2 Types of Uncertainty in Pre-Revenue Profit Decisions
The decision introduced in Chapter 1—Is this worth doing?—is an economic one. It asks whether an initiative justifies commitment before outcomes are known and before revenue exists.
At this stage, it helps to be clear about what kind of profit is under consideration.
This chapter is concerned with profit potential, not profit realization. Profit potential asks whether an initiative is economically worth pursuing if executed competently. Profit realization depends on execution, operations, management discipline, and time. Those uncertainties matter—but they come later. An initiative that is not worth doing economically cannot be rescued by excellent execution; one that is worth doing may still fail if executed poorly.
Evaluating profit potential before revenue exists requires understanding why profit is uncertain and where that uncertainty comes from. Entrepreneurship involves many kinds of uncertainty, but not all of them are relevant to this early decision.
This chapter focuses on the uncertainty that is always present when profit must be evaluated before revenue exists. Disaggregating that uncertainty makes it possible to distinguish what must be accepted from what can be learned—and to approach the
2.1 Why Profit Uncertainty Must Be Disaggregated
Entrepreneurs often describe early-stage decisions with a single phrase: “It’s uncertain.”
That statement is usually true—but it is rarely helpful.
Uncertainty before revenue exists is not a single condition. It is a collection of distinct unknowns that behave differently, matter in different ways, and can be addressed through different forms of learning. Treating them as interchangeable makes it harder to know what to investigate, what to accept, and what should guide judgment.
This chapter disaggregates profit uncertainty into its constituent parts.
Uncertainty, Not Risk
Throughout this book, uncertainty refers to situations where outcomes are unknown and probabilities may not be well defined. Risk is reserved for cases where probabilities can be meaningfully assigned. Most pre-revenue decisions involve uncertainty rather than risk, even though everyday language often blurs the distinction.
This distinction matters because the tools used to manage risk are often ineffective—or misleading—when applied to uncertainty.
Why Disaggregation Matters
When uncertainty is treated as a single undifferentiated obstacle, several problems follow.
Learning becomes unfocused. Entrepreneurs gather information without clarity about which unknown they are trying to reduce. Intuition fills the gaps left by structure. And uncertainty that could have been reduced is often mistaken for uncertainty that must simply be endured.
Disaggregating uncertainty makes it possible to ask better questions:
What exactly is unknown?
How does this uncertainty affect profit?
And could it be reduced before resources are committed?
Scope of This Chapter
Entrepreneurship involves many forms of uncertainty. Regulations can change. Technologies can fail. Teams can underperform. Capital markets can tighten. These uncertainties are real, but they are not the focus here.
This chapter addresses only the uncertainty that is structurally present whenever profit must be evaluated before revenue exists—the uncertainty that stands between an idea and a responsible economic decision.
That uncertainty concerns: - who the relevant customer is, - how that customer values the offering, - what those preferences imply for profit, - and how others’ actions may shape outcomes.
2.2 Customer Uncertainty
Before profit can be evaluated, there must be clarity about whose profit is being evaluated.
This is the role of customer uncertainty.
Customer uncertainty refers to uncertainty about which group of people or organizations should anchor the analysis. It is uncertainty about identification, not behavior. Until the relevant customer is specified, questions about demand, pricing, and profit remain loosely defined.
Who Is the Customer?
Entrepreneurs often speak casually about “the customer,” as if the answer were obvious. In practice, it rarely is.
A product may appeal weakly to a large population or strongly to a small one. It may solve an acute problem for a fringe group or a mild inconvenience for a mainstream one. It may be purchased by one party and paid for by another. Each of these possibilities leads to a very different economic reality.
Customer uncertainty exists whenever it is unclear:
- which group’s preferences matter,
- whose willingness to pay should be evaluated,
- and whose adoption behavior will determine outcomes.
Until these questions are resolved, profit evaluation cannot really begin.
Customer Uncertainty Is Not Demand Uncertainty
Customer uncertainty is often confused with demand uncertainty, but the two are distinct.
Customer uncertainty asks who the relevant customer is.
Demand uncertainty asks how that customer behaves economically.
These uncertainties interact, but they should not be collapsed. It is possible to estimate demand precisely for the wrong customer group—and end up with answers that are economically meaningless.
