tv_guide_vintage_photo_-_Google_Search

Subscription Model Template – Explained

The Subscription model has its history in newspaper and magazines. Where you would have an annual subscription for a number of editions per year – think TV Guide ( remember those, well, maybe not) vs. The Farmer’s Almanac that was a once a year purchase.

For software, we’ve shifted from a licensing model. For example, a copy of Microsoft and you get the rights to use that product into perpetuity or when they no longer support. License companies have been slow to migrate to monthly subscription – preferring the half step to annual subscriptions.

Subscriptions also apply to physical goods companies – like Dollar Shave Club. Where you get the same recurring product and charge every month.

Subscription models today for software follow the same recurring revenue model – they can be billed in multiple frequencies – especially as you begin to test your pricing models. Why would you charge monthly, vs. annual? Though both types are referred to as Software as a Service or SaaS. Monthly revenue companies generally carry is higher enterprise valuation when they exit or sell the company.

Annual vs Monthly Models

There are a number of reasons:

  • Annual subscriptions (or Annual Recurring Revenue, ARR) are likely better for the company cash flow in the short term. If you can take a discount for paying an annual fee vs monthly it’s likely in your best interest to do so
    • Many companies like Salesforce.com “price” their offering on a monthly basis – but they don’t actually sell a monthly product. You can pay annually or with a contract semi-annually. They have enough scale however that they can demand whatever pricing they want to dictate.
    • Keep in mind that the accounting version of how you track this revenue or “Bookings” in an accrued model is different – thus in most financial models it will show monthly
    • On an annualized basis, you have less visibility to Churn. Churn is the percentage of companies that will not renew. This is due to the higher price point as well as the lack of regular customer interaction.
  • You can show your pricing as both Annual with discount or monthly on your pricing page and begin to test the conversion rate
  • Monthly subscriptions (or Monthly Recurring Revenue, MRR)
    • Use cases for MRR are where you customers are more likely to want to test your product offering – or they don’t know if they would regularly use the features – think one-time purchase vs. recurring use.
    • It also assumes a lower price point (lower risk) and that it’s just a charge that in essence goes under the radar on a credit card.
    • MRR is the purest measurement – for both price and churn

In the simplest calculation – ARR is simply MRR multiplied by 12. But in the early years having that cash early will make a big impact on Cashflow but not Bookings.

Looking for a template for Subscription Model – click here

 

 

Comparing Business Models to Sales Models

For startups entrepreneurs, there’s is often a blending together of business models and sales models. Here’s a way to think about it, for both tech and non tech companies.

Business Models

Business models include the purpose, strategy, competitive advantage, ecosystem (Partner and Channel) and of course the product or services. Too often we take these items for granted and think of it simply as a tech business model or software business model.  This can be a euphemism for “I have a cool product and don’t know if anyone will buy it”.

This isn’t horrific as long as you have a proxy model in mind for your company. For example, my startup is like Salesforce.com (subscription model, sold to business) or like AirBNB (transactional fee paid for the marketplace of connecting buyers and sellers of rooms).

Continue reading “Comparing Business Models to Sales Models”

Don’t Startup Product Pricing too Low

The saying goes – You can always lower your price – but it’s difficult to raise it.  So start testing before you become fixated on a price.

When you’re doing a startup it’s tempting to start your pricing low. In fact, many founders will become fixated on a price or a specific percentage of margin before testing their assumptions. Avoid that temptation. I talked before about startup pricing metrics, categories and comparisons. This is an important part of building your financial model, but it’s not the only part.

Your sales price has to be large enough to cover three additional expenses:

  1. Cost of customer acquisition – what does it cost to acquire a PAID customer to your site? As an example:
    • How much does it cost to get 1,000 uniques to your site in a month
    • What percentage of that traffic will register and give you email, name and phone number
    • What percentage of those registered will give you a credit card and purchase your product
    • How much churn will you have
  2. Margin – is the difference between that revenue and the cost of acquiring your customer
    • You obviously can’t price gouge – unless you’re the only product with no competition – which isn’t going to be your problem
    • You will need as much margin as you can eek out of the sale, because you’re going to be wrong with your other assumptions
  3. Cost of Building your product –
    • How many hours for developers
    • How much time for sales people
    • How much general and administrative costs

The problem with starting your price too low is that it establishes a value that is in direct correlation to your belief in the product. Let the market give you the value through testing, not from a lack of belief. Besides, you’ll need all of the margin you can find to answer these other questions.

