Table of Contents

1. How Startups Make Money
2. Pricing and Metrics That Matter
3. Go-To-Market
4. Traction and Product/Market Fit

How Startups Make Money

Do you know?

• Cost to build
• Cost to sell
• Price
• Profit

How NOT to make money?

• Small transaction values
• Small percentages
• Not being able to capture value
• Lumpy sales cycles
• Long sales cycles
• Pricing too low could kill your idea before you start

Marketing - Finding Customers

Hire someone who is culturally fit.

• Messaging/Value proposition
  • Does it resonate with the target customer?
  • Is it repeatable?
  • Don’t make your product the hero of the story - the customers are.
  • Let them remember your story, not that you are smart.
• Strategy
  • Outbound first
  • Inbound second

Key Metric Terms

• CAC (Customer Acquisition Cost)
• LTV (Customer lifetime value):
  • How much is the customer worth over time.
  • A prediction of the net profit attributed to the entire future relationship with a customer
  • LTV to CAC ratio: 10 to 1 (B2B) or 5 to 1 (B2C)
• ARPU (Average Revenue Per User): the total revenue divided by the number of subscribers. Used for subscription services.
• Churn vs. Retention
• Time to close
• Customer engagement: how long do the users use?
• Time on site

Marketing Channels

• Paid search
• Organic search
• Word of mouth
• Sales calls
• Public relations
• Affiliate
• Email marketing
• Social

MQL & SQL

• MQL (Marketing Qualified Lead)
  • Define qualified vs list
  • Suspects
  • Prospects
  • Qualified suspects
• SQL (Sales Qualified Lead)
  • Hand off to sales
  • Identify steps to close
  • Number of calls

Time to Close

• Lead attribution
• Source time
• Compressing or expanding
• Trend by source

Tracking

• Data allows you to know where to double down and where to hold back
• Conversion ratios

Sales - capturing value creation

• How will they buy?
  • Web Direct: place the order to buy on the web
  • Direct: outbound sales, inside/outside
  • Indirect/Channel: fulfills demand, doesn’t generate
  • Retail

Business Development

• Strategic relationships
• Who has the list you want
• How do you get the partnership
• Strategy
  • Who should you get as a partner: how will you build the relationship?
  • What channels
• Tactics
  • Messaging/Value Proposition
• Tools
  • CRM

How to monetize your startup: Revenue Models

• Business Models: abstract framework of creating, delivering, and capturing value
• Revenue Models (part of business model) is the framework of revenue, pricing, who pays
• Models Lean toward Tech and Product

1. Fee for Service

• Example: Consulting Services company
• Use: B2B & B2C
• Key Metrics
  • Project Revenue
  • Cost of delivering (usually time)
  • Gross Margin
• Services are hard to scale because they require people to deliver including restaurant, contractors, etc.
• Services include markup on cost of goods sold

2. Commerce

• Example: Amazon, AmazonSupply
• Use: B2C & B2B
• Key Metrics:
  • Wholesale or cost of goods sold
  • Average Margin %
  • Average Basket
• Commerce: physical gooods - wholesale, cost of goods, retail, average margin, physical good
• Notes: can mature into marketplace

3. 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

4. Metered service

• Example: AWS, Splunk, Azure
• Use: Favors 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

5. 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

6. Productize a Service

• Your offerings are 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

7. 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

8. Marketplaces

• Example: eBay, Alibaba
• Use: B2C & B2B
• Key Metrics
  • Average Transaction Amount
  • Number of Monthly Transactions
  • Commission %
• Challenges: two sided market places require you to start with one side, value to seller & product market fit (x2)
• Notes: critical mass or marketplace required

9. Lead Generation

10. Gaming

11. Advertising/Search

12. New Media

13. Big Data

14. Licensing

Pricing and Metrics That Matter

Pricing

Your price will be wrong! Increase it every year and grandfather early customers for a period of time

• Art or science
  • Benchmarks: Comparable products
  • Don’t start too low
  • Cost base vs. Value based
    • What is the alternate for the “Job to be Done”?
  • Remember Freemium is a marketing mechanic, not a price
• Product Pricing
  • First Product
    • Staged pricing - up or down over time
  • Second Product
    • Staged pricing - up or down over time
    • Launch timeline based on product road map
  • Services?
    • Could it improve your sales cycle
• Pricing Plan 30/60/90
  • Rationalize your current price
  • Can you move it up
  • Can you bundle with other offers/services?
  • Schedule quarterly pricing committee

Metrics that Matter

• What to track - best practices
  • Marketing metrics - “Marketing Motion”
    • Ad Spend
    • Traffic
    • Marketing Qualified Lead (MQLs)
  • Sales metrics - “Sales Motion”
    • Outbound/Inbound
    • MQL to SQL conversion
  • Business Development - partnerships What’s in it for them?
  • Pricing

Go-to-market

• Templates
  • Four Templates
    • Marketplace
    • Subscription
    • Transaction Fee (works for commerce)
• Financial Model Heuristics
  • $0 - $40 is likely OK
  • Start with assumptions
    • Product
    • Services
    • Release timing
  • Scale revenue first
    • Customer count and timing
  • Keep expenses in line as you grow

Traction and Product/Market Fit

Product Market Fit

Two epochs of every startup

• Pre: the only thing that matters is getting there
  • Some revenues
  • Some customers
  • some marketing
  • A lot of hypothesis
• Post: a whole new set of questions - scale, culture, and people
  • Predictable & Scalable Revenue
  • Customer profiles: Cohort analysis
  • Churn
  • Scalable marketing
  • Hypothesis + Data
• PMF Scorecard
  • How would you feel if you could no longer use (product)? Disappoined?
• Tracking Over Time
  • Churn Rate
  • Net Negative Churn
  • NPS vs. CSAT
  • Product usage level
    • Frequency
    • Recency
  • Growth rate

Traction

• Predictable/Forecastable Revenue
  • De-risking your investment
  • Predictable revenue moves you from valuations based on trailing 12 to future 12
  • Target customer
  • Sales Cycle
  • Tools trail Strategy and Tactics
• Customer Acquisition Hypothesis
  • CAC
  • LTV
  • Time to close sale: how does this change with product/market maturity?
  • Churn/Retention
  • Average Revenue/Measure (user, account, etc.)
  • Word of mouth vs. Virality