Clarity about the customer is a prerequisite for learning about demand.
Why Customer Uncertainty Matters for Profit
Profit potential depends on focusing attention and resources on the customers for whom value creation is strongest. When customer uncertainty remains unresolved, entrepreneurs often average across groups, dilute value propositions, or rely on generic market descriptions.
These moves can feel prudent. In reality, they often reduce clarity while creating the illusion of progress.
A smaller group with intense need may support a profitable initiative that a larger group with weak interest cannot. Profit potential is shaped not by population size alone, but by which population is being served.
Reducing Customer Uncertainty
Customer uncertainty is often reducible before revenue exists. Through observation, conversation, and disciplined comparison, it is usually possible to identify which groups experience a problem acutely enough to warrant attention.
At this stage, the goal is not to optimize a solution or finalize a business model. It is to anchor the analysis to a clearly defined customer group whose behavior can be meaningfully studied.
Once that anchor is in place, the next uncertainty becomes unavoidable: how that customer values the offering, at what price, and in what quantity.
That uncertainty—demand uncertainty—is where the evaluation truly begins.
2.3 Demand Uncertainty
Once the relevant customer has been identified, the question usually shifts—and becomes harder.
How much do they actually value this?
At what price?
And how many of them would really buy?
This is the domain of demand uncertainty.
Demand uncertainty refers to uncertainty about how customers behave economically: how much they value an offering, how sensitive they are to price, and how much they would purchase under different conditions. It is not uncertainty about whether customers exist, but about how their preferences translate into economic outcomes.
For pre-revenue profit evaluation, this uncertainty is unavoidable—and central.
What Demand Is (and Is Not)
In everyday conversation, demand is often treated loosely. People talk about interest, excitement, engagement, or positive feedback. Those signals feel reassuring, especially early on.
Economically, demand is more precise—and more demanding.
Demand describes the relationship between price and quantity purchased, holding other factors constant. It answers a specific question: how many units will be purchased at a given price?
This means demand is not:
- market size,
- awareness,
- enthusiasm,
- or stated intent.
A large market does not imply strong demand. High interest does not imply willingness to pay. Positive interviews do not imply purchase at a profitable price. These confusions are common, and they explain why demand uncertainty often feels opaque.
Why Demand Uncertainty Dominates Early Decisions
Before revenue exists, many aspects of a business can be chosen or approximated. Prices can be set. Costs can be estimated. Fixed investments can be planned.
Quantity cannot.
No matter how carefully a venture is designed, customers ultimately decide how much they buy. Small errors in estimating that behavior can overwhelm reasonable assumptions about pricing or costs. As a result, uncertainty about demand often determines whether an initiative is plausibly profitable at all.
This is why early decisions feel so speculative. It is not because everything is unknown, but because the most important thing is.
Demand Exists Before Revenue
It is easy to conclude that demand can only be known after launch, through sales and iteration. Many entrepreneurs accept this as a fact of life.
It is not.
Customers have preferences, constraints, and tradeoffs even when no product is offered for sale. While demand cannot be measured with certainty before revenue exists, it can often be bounded, structured, and compared. Some demand scenarios can be ruled out. Others can be treated as more or less plausible.
Learning demand early does not require perfect prediction. It requires disciplined effort to reduce uncertainty where it matters most.
Demand in Context
Demand uncertainty sits between other uncertainties.
Customer uncertainty asks whose behavior matters.
Demand uncertainty asks how that customer behaves economically.
Profit uncertainty reflects how that behavior interacts with prices and costs.
When these uncertainties are blurred together, effort is often misallocated. Entrepreneurs refine customer descriptions without learning about willingness to pay, or build detailed cost models without anchoring quantity. In both cases, work is done without reducing the uncertainty that drives the decision.
A Question to Carry Forward
At this point, you may notice a tension.
Demand feels essential, but also difficult to learn without committing resources. Yet treating it as unknowable pushes decisions toward guessing. The chapters that follow take up this tension directly.
For now, a simpler question is enough:
What would you need to learn about demand for this decision to feel responsible rather than hopeful?
2.4 Profit Uncertainty
Once customer and demand uncertainty are on the table, profit uncertainty becomes unavoidable.
This is often the point where conversations become vague. People say things like “the economics are unclear” or “we’ll figure out profitability later.” What they usually mean is that they are unsure how what they’ve learned so far translates into money.
