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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

 

 

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.

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.

Step by Step Guide to Building a Minimum Viable Product (MVP) Test

Part 1 of 5 Part Series on testing your MVP

I was planning on giving a “Financial Model for Founders” talk at Seattle Startup Week (#SSW2016) in November. As I worked on the presentation, the final version is here on Slideshare, I realized that  screenshot_11_26_16__8_29_ammaking this less conceptual and abstract the better so I wanted to use an very tangible example. What’s I’ve outlined below in Part 1 is are the Lean Startup Steps you can follow to test your hypothesis.

How do you define Viable? Well, that depends on you as a founder. You may want to create a massive unicorn business at one end of the spectrum or some passive income at the other end. The definition is that your business is “capable of working successfully; feasible”.

define_viable_lean_startup_-_google_search

This is the actual case study that I’m using to launch VentureReadyModels.com, a site that I have built to provides resources for startups, it starts by outlining the business models options for tech and internet companies. Though the principals for marketing and sales apply to regular business as well, just start with the Commerce model. Finally I provided the template versions of the Excel Financial Models that map s to the specific business models.

When I do startup events, I often get questions about how to test early startup MVP before investing any real money (let’s say $10k) into the startup and definitely before writing a single line of code. This is the definition of “Lean”, doing tests on the cheap to prove if anyone cares about your idea. This is also consistent for the business founders that lacks a technical co-founder to build a mobile app or web app. You’re going to start with traffic and interest.

Here’s the answer to the question in step-by-step format with links to outside resources if you need some guidance along the way.  

I’ve broken this series into five parts:

  1. Website Setup
  2. Keyword Brainstorming
  3. First Data Driven Decision
  4. Optimizing and Going Forward
  5. Additional Resources

Each part will also have a Part B – Results and Lessons Learned to follow up on what worked and didn’t work.

Part 1 – Website Setup

  1. Start with your concept/hypothesis or Domain Name
    1. What idea is it that you want to test? For me, the test was if people that read my blog on a monthly basis for business models would be interested in purchasing a $99 – price testing to come later in the sequence – for a Startup Financial template based on their business model?
      1. Given the number of times I’ve given this talk to various groups and accelerators – I knew there was demand, I just didn’t know how much demand, I just didn’t know if anyone would pay for it!
      2. What/Who are the competitors for this hypothesis?
        1. Build a list of competitive sites
    2. Do you have a domain name that you want to use for the test? Does the domain name include any of the keywords that you want to test? You don’t need to buy an expensive or “perfect” domain name here. Test first, if you get a great name that you can spend $100’s or $1,000’s of later that’s ok. Go to Name.com to buy a domain, consider a .co as an option. Domains with .com has historically been a preference, but keywords are likely more valuable than the extension at this point for your test.
    3. Is it worth testing the hypothesis? Well, I had a deadline to meet and a Sunday afternoon with a Football game on in the background. So over the three hours that followed here’s what I did:
  1. Now launch the Website
    1. 14 day free trial of CloudWays  
      1. With this service you pay based on usage and you can test multiple domains vs. purchasing a single WordPress.com annual contract of $99 + domain mapping for $13. This is a mistake I made early in this process… technically a hosted WordPress.org site uses the same Dashboard and you can test multiple ideas for an inexpensive price point. Plus you can do nested and numbered lists like this without touching the HTML (total pet peeve). 
      2. 14 days is a good test for you to get the site up and optimized with content for Search Engine Optimization (SEO). SEO takes time to build so your brand new site won’t be driving traffic in day one, but you need to get it started, so get to work.
    2. Cloudways Server setup
      1. Name your server – use your last name for now.
      2. Start with the basic settings – single CPU and minimum storage
    3. Add an Application
      1. Choose between
        1. Startup with a Single Site WordPress install or –  
        2. If you have a product to sell – this is the one I used because I knew I had at least four versions of a Excel Spreadsheet that I could sell install the Application Commerce on WooCommerce
          1. If you’re going to sell a downloadable, virtual or physical goods, you can install a WooCommerce site at setup
          2. You’ll need to input your products, names, descriptions, prices and
      2. Cloudways will assign your default email and Password for the account – it’s easy to hover over and copy.
    4. Configure WordPress
Website setup for Venture Ready Models
Website setup for Venture Ready Models
      1. Customize your Site
        1. Theme – if you’re going to finish this project during a football game, go with the default theme. Right now it’s called Twenty Sixteen. There are a ton of free and paid Themes available. You can come back to this later.
        2. Site Identity – Use your domain name and keywords
        3. Images – come back to this later – you can spend hours looking for the perfect photo on iStockPhoto or Site Icon
    1. Configure WordPress site plugins. Plugins can be downloaded from inside the WP app – “Add New”  
      1. SumoMe – this will allow you to test popup and build your lists, there is a free version you can use for the test. It’s limited, but go build some traffic and buy the paid subscription – see additional info below
      2. You need to startup building an email list – so go to MailChimp and setup a free Account for now. If you are going to use email automation – e.g. forwarding a five part email to remind people how to use your product – you’ll need a paid account. More later on that topic.
      3. Jetpack – allows you to track traffic on the WordPress site
      4. Yoast SEO – shows you where you can improve your content to have it better indexed for Google. Configuring your site for SEO is a topic that will go past the Football game timelines – see more below.
    1. Add Content to your site in two types Pages and Posts – you can visit my site here to see the final version. Pages use navigation, Posts are generally Blog content.
      1. All of the Pages that I started with during the football game – other pages were added later after looking at competitive sites
        1. Home – some of this content was pulled from DKParker.com/Blog to make the pace of copying and pasting faster – writing content will take time if you haven’t already started
        2. Business Models – base level content for the site. Greater than 300 words per page
        3. Shop
          1. Added the first Subscription Model spreadsheet
      2. Posts – I simply pointed this site to my other blog above vs. copying and pasting content. During the football game, no additional content was created
      3. Redirect your domain name/URL to the site – this was a little tricky because the description wasn’t great and I only do DNS/CName type of work once every year or so…
        1. It was easy to add a CNAME change to my Name.com account – the DNS servers needed to stay in the default setting.
      4. If you have trouble at any point in the setup you can use the Live Chat that is provided in the top right
    2. Submit your URL to Google URL Submit
    3. Download and install the WordPress Mobile App for your smartphone to monitor your site(s)  
    4. You should be at Half Time and ready for an adult beverage! If you spent too much time on theme or photos you’re likely into the fourth quarter!

Go right your first blog post and tell people why you think this is a great idea! Share it on social media, you can go get the social media profiles for your new product later

How to Build a Startup Financial Model

Ever stared down at a blank spreadsheet looking for inspiration for your startup? Want to know where to start, what business model you will follow and how you will grow revenues?

Startup Spreadsheets templates allow you to focus more on customer development and product market fit instead of learning to become a Spreadsheet Jockey. You still need to own your own model, there is no way you can outsource this work and still know how the model works. However, you don’t need to build it from scratch.

Excel templates for Venture Capital give you insight in the type of models used by Venture Capital firms.