Price elasticity is a concept every business person should understand but I have found that many don’t.

Wikipedia defines price elasticity as:

a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price

Here is a chart that, I think, makes the concept easier to understand:

In it’s simplest terms, the lower the price of something the more demand there usually is for it. But every product and service has its own elasticity curve and it is important to understand what the price elasticity is of your product or service.

The good news is that it has never been easier to determine the price elasticity curve of a product or service.

Here is how you do it.

1. offer the product or service on the web and make the purchase as easy as possible (Stripe and/or Paypal).
2. establish the range of pricing you want to measure, start at a number higher than you can imagine anyone paying and end at a number that is equal to the cost to produce your product or service (the cost of good sold)
3. set the price at the high end of the range
4. buy some search traffic to your offering (Google Adwords)
5. measure the traffic to your offer and the conversion rate (Google Analytics)
6. lower the price
7. repeat 4 & 5
8. lower the price again
9. repeat 4 & 5
10. continue this process until you reach the low end of the range

Then plot conversion rate against price and you will have the price elasticity of your product or service. It is best to keep everything other than price constant as you move through this exercise. For example, don’t change the adwords campaign as you move through this process.

As you do this, you can also measure what it costs to acquire a customer (CAC) via search. That may not turn out to be the best way to acquire a customer but it’s a very helpful number to know.

You will want to consider this formula as you think about where to land on pricing:

Price > CAC + COGS

That means the price you charge must be greater than the cost you must pay to acquire a customer plus the cost you must pay to make or deliver the service.

If your product or service is sold on a subscription basis, then you must also know the amount and timing of churn to expect and the lifetime value of a customer (LTV). In a subscription offering, the above formula becomes

LTV > CAC + COGS

All of these concepts and math falls under the terminology of “unit economics” and you will often hear investors (including VCs) talk about “understanding the unit economics” of a business. If you don’t know what that means when an investor brings it up, you are unlikely to close that sale.

But I am not writing this to help entrepreneurs raise money. I am writing this post to help entrepreneurs understand how to build a profitable business.

You must know the price elasticity of your product or service. You must know how much it costs to produce. You must know how much it costs to acquire a customer. And if your model is subscription, you must know your churn and lifetime value. From all of that comes the data and knowledge that allows you to optimize price, margins, and profitability. Which, after all, is the goal of a business, all the other bullshit you read on the internet notwithstanding.

As I watched the video I posted yesterday, I was struck by the last question of the discussion. That question was “what do you wish that entrepreneurs would ask you when they meet with you, but they don’t?”

For me the answer is obvious. I wish they would ask me what I would worry about most if I was an investor in the business. I often give entrepreneurs the answer to that question when they meet with me even if they don’t ask, and they rarely do.

All businesses have challenges, weaknesses, risk factors. These don’t generally get in the way of us investing, as long as we and the entrepreneur(s) are aligned about them and the need to manage and mitigate these risk factors as quickly as possible. We are drawn to an investment by the upside potential of the business and we recognize that every investment we make has significant downside potential as well. Our hope is that the founders and management team can mitigate the downside risk and, in doing so, set the company up to realize the upside potential.

So it is not a negative when pitching to discuss the risk factors. I like to ask entrepreneurs “what keeps you up at night?” There are obvious answers to that question; hiring the right people, shipping product on time, raising capital. But those are common to every business and that’s not what I’m looking for when I ask that question. I am interested in finding out if the founder understands the risks of the specific go to market strategy they have chosen, or the challenges of the market they are operating in, or the difficulties of implementing the business model they have chosen.

If they see those risks clearly and have plans to manage them, that creates alignment and comfort for investors. If they don’t see them at all, that is a huge red flag for investors.

My partners landed on this same answer after talking it through among themselves. As Albert said, entrepreneurs often feel that they have to be selling when they pitch. And many come in telling a rosy story that is all upside and no challenges. That can come off as naive and can be off putting. It is way better to start with the upside. As I like to say, “take me up the mountain and show me the promised land on the other side.” But after you’ve accomplished that, it is wise to explain where the tough spots will be on the way up the mountain and how you plan to manage through them. It’s the latter part that really seals the deal with an investor. You must do the vision part to hook the investor. Reeling them in requires the reality check.