Profit uncertainty is not mysterious. It is simply the uncertainty that arises when uncertain demand interacts with prices and costs.
What Profit Uncertainty Is
Profit uncertainty refers to uncertainty about economic outcomes—whether an initiative can plausibly generate surplus after accounting for what it costs to operate.
Unlike demand uncertainty, profit uncertainty is not about customer behavior alone. It reflects how that behavior combines with choices the firm controls: pricing, cost structure, and scale.
This distinction matters.
Demand uncertainty asks: How many units would customers buy at a given price?
Profit uncertainty asks: Would that level of demand justify proceeding, given what it costs to serve it?
These questions are related, but they are not the same.
Why Profit Feels Harder Than Demand
Many entrepreneurs find profit uncertainty more intimidating than demand uncertainty. Demand at least feels like a customer problem—something that can be explored through conversation, observation, or testing. Profit feels abstract, numerical, and distant.
This reaction is understandable, but misleading.
Profit uncertainty feels difficult not because it is fundamentally different, but because it aggregates several moving parts. Prices must be chosen. Costs must be estimated. Fixed investments must be contemplated. Each introduces assumptions, and assumptions compound.
What often gets lost is that most of the uncertainty in profit comes from demand, not from costs or pricing mechanics. Prices are chosen by the firm. Costs are constrained by operational decisions. Quantity is not.
Why Profit Uncertainty Cannot Be Ignored
It is tempting to postpone profit questions until demand feels more certain. Many teams do. They focus on traction, engagement, or growth, assuming that profitability can be addressed once momentum exists.
This postponement carries risk.
Investments in features, infrastructure, hiring, or growth paths implicitly assume a future profit profile. When those assumptions are not examined early, resources are committed without clarity about whether the underlying economics can support them.
Evaluating profit potential early does not require precise forecasts. It requires understanding whether plausible demand scenarios support outcomes that justify commitment.
Profit Potential Versus Profit Realization
At this stage, it is worth returning to a distinction introduced earlier: profit potential versus profit realization.
Profit uncertainty at the pre-revenue stage is about potential, not execution. It asks whether an initiative is economically worth pursuing if carried out competently. It does not ask whether the team will execute perfectly or whether every operational challenge can be overcome.
Execution matters. But it cannot rescue an initiative whose economics are fundamentally weak.
Separating these questions allows profit uncertainty to be examined without conflating it with every other source of difficulty in entrepreneurship.
A Question to Carry Forward
At this point, profit uncertainty should feel less opaque—even if it remains unresolved.
You may not know what demand will be. You may not yet know what prices or costs will ultimately be chosen. But you can ask a more disciplined question than “Will this work?”
Instead:
Given what I know about demand so far, are there plausible paths to profit that would justify continued investment—or is the economics itself the constraint?
2.5 Strategic Uncertainty
So far, the uncertainties we have discussed arise even when an initiative is considered in isolation. They concern identifying the right customer, understanding how that customer values the offering, and assessing whether plausible demand could support profit.
Strategic uncertainty enters when outcomes depend not only on customers, but on the actions of others.
What Strategic Uncertainty Is
Strategic uncertainty refers to uncertainty about how other decision-makers will act and how those actions will affect outcomes. Competitors may change prices, add features, reposition offerings, or enter or exit the market. Partners may renegotiate terms. Customers may gain alternatives.
Unlike demand uncertainty, strategic uncertainty does not arise from preferences alone. It arises from interaction.
This distinction matters because interaction changes the logic of evaluation. When outcomes depend on others’ choices, profit is shaped not only by what customers want, but by how firms respond to one another.
When Strategic Uncertainty Matters—and When It Doesn’t
Not every initiative is meaningfully shaped by strategic interaction.
In some cases, strategic uncertainty is minimal. Early-stage products may face no direct competitors. Niche offerings may serve customers others overlook. Temporary advantages may exist due to timing, access, or novelty.
In these situations, assuming away strategic interaction can be reasonable—at least initially. Doing so simplifies evaluation and focuses attention where it belongs.
In other cases, strategic uncertainty is unavoidable. Markets may already be competitive. Rivals may respond quickly to changes in price or features. Customers may switch easily between alternatives. In these environments, ignoring strategic interaction leads to fragile conclusions.