Startup Guide to Pricing your Product

Dealing with startups and financial models is one of the areas of discussion that always comes up in product pricing. What’s generally astounding is the lack of thought or time that has gone into the process. I know, I know,  you’re busy building a product and can’t be bothered by such triviality. But, when it’s time to prepare a venture ready financial model, you’re going to need to input your pricing hypothesis into your pro-forma document. So let’s get to that hypothesis. But first:

What pricing isn’t:pricing-startup-products

  • SAAS isn’t a price – software as a service is a delivery model (Compared to shipping boxes of software on disks).
  • Freemium isn’t a price – it’s a go-to-market strategy that is designed to acquire customers and convert some percentage of these customers to a paid version of the product.
  • In App Purchase isn’t a price – it’s a way to monetize the sale of virtual goods within a game.  Continue reading “Startup Guide to Pricing your Product”

Epic Fail Fundraising – Top 10 List

I had a chance to speak at an NWEN event on Monday. . The forum was a Mentor Monday program (#mentormonday) with Chris Dishman from Denali Financial Consulting. Thanks to the Sponsor – Cairncross and Hempelmann for sponsoring Mentor Monday.

We discussed the Top 10 list of Epic Fails in Fundraising, here’s the list and the list of resources that were referenced at that event.

Productize a Service – Explained

Thanks to the team at 9Mile Labs, a Seattle-based Accelerator, for letting me present last week on the seven (now eight) B2B business models. 9Mile_logo, b2b business modelsYes, they helped me add one to the list!

In the discussion and Q&A afterward, I realized I left off an obvious business model. In fact, it’s a model that I’ve really supported in the past – how to “Productize a Service”.

Why did I leave it off, given that it’s actually one of my favorite models in my own startups? It’s usually because I think of services, categorically, as not as scalable as product. I know that qualifies as a “well, duh” statement, but that’s not quite accurate.

Here’s the deck from the presentation:

Here’s the situation: you’ve created a service-based business (where people do the work), and over time, you add some tools, improve the business process and even create some level of automation, driving costs down in the business (hopefully to increase profits). There was company in the cohort that is an example. They are building a tool that scans physical products and creates a 3D image to be importing into a database – and they’ve built the viewer to view the image on a website.

So the Founder asked, what’s the “snappy name” of that business model, since you have names for the other seven? Though his business will likely mature into a subscription model in the future, for now, at least at the launch, it’s really providing a service where someone on their staff (vs. a customer) has to do the work.

Productizing the service then requires the company to bundle in the different services and create a pricing model that lowers the friction for customers to say “yes”. The customer doesn’t really care how you do the work, what tools you use or how expensive those tools were to buy or build, they just want the solution.

One of the methods for doing this is to create a pilot offering. In this example, you have the tools to do the scanning, you store them in your database, and you’ve built the viewer to use on the website. Pricing each part separately may be the way you think of it, but it’s not how the customer thinks of it.

Have you heard anyone talk about wanting a drill bit? No, actually they really want a hole and the drill bit is just the means necessary to get it. The same is true with your product pricing.

Create a solutions-based price. Include the setup services, the scanning, and perhaps capped use of the viewer, based on the number of websites the view is used on. The principle here is simply risk reversal – you’ve created a new product, shown your confidence, and taken the risk vs. shifting that risk to the customer.

Startup Market Sizing

What’s your TAM, SAM, SOM and LAM – What’s your Launch Addressable Market?

Is this market big enough to build a company around?

The effort of market sizing helps establish the potential market share your product could attain within the total market. Market sizing can be a difficult challenge for startup founders. They are looking to prove that they are going after a Multi-Billion dollar market for their products so this can lead to a bit of delusion on the market scoping exercise.

