Monte Carlo or bust

Being the geek that I am, I've now developed my own Monte Carlo Simulation after reading about it in "Fooled By Randomness" by the same author as "The Black Swan", Nassim Nicholas Taleb. Its not a very sophisticated Monte Carlo Simulation, but it does do the job I set out to use it for - interrogating my business model.


This isn't the first time I've come across a Monte Carlo Simulation, as a Finance geek I used to work with (we used to call him the Temple of Doom!) used it to stress the probabilities of success for hitting our finance targets - he persuaded the company to buy a very sophisticated software package that I seem to recall was several hundred if not a thousand pounds, but anyway it looked amazing and told us all what we already knew - that we were not going to hit our targets!

Anyhow, my Sim has been used to "test the robustness" of my business model.

So I've taken my top down model (Total number of current users x Awareness x Trial x Distribution x Gross profit per unit) and run that 15,000 times with random numbers every time in each element of the model, e.g. Awareness.


Now at this stage its just a stack of numbers, so then comes the "fun" bit... the analysis. And this is the bit where I have to confess to not knowing exactly what I'm doing... (I should have kept awake during that one term of Stats I did at Uni!). But what I think I am doing is building a histogram using a function in Excel called Frequency which tells me the number of instances that the random numbers in my model have generated an answer within a set band level, i.e. bins. All very interesting I hear you cry...


Well I won't bore you with the detail on the guts of the model, but basically my Sim shows a range of possibilities for my business model, from £0 to £30m. The mean seems to be in the £8m ish range (give or take several hundred thousand pounds!) while the mode is in the £4m ish range. The standard deviation is £10m ish, and the Standard Error is under £100k. So what???


Now whilst it is possible that my business idea (if successful!) could hit £30m plus it is more probable than not to be significantly less than that, which has dented a bit of my enthusiasm. But still £2m is better than a kick in the teeth!


I've found building my Sim very stimulating and I already feel that it has been worthwhile for me as it has started me thinking about moving away from the big scale launch and more towards a slow burn launch. I think I will now use my little Sim a little more often now to see the effects of randomness on a whole range of things...


The image above is from Rolf Hicker