The challenge is not to eliminate strategic uncertainty, but to recognize when it is relevant and when it can be safely bracketed.
Strategic Uncertainty Is Not an Excuse to Avoid Evaluation
Because strategic interaction is complex, it is often treated as a reason not to evaluate profit at all. People say things like “it depends on what competitors do” and stop there.
This reaction is understandable—but incomplete.
Strategic uncertainty complicates evaluation, but it does not make it impossible. It changes the questions that must be asked. Instead of evaluating a single outcome, entrepreneurs must consider how outcomes vary across plausible responses by others.
Importantly, strategic uncertainty does not eliminate the need to understand demand. It builds on it. Competitive interaction reshapes demand and profit; it does not replace them.
Why Strategic Uncertainty Comes After Demand and Profit
It is tempting to begin with competition. Many strategy frameworks do. But for pre-revenue profit evaluation, this ordering often obscures more than it reveals.
Without a grounded understanding of demand, strategic scenarios are untethered. Competitive responses cannot be evaluated meaningfully without knowing how customers value alternatives, how sensitive they are to price, and how substitution occurs.
For this reason, strategic uncertainty is best addressed after customer, demand and profit uncertainty are clarified—not before.
A Question to Carry Forward
At this stage, it is enough to recognize whether strategic uncertainty belongs in the picture at all.
Before asking how competitors might respond, a simpler question is more useful:
If others reacted in reasonable but unfavorable ways, would the profit potential still justify proceeding—or is this initiative only attractive in the absence of response?
2.6 Reducible and Irreducible Uncertainty
By now, it should be clear that uncertainty before revenue exists is not a single obstacle. It comes from different sources, affects decisions in different ways, and deserves to be treated with care rather than resignation.
The final distinction that matters is between reducible and irreducible uncertainty.
What Can and Cannot Be Reduced
Some uncertainty cannot be resolved before action is taken. Competitors may behave unpredictably. Markets may shift. Technologies may evolve. These uncertainties are real, and no amount of analysis can eliminate them.
This is irreducible uncertainty. It must be accepted and managed through judgment, flexibility, and resilience.
Other uncertainty, however, exists only because the relevant questions have not yet been asked—or the effort to learn has not yet been made.
This is reducible uncertainty.
Customer uncertainty is often reducible. With disciplined exploration, it is usually possible to determine which groups experience a problem acutely and are worth anchoring the analysis to.
Demand uncertainty is frequently reducible as well. While it cannot be eliminated, it can often be bounded, compared, and structured in ways that rule out implausible scenarios and clarify what is economically at stake.
Profit uncertainty, because it is largely driven by demand uncertainty, is often reducible to the same extent.
Strategic uncertainty is more mixed. In some contexts it can be bracketed temporarily. In others it must be confronted directly. Recognizing which case you are in is itself a form of learning.
The Common Mistake
A common mistake in entrepreneurship is to treat all uncertainty as irreducible.
When this happens, evaluation is abandoned prematurely. Decisions are justified with stories rather than evidence. Guessing is reframed as courage. Failure is reframed as inevitable.
This mindset is often defended as realism. In practice, it reflects a failure to distinguish what must be accepted from what could have been learned.
Reducing uncertainty before revenue exists does not mean eliminating risk. It means avoiding unnecessary ignorance.
What Reduction Actually Looks Like
Reducing uncertainty does not require precision. It does not require forecasts with decimal points or confidence intervals. It requires clarity about what matters and what would change the decision.
Often, a small amount of learning goes a long way. Ruling out a single demand scenario, identifying a price range that will not work, or discovering that a customer group is less responsive than expected can dramatically alter the evaluation.
The goal is not certainty. The goal is responsible judgment.
Making the Call Under Uncertainty
Every entrepreneurial decision is made under uncertainty. That will not change.
What can change is whether uncertainty is confronted deliberately or endured passively. By disaggregating uncertainty and reducing what can be reduced, entrepreneurs gain the ability to make decisions they can stand behind—even when outcomes remain unknown.
With this landscape in view, the next step is clear. If demand uncertainty is central, and if it is often reducible, then learning about demand before revenue exists becomes the core task.
The chapters that follow take up that task directly.