My goal here is to help you to avoid the 1% of China market – you know the person that has an awesome product and if they just sell it to 1% of the China consumer market they will make Billions! Of course the other example is that you just need one customer at $1B!

To help understand market sizing, let’s use a software example (vs. a restaurant of automotive). Let’s say you want to build a better Customer Relationship Management (CRM) product to compete with Salesforce.com. OK, I’m a Salesforce fan, but I’m happy to start with you on your hypothesis, Salesforce isn’t for every company.

Total Addressable (Available) Market – or TAM – is the entirety of the market for your product. Everyone worldwide that could buy your product.

So in the competitive scenario above, your Total Market would be any person that interacts with customers or potential customers – across all industries, geographies and sales models.Market-sizing-TAM-SAM-SOM

Service (Serviceable) Addressable Market – or SAM – is the market you can acquire with your product. An example of a limitation would be if your product is only in English, you would only be able to target a subset of the TAM that would be willing to buy your product in English. The next filter might be the vertical market that  you are targeting, e.g. technology companies with sales teams vs. let’s say, drug companies with sales teams.

In the CRM market, your SAM would now be the people in sales and customer service worldwide who use English as their primary language for business.

Service Obtainable Market – or SOM – is the portion of the market that you can garner or get to use your product. What is the realistic market share that your company can garner at six months, 1, 2 and 3 years after launch.

This is where the analysis gets harder to calculate. It now has to do with the features you have at launch and the needs of your customers.

You can’t sell to everyone, who is the most realistic target customer?

In the example you’ve decided to target your CRM product at the technology sales market, you’ll need to narrow your market again:

  • Small sales teams
  • Medium sales teams
  • Large sales teams
  • Complex selling cycles
  • Educational sales cycles
  • Transactional sales cycles

The new concept I want to propose is Launch Addressable Market – or LAM. Today’s startup market is very familiar with the concept of Minimum Viable Product (MVP) and Lean Startup methodology talks about “getting out of the building” to validate you idea with real customers (technically prospects because they haven’t purchased anything yet). The concept of the LAM is where your market sizing exercise meets your MVP and product roadmap.

Get out of the building and go prove your launch customers enthusiastically wants your product. If that LAM customer falls into the “Meh” category, they are underwhelmed by your offering, you’re never going to get to your SAM market.

Remember there is a difference between your launch product/market and your scale product/market. If you don’t find customers for your launch, you’ll never get to scale!

You’ll need to convince investors that the market is both big and you can find the path to get to that market.

Step by Step Guide to MVP Part 3 – Data Driven Decisions

Part 3 – Making your first data driven decision

Given what you have discovered so far in your experiment, what’s your next step in investing in your MVP and this idea? Because it’s easy to spend reach cash on advertising it’s important to have a thesis on why you’re investing in this idea.

What I’ve outlined in the following section are tasks that you can continue to develop and learn about what your potential customers are searching for on the web and how you can stand in the path of their search to monetize your startup idea.

  1. SEOYoast Setup
    1. Google Search Console Setup, also known as Webmaster Central  
      1. Authentication – this process is dependent on your Domain Name Provider
      2. Use this tool to test your content for Readability and SEO. It will score your post and give you tips of what you should improve.
  2. Google adwords initial review – Hit Pause
    1. What did you think?
    2. What did you learn?What are you going to do about it?
  3. Quality Score – my average quality score on starting keywords was a 2/10 or 3/10. After doing the items listed below, I was able to get them to a 5 or 7.
    1. Start at Google for where to start – here. This includes a live chat channel, by the way. Quality is based on three factors:
      1. Data Relevance – how does the ad map to the website for content?  
      2. Landing Page Experience – this is more about the speed of the landing page vs. the content of the landing page
    2. Performance Testing – I used the free 14 day trial of Pingdom to test speed.

venturereadymodels_ads_-_http___www_venturereadymodels_com_building-financial-models

