10 business models that can make you $$ and 3 that can kill you
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Understand the difference between sales & marketing methods, pricing, business models and financial models. Use this financial model components to get your Startup Financial Model venture ready.
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10 business models that can make you $$ and 3 that can kill you
- 1. Copyright DKParker, LLC 2016 10 Business Models (+3 that can fail) Dave Parker @DaveParkerSEA www.dkparker.com/blog Dave@dkparker.com http://AddSlideShare
- 2. Copyright DKParker, LLC 2016 Agenda About Dave Methods – Marketing, Sales & Pricing 10 Business Models 3 that can fail Financial Models Q&A – Your ideas
- 3. Copyright DKParker, LLC 2016 About Dave 5X founder, Board Member and (former) VC, SVP Programs at UP Global (Startup Weekend + Startup America) CEO – Code Fellows, code school based in Seattle Husband, Dad & Husky Startup Week Lead Organizer Nov 14-18 – 150 FREE events
- 5. Copyright DKParker, LLC 2016 Three Methods + Two Models Marketing Methods – how you get customers to FIND you Sales Methods – how you SELL your product. Pricing Methods – how to price your product Business Models – are the way to monetize, including key metrics Financial Models – include revenue and expenses. Used for both forecast and actual results
- 6. Copyright DKParker, LLC 2016 Marketing & Sales Terms The following apply regardless of business models Cost of Customer Acquisition (CAC) Lifetime value of Customer (LTV) 12 month calculation (36 for mature businesses) LTV:CAC Ratio >5X Time to close sale How does this change with product/market maturity? Churn/Retention
- 7. Copyright DKParker, LLC 2016 Marketing Channels and Metrics What are your core assumptions for marketing? Track all Marketing by channel and $$ spend Paid, SEO, etc. Cost to create leads (traffic) Cost (effort) and % convert to prospects Cost (effort) and % convert to customers
- 9. Copyright DKParker, LLC 2016 Sales Methods Web Direct – Advertising and conversion based sales, sales support?, requires customers to search and find Direct – internal sales people (Inside or Outside), # of deals/Month, salary + commissions Distribution/Channel Sales – Indirect or external, <# of deals/Month, no Salary, just commission <Mindshare. Fulfill demand, don’t create demand White Label Sales/Licensing – infrastructure or license sales, long sales cycle, few but targeted customers Retail – Product on shelves - N/A
- 10. Copyright DKParker, LLC 2016 Known Market Unknown Market Low Price Point High Price Point Known Search Words Unknown Search words Web Direct ✔ ✔ ✔ Direct ✔ ✔ ✔ ✔ ✔ Indirect ✔ ✔ ✔ Licensing ✔ ✔ Retail
- 11. Copyright DKParker, LLC 2016 Pricing Methods What do you need to charge to cover: Cost of build Cost of Sale Profit Expectation = Cash flow Value based pricing – don’t start too low One time or recurring? Test, test, test
- 12. Copyright DKParker, LLC 2016 Business Models – Pick ONE!