For the second year in a row, USV did an event in Berlin in November and invited entrepreneurs to attend a moderated discussion. Our friends at Tech Open help us produce these events.

This year the USV partners who were able to attend this event were Brad, Albert, and John. The conversation was moderated by Ciaran O’Leary, who is one of our favorite VC co-investors in Europe.

Here’s the video of that moderated discussion. It’s long, at almost one hour, so you might want to chromecast this one to your TV and watch “on background.”

It’s Christmas Day, a holiday in much of the world and one of the biggest religious days of the year. We are spending it with family and friends on a beach in the caribbean. I hope that all of you are spending the day with friends and family. I know that Christmas is a tough day for some and I hope that you have someone close to you to spend it with.

We are on our seventh day of our vacation and have dialed it down to such a level that pulling out a laptop and writing on it is a real effort. As the Gotham Gal says in her post today, that is a good thing every once in a while.

We are back in NYC tomorrow and I plan to write some posts next week, like I did last year, on what happened in 2015 and what I think will happen in 2016. I’m looking forward to that, but for the next 24 hours I’m going to chill out with friends and family and put the finishing touches on a relaxing getaway week on the beach.

We are enjoying the entire Beatles catalog streaming via Sonos in our vacation house this morning. That’s because the Beatles finally decided to put their music on the various streaming services and their catalog arrived today.

The Beatles did not put their music on iTunes until 2010. So it is not surprising that they took such a long time to join the streaming music world.

It is worth noting a few things.

First, you don’t need the Beatles to build a great streaming product. They are a nice to have but not a need to have. It seems that there are no “need to haves” in the world of streaming music as long as you have most of the artists. No one artist is that powerful, even the greatest artist of the pop music era.

Staying off iTunes until 2010 and streaming until 2015 may have made good business sense for the Beatles, but it was certainly not a fan friendly move. It took me all of one minute to load up their entire catalog into our Sonos queue and hit play. That is such a superior experience to loading CDs, one by one, into a CD player, or downloading each and every record from iTunes and then creating a playlist. I am not sure where the line should be drawn by an artist between maximizing profits and maximizing the fan experience. But I don’t think the Beatles drew that line correctly over the past fifteen years.

The Beatles’ music is timeless. Unlike most pop music, the Beatles’s music seems to appeal to generation after generation. We have several generations in our house this morning and everyone is totally enjoying the music.

So I’m so happy that the Beatles finally decided to join the streaming party and we are celebrating that move. But I sure wish they hadn’t taken so long.

I woke up late (for me) this morning, worked out, and when I got around to posting here, my web host (bluehost) was down for what seemed to be like 30-45mins. I’m deep into the vacation groove and wasn’t the least bit bothered by being down.

Now that it’s back up, I’m onto other things. So I’m not going to post anything today.

Here’s Bruce Springsteen and Paul McCartney on SNL last weekend. I watched it today while waiting for AVC to come back up and thought you all might enjoy it too.

If you are wondering what to get your road warrior friend or family member for the holidays, consider a Chromecast. It’s just $35 and it will come in handy time and time again.

We arrived on our family holiday with a ton of movies to watch and a desire to keep up on the NBA and NFL action. But the TV in our rented house was only connected to the local cable TV system which had none of that.

Not to worry, my friend John travels with a Chromecast in his briefcase. We connected it to the HDMI port on the TV in our rented house, plugged it in and now any laptop in the house can drive the TV via the Chrome browser. Plus all of apps we have on our phones with Chromecast support can also take over the TV. Adding a VPN to our phones and laptops was also quite helpful.

John tells me he pulls this move all the time in hotels around the country. And from time to time he accidentally leaves them there. Not to worry. For $35, you can afford to keep a couple in your briefcase.

I’m a huge fan of Chromecast and AppleTV’s Airplay. These services allow you to bypass the traditional TV distribution system and go “over the top” with relative ease. And for $35, you certainly can’t beat the price. So my vote for the killer stocking stuffer this year is Chromecast.