  1. Click through rate – this will have to change over time – but as it improves, your costs for those keywords are likely to go down.
    1. Matching
      1. Broad Match
      2. Exact Match
      3. Phrase Match – I shifted all of my adwords to Phrase Match which caused the quality score to start over
    2. Duplicate keywords
      1. You don’t need to list a plural “s,” e.g. “model” vs. “models” will show as a duplicate key word
  2. Outcome: I need to work on Landing Page Experience more – improve the speed and on page experience.
    1. For speed, I’m working through these 19 things.
    2. For experience, I’m using A/B testing tools and looking for plugins.
  1. Restart the broader keyword search and try the campaign again. Remember, testing keyword spend is always good for Google. So unless you want to feel like you went to Las Vegas and walked away with nothing, you should plan on micromanaging the process for now.
    1. Bounce Rates – here’s what you need to know
      1. Startup with Search only and avoid Display ads. For me, at least, the display ads only created a huge bounce rate
  2. At this point, you could either buy traffic at reasonable economics or not. Time for another decision – do you keep pushing ahead with this idea?
    1. Google will calculate your Average CPM or Cost per Thousand – (M represents the Roman Numeral for 1,000. I know, couldn’t they have referenced something from a digital decade?)
      1. This CPM rate will help you understand other advertising alternatives like Facebook ads or Display Ads for blogscampaign_management_-_google_adwords
    2. Have more cash to spend on Google? You can spend it there.
      1. Ad Groups – what did you learn about categories of adwords that aren’t directly tied to your core campaign? In this specific example, I learned there were two different groups that I need to follow up on at a later time:campaign_management_-_google_adwords
        1. Cap Tables
        2. Valuations
        3. You can use the “Get keyword ideas” tool to understand the traffic and potential costs.
  3. Take some time to build out SEO traffic through building content. This is going to take time, so block out an hour, three mornings a week to write unique content.
    1. Write more content and get those pages indexed – by the way, you will always be writing more content
      1. If you are unsure of the content as main website or Page content use Posts (blog posts) to test the content.
      2. Use your keywords in the Titles (H1s) and top paragraph, but write it to be read by a person not a machine
  4. AppSumo is installed. Start using these tools to test building your email list. More on this later, there are a lot of features here.

Building Financial Models

Here’s what do you need to know about Building Startup Financial models before you get started:

  • What business model are you anticipating that you will use? For example:
    • Who will buy your product? A consumer or a business? Though the templates don’t reflect a different layout, there are some things you should consider in your assumptions.
      • Consumer or B2C
        • Consumers will likely have a smaller price point
        • Expect more churn with early customers
        • With B2C you can likely buy advertising to get consumers to your site. Keep in mind you’ll need to closely monitor things like bounce rate and conversion ratios.
        • If the product is ready to purchase today (still an MVP) you will likely frustrate customers, that can be OK as long as you capture email or contact information to fulfill later.
      • Business or B2B
        • Your MVP will likely need a more full-feature set before they can purchase your product
        • Time to close for B2B sales will need to be estimated. It’s likely that you will be the sales person on the first few customers. The sales process should go down over time, however, don’t underestimate the time required or your financial model will be significantly off in the future.
        • With B2B you’re likely to buy a list that will need to be marketed to in the form of outbound sales calls.
    • If you have a more traditional business (vs an Internet business) you can use one of the two downloadable templates:
      • Transaction Fee model as a base template. It assumes you will still use the Internet to drive traffic to your site. It then assumes a percentage of margin on product sale.
      • Productize a service has the product and service combinations. For example, it assumes a service component with Gross Margin plus a form of product sale
  • What are the inputs that you will need to fill in the model?
    • Product – when will it ship – in the spreadsheet, this will be in what month
    • Price – what’s the selling price
    • Returns or Churn – what sort of return rate do you expect
    • Headcount expenses:
      • Who will you hire and when?
      • What are current market rates, or the rate required to contract the talent.
    • General & Administrative expense
      • Office space, Internet service provider, insurance, etc.

If you know which Financial Model Template you need, go to the Shop to purchase a Financial Model Template.