- 14. Copyright DKParker, LLC 2016 1. Subscription Example: Salesforce , Box, Spotify Use: B2C & B2B Key Metrics Average Revenue Per User (ARPU) Conversion ratio – e.g. trial to purchase Churn Challenges: MVP won’t be enough to be Kick Ass Product Notes: Highest multiple, forecastable revenue
- 15. Copyright DKParker, LLC 2016 2. Commerce Example: Amazon, AmazonSupply Use: B2C & B2B Key Metrics: Wholesale or cost of goods sold Average Margin % Average Basket Commerce – Physical Goods- Wholesale, cost of goods, retail, average margin, physical good Notes: Can mature into marketplace
- 16. Copyright DKParker, LLC 2016 3. Productize a Service Your offerings is generally complex and requires services to deploy Gross margin on Services >35% Product development comes with services Use: B2C & B2B Examples: Moz, service company convert to tools. Challenges – difficult to make the transition away from services
- 17. Copyright DKParker, LLC 2016 4. Transaction Fees/Rental Example: 99Designs, KickStarter, Elance, Chugg Use: B2C & B2B Key Metrics Average transaction revenue Fee % per transaction Number of transactions Challenges: Margins are small (15%), need efficiency Notes: Don’t start too low
- 18. Copyright DKParker, LLC 2016 5. Lead Generation Example: Mint.com, AllStarDirectories, NetQuote Use: B2C & B2B Key Metrics Cost to generate traffic % conversion of form data Price per lead Challenges: Highly competitive, barrier of entry is low Notes: Conversion rates average 0.06%
- 19. Copyright DKParker, LLC 2016 6. Gaming Example: King.com/Candy Crush Use: B2C Only Key Metrics: Downloads % play Average in app purchase Challenges – tends to be “hit driven business” Notes: use in first 21 days is a predictor of success
- 20. Copyright DKParker, LLC 2016 7. Marketplaces Example: eBay, Alibaba Use: B2C & B2B Key Metrics Average Transaction Amount Number of Monthly Transactions Commission % Challenges: two sided market places require you start with one side, value to seller & Product market fit (x2) Notes: critical mass or marketplace required
- 21. Copyright DKParker, LLC 2016 8. Advertising/Search Example: Google, Facebook Use: B2B – advertisers pay, users are free Key Metrics Traffic Click Avg. revenue/click Challenges – Scale, need >1M uniques/month to consider the option
- 22. Copyright DKParker, LLC 2016 9. New Media Example: SnapChat, WhatsApp Use: B2C only Key Metrics: K-Factor (Viral Co-efficient) Network effect of inviting others to join Challenges – K-Factor is hard. Little revenue until scale Notes: Everyone wants to! Not happening in B2B
- 23. Copyright DKParker, LLC 2016 10. Combinations Combinations business models happen for two reasons You don’t know which model is right At scale you can expand revenue sources Examples: Hardware sensors + software services to create data analytics Challenges – most require scale or at least traction
- 24. Copyright DKParker, LLC 2016 Three that could cost you everything!
- 25. Copyright DKParker, LLC 2016 Three at Scale – Not Launch 1. Multi-sided Marketplaces – Etsy – create products and customers 2. Big Data – PatientsLikeMe is emerging, but requires massive data in advance = massive cash 3. Panels – Toluna, precise groups of customer service research
- 27. Copyright DKParker, LLC 2016 Financial Models Components Assumptions – from above, converts into #s on forecast Marketing spend, conversion Sales – who and how much Pricing Product timing, services required Expenses Staff Ops Build in “Sensitivity Analysis” vs hard coding, plan for time & Product changes
- 28. Copyright DKParker, LLC 2016 Example: Subscription Model What can you know or at least estimate? Price per/sub/month Marketing spend to estimate Customer Acquisition Cost – CAC By channel, e.g. $1000 buys you how much traffic Converts to trials Converts to paid Churn % Time to close the sale
- 29. Copyright DKParker, LLC 2016 Example: Subscription Model 2 Expenses Timing and budget for staff Department level budget (Cost of Sales vs. G&A) Fully burdened expenses (taxes, benefits) Never a % of revenue Charts Simplified for your presentation Used as Forecast and Actual – living document When you showed it four months ago investor will ask
- 30. Copyright DKParker, LLC 2016 Six Financial Model Fails 1. Not knowing your key metrics 2. Top down vs. bottom up revenue 3. Not using accounting terms 4. $100M in 3-5 years (knowing anything in 3-5 years is a guess) 5. Not scaling expenses with revenues 6. Not connecting financial plan to story narrative
- 31. Copyright DKParker, LLC 2016 A good financial model shows you were thoughtful and disciplined – but it’s still WRONG
- 32. Copyright DKParker, LLC 2016 Want a copy of the Subscription Model? Go to www.VentureReadyModels.com
- 33. Copyright DKParker, LLC 2016 Q&A – Your Models