 330 $9,900.00 $4,300.00 $5,600.00
2015 11 340 $10,200.00 $4,400.00 $5,800.00
2015 12 350 $10,500.00 $4,500.00 $6,000.00
2016 1 360 $10,800.00 $4,600.00 $6,200.00
2016 2 370 $11,100.00 $4,700.00 $6,400.00

So what we have here are monthly estimates of cost, revenue, and profit over a three year period. We can see how our revenues grow faster than our costs and eventually starts producing a profit situation which increases over time. You might be saying "but the assumptions are too simple". You might argue that customers won't come in as regular blocks of 10 new customers a month but rather as a smaller number per month at the beginning and a larger number per month as your business gains momentum. The beauty of providing you with the source code is that you are now empowered to change the business model so that customer growth follows, say, an exponential function or piecewise-linear function rather than a simple linear one. You can do that if you have access to the source code which is provided below (with lots of comments in the code that preclude the need for me to explain it much more):

<?php 
/**
* Prototypical business model involving the generation of monthly 
* revenue based upon the number of existing customers plus new 
* customers per month with each customer paying a monthly fixed fee.  
* Costs based upon monthly fee for servicing "rents" and a cost per 
* customer (variable cost) for providing the service to the customer.
*
* Assumes simple linear growth. 
*
* @script: monthly_growth.php
* @author: Paul Meagher
* @version: 0.1
* @modified: Feb 11, 2012
*/

// PART 1: CHANGE THESE SETTINGS

// Set number of years for your projections.
$num_years 3;

$num_new_customers_per_month 10;
$monthly_fee_per_customer 30;
$monthly_cost_per_customer  10;

// Cost of "rents" per month.
$fixed_cost_per_month 1000;

// Starting number of customers customers - default 0.  
$num_customers 0;  

// Set money formatting according to a locale setting.
setlocale(LC_MONETARY'en_CA');

// Starting month - defaults to current month.
$start_month date("n");

// PART 2: DO NOT CHANGE THESE INITIALIZATION SETTINGS

// setup year number to year date mapping for reporting purposes
$year_num_to_year_date[1] = $next_year date("Y");
for(
$n 2$n <= $num_years+1$n++) {
    
$next_year $next_year 1
    
$year_num_to_year_date[$n] = $next_year;
}

// Zero the parameters we will be estimating
$costs    = array();
$revenues = array();
$profits  = array();

// PART C: GENERATE REPORT PROVIDING ESTIMATES OF COST, 
// REVENUES, & PROFITS
?>

<table border='1' cellpadding='5' cellspacing='0'>
  <thead>
    <tr>
      <th>Year</th><th>Month</th><th># Customers</th>
      <th>Revenues</th><th>Costs</th><th>Profits</th>
    </tr>
  </thead>
  <?php
  
if ($start_month == 1
    
$y_end $num_years;
  else
    
$y_end $num_years 1
  
  for(
$y=1$y<=$y_end$y++) {
      
      if (
$y == 1
        
$m $start_month;
      else
        
$m 1;
    
    for (
$m$m<=12$m++) {
      
$num_customers $num_customers $num_new_customers_per_month;
      
$year_date     $year_num_to_year_date[$y];
      
// the data structures don't have to be this complicated
      // but they can be used in downstream calculatios more  
      // easily in this format
      
$costs[$year_date][$m]    = ($num_customers $monthly_cost_per_customer
                                  + 
$fixed_cost_per_month;
      
$revenues[$year_date][$m] = $num_customers $monthly_fee_per_customer;
      
$profits[$year_date][$m]  = $revenues[$year_date][$m] - $costs[$year_date][$m];
      if ((
$y == $y_end) AND ($m == ($start_month+1)))
        break; 
      
?>
      <tr>
       <td><?php echo $year_date ?></td>    
       <td align='center'><?php echo $m ?></td>    
       <td align='center'><?php echo $num_customers ?></td>           
       <td align='right'><?php echo money_format('%n'$revenues[$year_date][$m]) ?></td>    
       <td align='right'><?php echo money_format('%n'$costs[$year_date][$m]) ?></td>    
       <td align='right'><?php echo money_format('%n'$profits[$year_date][$m]) ?></td>    
      </tr>
      <?php
    
}
  }
  
?>
</table>

There is more to be said and done on the topic of business models so I may continue posting on this topic this week.

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