10 business models that can make you $$ and 3 that can kill you

Copyright DKParker, LLC 2016

10 Business Models (+3 that can fail)

Dave Parker

@DaveParkerSEA

www.dkparker.com/blog

Dave@dkparker.com

http://AddSlideShare

Agenda

About Dave Methods – Marketing, Sales

& Pricing 10 Business Models 3 that can fail Financial Models Q&A – Your ideas

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

Context Matters

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

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

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

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

Known Market

Unknown Market

Low Price Point

High PricePoint

Known Search Words

Unknown Search words

Web Direct ✔ ✔ ✔

Direct ✔ ✔ ✔ ✔ ✔Indirect ✔ ✔ ✔Licensing ✔ ✔Retail

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

Business Models – Pick ONE!

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

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

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

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

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%

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

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

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

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

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

Three that could cost you everything!

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

Financial Models

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

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

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

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

A good financial model shows you were thoughtful and disciplined – but it’s still WRONG

Want a copy of the Subscription Model? Go to www.VentureReadyModels.com

Q&A – Your Models

dave@dkparker.com www.dkparker.com @DaveParkerSEA

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