As I shared a few weeks ago, I’m taking Seth Godin’s online course titled The New Business Toolbox: Help Your New Business Do It Right The First Time. In the first session, Seth decides to start off by breaking down the idea of a business model in simple terms.

The way he explained it really made a light bulb go off for me.  He describes a business model in terms that helped me create this equation.

V x L² = R

With V being Value, L being Location and R being Revenue. Godin explains in so many words that when assessing your business model, location is more important to revenue than the value you are selling. To explain his reasoning for this, I will use an example of a pizza shop’s business model to keep things simple.

Most pizza shops offer a similar value proposition – tasty pizza at an affordable price. Assuming all things being equal in terms of taste and price (no pizza entrepreneur starts off with the dream of making the most expensive bad tasting pizza in town), then the differentiating factor between pizza shops is all about where that pizza shop is located.

If it’s a pizza shop located in the mall, the business model is simple…sell pizza to the people who come to the mall.  If the pizza shop is located in a city’s business district, then its business model is to convert foot traffic during lunch time into customers. If the pizza shop is located in no man’s land near a sprawling suburb, then its business model is delivery.  As you see, the factor that impacts the business model more than anything else is the location of the pizza shop. It impacts the price they charge, their marketing, their operating hours, the type of people they must hire, and how they handle customer service.

That’s why pizza shops located in the mall don’t deliver. It’s also why you can argue over the best pizza in town all day, but most people won’t drive across town for that great pizza when they can get decent pizza 5 minutes away.

We’ve all heard the real estate mantra LOCATION, LOCATION, LOCATION. Well this is an obvious concept to apply for brick and mortar entrepreneurs who sell in local markets, but not so obvious for everyone else.  What Seth Godin did in his first session is explain why you should apply this simple concept to any business model using location as a metaphor for a customer acquisition strategy that scales.