Over the past years, I've talked with hundreds of entrepreneurs about their business ideas, and go-to-market strategies. Many entrepreneurs struggle with the business they want to bring online, simply by not thinking through the model which drives the profitability of their businesses.
This is both critically important, and highly overlooked; so let's go over some notes around this.
Reference numbers, and relationships in business modelling:
B2B reference for High Probability Opportunities
1. Deals < $2,000 in ACV should close on average within 14 days.
2. Deals < $5,000 in ACV should close on average within 30 days.
3. Deals < $25,000 in ACV should close on average within 90 days.
4. Deals < $100,000 in ACV should close on average within 90-180 days depending on # of stakeholders and gates.
5. Deals > $100,000 in ACV will take on average 3–9 months to close. [source]
B2C / D2C:
A typical conversion funnel is ~10-30% registration rate, 5-10% subscription / purchase rate, these are linearly dependent, meaning that the probability for a random visitor to become a customer is around 1%.
The biggest factors in whether the user will pay are:
- whether the offering is directly relevant to the browser intent;
- what the level of urgency is on solving the problem
- how quickly do they expect the thing to be solved once purchase is made
- how patient the target market is related to the offering
- what the value difference is between proposed solution, and next-best-substitue
Conversion optimization can help, but only +-2-5%; the most dramatic impacts are in the conceptual value proposition, and it's framing & value communication.
Costumer acqusition cost (CAC) for a web-based app = Cost of click / (P(register) X P(subscribe))
Eg if you're acquiring -via eg adwords- users for $0.1, with a registration conversion rate of 10%, and a subscription rate of 10%, your CAC is $10.
But the funnel impacts that, for example:
Costumer acqusition cost for an iOS app = Cost(click to appstore) / ( P(app install) X P(signup) X P(subscribe) ) <- and that first app install term adds a ~5-10x multiplier for customer acqusition costs which does not lead to any corresponding increase in either subscription conversion rate, or length.
For this reason, there is generally very little business sense in app-based customer acqusition strategies (ie apps can help in direct access, and conceptually for doing the things that are on-the-go, but not for customer acqusition directly)
Lifetime value of customer should be < 3x Cost of customer acqusition (1 to pay back acqusition cost; 1 to pay marginal costs; 1 to make a profit) (source: Cost of Customer Acquisition is the Startup Killer)
Estimating volumes: how many people will you be able to acquire? This puts an upper limit to the business' scalability. TAM -Total Addressible Market- have 2 parts:
* total market: you can use eg Fermi estimations to get a sense of how many people / businesses there are, in total, who will be interested in your offering
* Addressible market: you have to look at the channels through which you're planning to acquire them for volumes, to see of the total market, whom / how many can you efficiently address.
In B2C, good reference numbers can be pulled from Google's Adwords volume estimation tool -plug in the keywords people would use to get to your offering (this is generally the Job To Be Done, or problem to be addressed), and see how many people search for those terms; this gives you a rough estimate for the addressible market -which will determine your rate of acqusition, and thereby, profitability.
Above the scalably addressible markets, you need to do demand generation -either growing the category pie, or reaching out via offline / non-scalable means, which as a rough rule of thumb, is ~10x in CAC costs.
Estimating rates: at what rate will you be able to acquire customers?
take the rate at which you're acquiring users / free trials
- in B2B, this is number of phone calls / conversations you have X rate of registering / trialing. If your hypothesis involves short sales cycles, this can be very quickly tested: can you go to an LOI based on a cold phone call? If it requires refereal, can you acquire those refereals at scale? At what rate?
- In B2C look at the scalable customer acqusition channels, and specifically rates of relevant traffic. Eg for SEO, this will be relevant keyword frequency; for ads, this will be volumes for relevant sites
- In either case, look into overlooked marketing channels: are there strategies the competition is not executing, but which has high volume, highly qualified, potential customers?
Building a revenue projection:
Given the above, you can estimate what revenue your business will generate prior to writing a single line of code: take the rate of acqusition, plug the volume into the estimated funnel. Output is rough first estimation on revenues you're making under given time.