If you live in NYC and are freaking out because you haven’t completed your Christmas shopping, I have the perfect solution for you, Etsy ASAP.

Through a partnership with Postmates, Etsy has offered sellers in NYC the opportunity to offer same day delivery. Thousands of sellers opted in and you can now buy from Etsy sellers in NYC and have the item delivered to you same day.

You can filter your search for items eligible for Etsy ASAP. Here I searched for a knit scarf and checked the Etsy ASAP filter:

When you check out, make sure to select Etsy ASAP as your delivery option.

If you are reading this on your mobile phone, you can also get Etsy ASAP there. If you have the Etsy app, click on this banner,

and get this feed, and go shopping for last minute items.

You can also do the filtered search thing on your phone if you prefer searching to browsing.

So with the help of same day delivery services, Etsy sellers are available in real time in NYC this week to solve your last minute shopping needs. If this pilot goes well, I hope Etsy will decide to roll this out to many more locations in the new year.

Happy holiday shopping!

Disclosure: USV and I are shareholders in Etsy and I am also on the board of Etsy.

Benedict Evans is such a great analyst and his insight into the web>mobile transition has been consistently prescient and helpful to investors, including USV and me personally.

A couple days ago, he penned “16 mobile thesis” which is a must read for anyone building a mobile/internet company or investing in that sector. These 16 theses are organized roughly chronologically, starting with what has largely happened, followed by what is happening, and ending with what may happen.

I found myself most interested in the middle section, 7-9, in which Ben talks about where the action is turning to in the mobile ecosystem. And my favorite part is titled “Post Netscape, post PageRank, looking for the next run-time.” In this part Ben describes what used to be the dominant environment and the search for what is next. At the end he states:

Really, we’re looking for a new run-time – a new way, after the web and native apps, to build services. That might be Siri or Now or messaging or maps or notifications or something else again. But the underlying aim is to construct a new search and discovery model – a new way, different to the web or app stores, to get users.  

I agree with Ben but I think there won’t be one runtime in the mobile era. I think what is emerging is multiple runtimes depending on the context – “contextual runtimes.”

If I’m building a lunchtime meal delivery service for tech startups, that’s a Slack bot.

If I’m building a ridesharing service, that’s going to run in Google Maps and Apple Maps.

If I’m building a “how do I look” fashion advisor service, that’s going to run in Siri or Google Now.

If I’m building an “NBA dashboard app”, that is mostly going to run on the mobile notifications rails.

So the war for users in mobile and the race to be a platform is real and it is important. And Apple and Google are playing that game as well (the notification, map and voice runtimes are controlled by them already).

But it isn’t clear that all of these contextual runtime environments will be controlled by and or subsumed into the mobile OS. That’s what makes chat so interesting. Slack has emerged as the dominant chat app in the enterprise, but not the only one. Facebook Messenger has emerged as the dominant cross platform chat app in the US, but not the only one (our portfolio company Kik continues to grow and is already massive). Whatsapp and Telegram are very popular outside of the US.

In content, there is an entirely different set of “runtime environments.” Facebook and YouTube are huge content discovery and consumption environments. Twitter and Snapchat are trying like hell to join them. So are many other mobile social platforms. Content is a bit like chat. I don’t see this sector converging quickly into the mobile OS platforms.

So the thing that is a bit different in the mobile era of the Internet, as opposed to the desktop era, is not everything is built on top of a browser. The phase we are in now, phase one I guess, has two dominant “runtimes”, mobile web and native app.

But we are heading into a new era in which a few native apps, chat, maps, voice input, notifications, content/social, and surely a few more, will become the new browsers. And entrepreneurs will be building contextual services on top of them.

In this era context will be critical. The example I keep coming back to is the list of places I need to go to when I’m in a new place. Like this Foursquare list of top places where we are this week:

Seeing that list on a map versus on a list makes a huge difference.

That is the power of context and that’s where I think the next big moves are to be made on the mobile internet.