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
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 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”
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:
- 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
- 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
- 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.
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.
With each Part of the five parts in this series of Building and Testing your Minimum Viable Product (MVP), I will add a Results and Lessons Learned. I learned from a great friend, these are “Retrospectives” vs. “Post Mortems” because no one died!
- Day one results – YES! Made a sale of the “Financial Model Template – Subscription Model” for $99 to someone who wasn’t on my existing list. That’s a win.
- I posted my first Blog Post – Step by Step Guide to Building a Minimum Viable Product MVP Test
- I should have listed that it was Part 1 of a 5 Part Series – foreshadowing is good.
- I posted the post on a Sunday – bad move. I should have scheduled it to be posted on a Tuesday, late AM, a time when people may actually read it vs. a weekend.
- It took more time than I planned setting up MailChimp Automation and integrating with SumoMe. MailChimp automation, the ability to send five scheduled emails in a row required me to move from “Forever Free” to pay as you go at $0.03 per email. Support from SumoMe was great. Thanks @noahkagan and @SumoMe team.
- Tips for setting up and managing WordPress (hosted)
- When you go to Customize Your Site on theDashboard there are two important settings.
- Set Front Page as Static – that means your homepage will stay the same vs. changing every time you post a blog post.
- I wrote and posted my second post, this time using the scheduling feature to launch Tuesday late AM!
- But I had to fix a setting on the “Customizing” (see image at right). I forgot to set that the lower text box wasn’t selected to “Blog” so though the first two blogs posts were live, but they were difficult to find because they weren’t on the Blog page … oops.
- Tips for WP setup
- I hadn’t yet set up automatic social sharing until I worked out the bugs – e.g. I wanted to get the 140 character Tweet right and have the right default image to share on Facebook. Determine your order of sharing and test it before you automate.
- There is a quirk in setting up nested numbers – the format I prefer to use. If you input an image in WordPress, it can cause numbering to start over. What I learned is that if you input the images before the text you don’t have the problem. The other option is to go into the HTML Text editor…
- Categories and Tags – make sure you add these before you post. The default Category will be Uncategorized. After you’ve made 100 posts you’ll want your reader to be able to find your themes… and it won’t hurt your SEO either.
- Finally, have an editor! I’m lucky for a lot of reasons on this one. My editor is my wife, Kathryn Parker, of 29 years (@StartupSpouse5). Someone should give your post fresh eyes.
Part 2 – Keyword Brainstorming
Is anyone looking for the product or service you want to sell? Using Adwords and spending $100 in the next five days will save you months of time working on an idea that has no demand, or no one wants to buy.
- Now it’s time for a little keyword brainstorming – this is going to take more than a football game and you will come back to this over and over again as you test your hypothesis.
Go to Tips for Building Keywords on Google Adwords. Here’s a video to help give you some context and get the 101 tutorial on Keyword Planner. The goal of this section is to determine if anyone is actually searching for what you are trying to sell (product or service) and how competitive it will be for you to land that traffic on your website.
- You’ll need a Google account
- Create a Google Spreadsheet to take notes
- Tab 1 – Keyword and phrase listing
- Tab 2 – competitor URLs
- In Keyword Planner – enter the keyword or phrase you believe will be most searched for in Google.
- Type in the competitor URLs that you believe people will use to find your site.
- Ad Group Ideas – this will show you similar campaigns and advertisements
- Use your primary language and location – the broader the search the better for the early stage test
- Update both the spreadsheet and keyword tool, as you move from resource to resource you’ll want to keep track – e.g. if you decide to test on Bing.com or other search engines
- Are there a lot of keywords or key phrases that can help drive traffic to your site
- How competitive are they?
- How expensive are they?
- Move to “Review Plan” tab – this will give you an estimate of what you will have to pay to drive traffic to your site and what your daily average spend would be for those keywords
- Some of the key metrics Google will show you at this point are:
- Max CPC or Cost per Click – that’s the high amount that any competitor is spending on the keyword
- Clicks – for that price, what Google estimates you will get for click volume
- Impressions – how many times your ad will likely be seen
- Click Thru Rate (CTR)
- Average Cost per Click (CPC)
- Average Position – where you will be on the page listing
- You can also setup Google Analytics at this point – you’re in the same login
- You will need to add Google Analytics (video) to your site, the easiest way to do so is to add YoastSEO tool
- Search Console
- Settings – Authenticate with Google
- We’ll come back to Google Analytics later – after you have some traffic to analyze.
- There are a number of free and paid additional tools you can use to go deeper into keywords and competitive analysis
- Go to the Topic Explorer tool at SEOMonitor to type in your key topic. It will create a list of the top traffic site and keywords to use on your site. Products like this are similarly to Keyword Tool but will provide you with thematic data and it has a better UI.
- SEOMoz is a time based trial tool, then you’ll need to upgrade to paid. So I’d get started learning SEO with the tools above before you launch into that tool.
2. Summarize your keyword learnings in the Google Sheet. Take a break… Time to ask yourself a critical question? Is anyone looking for the Product or Service that you are thinking of selling?
a) What is the competition for keywords?
b)Are there any competitors that are selling this product or is it free?
Are you looking for a Startup Financial Model that you can use to help fund your business?
Venture Ready Models has downloadable Financial Model Templates that help you speed through your process of created a Venture Capital Financial Model without having to get your MBA from a top tier program.
Startup Financial Models Include:
They also start with a business model template based on your key hypothesis of the company you are launching. For example, a Subscription Model template or a Marketplace Template.
Please review the Business Model resources on the site as a resource.
Financial model and the corresponding business models are the tools that investors will expect you to have prior to getting funded. It’s critical that you start with what you can know about the business.