10 business models that can make you $$ and 3 that can kill you
TRANSCRIPT
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10 Business Models (+3 that can fail)
Dave Parker
@DaveParkerSEA
www.dkparker.com/blog
http://AddSlideShare
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Agenda
About Dave Methods – Marketing, Sales
& Pricing 10 Business Models 3 that can fail Financial Models Q&A – Your ideas
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About Dave
5X founder, Board Member and (former) VC, SVP Programs at UP Global (Startup Weekend + Startup America)
CEO – Code Fellows, code school based in Seattle Husband, Dad & Husky Startup Week Lead Organizer Nov 14-18 – 150 FREE
events
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Context Matters
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Three Methods + Two Models Marketing Methods – how you get customers to FIND
you Sales Methods – how you SELL your product. Pricing Methods – how to price your product Business Models – are the way to monetize, including
key metrics Financial Models – include revenue and expenses. Used
for both forecast and actual results
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Marketing & Sales Terms
The following apply regardless of business models Cost of Customer Acquisition (CAC) Lifetime value of Customer (LTV)
12 month calculation (36 for mature businesses)
LTV:CAC Ratio >5X Time to close sale
How does this change with product/market maturity?
Churn/Retention
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Marketing Channels and Metrics
What are your core assumptions for marketing? Track all Marketing by channel and $$ spend
Paid, SEO, etc.
Cost to create leads (traffic) Cost (effort) and % convert to prospects Cost (effort) and % convert to customers
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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
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Known Market
Unknown Market
Low Price Point
High PricePoint
Known Search Words
Unknown Search words
Web Direct ✔ ✔ ✔
Direct ✔ ✔ ✔ ✔ ✔Indirect ✔ ✔ ✔Licensing ✔ ✔Retail
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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
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Business Models – Pick ONE!
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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
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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
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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
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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
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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%
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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
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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
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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
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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
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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
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Three that could cost you everything!
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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
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Financial Models
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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
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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
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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
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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
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A good financial model shows you were thoughtful and disciplined – but it’s still WRONG
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Want a copy of the Subscription Model? Go to www.VentureReadyModels.com
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Q&A – Your Models
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[email protected] www.dkparker.com @DaveParkerSEA