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What factors should comprise a startup's "economic" model?

FD amigos and amigas -

I'd love your thoughts on building an effective economic model (i.e. financial model that helps baseline costs and inform pricing) for SaaS/cloud platform product. Specifically, I'm looking to totally re-build my current economic model or adopt a better one altogether. What components should I definitely incorporate into an economic model to ensure key and material costs are captured and to ensure we think through all key aspects of pricing, growth, costs, etc.

Here's a quick braindump of items I want to be sure I incorporate into the new model - let me know your thoughts. Elements: Ramp rate, conversion rate, customer acquisition cost, conversion to trial, conversion from trial to paid subscription, user growth rates, avg cost to serve a customer, hosting service costs, etc. Let me know your thoughts!

7 Replies

Dhruv Vasishtha
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Dhruv Vasishtha Entrepreneur
Product Management at Medidata Solutions
If you have a decent sized sales team use a sales force based model (esp. since you're b2b). You assume revenue is driven by the size of your sales team and from there you can estimate leads per FTE, conversation rate from lead to trial/convo/demo whatever the beginning of your sales funnel is, and finally subscription. Depending on your marketing strategy you could instead / also incorporate a user growth model based on historical data but I'm not sure what the nature of your customer acquisition is exactly. It sounds like you're doing fine on costs, FTE salary, customer acquisition cost at each point in your funnel (this would come from the number of customers you estimate in your revenues), hosting cost, etc.
David Crooke
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David Crooke Entrepreneur
Serial entrepreneur and CTO
I don't know your business, but at Convio the SaaS product was complex with multiple modules, and huge range of customers from a local museum to American Cancer Society (6,000 walkathons a year, 8m users) I was decidedly suspicious of "average cost" and, as the manager of IT, I built a comprehensive bottom up model of the costs of service for each module based on volume, pulling real metrics from the SaaS platform, and handed it off to the CFO. Our VP Services did likewise. We found a very wide range of gross margins, from 99% to -500%, and it really helped us price to be competitve and profitable. It's important to continually revisit and be realistic about growth projections - I was once wrong-footed when a junior sales person booked an obscure political campaign, which turned into DeanForAmerica.com and took off virally, on the flip side we had a VP Sales whose forecasting was wholly unrealistic, and it was quite disruptive before we fired him. It sounds like you have a good handle on your sales funnel. Cheers Dave
DS Benbow
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DS Benbow Entrepreneur • Advisor
(1) Product/Services Builder, (2) Innovative Engagement/Growth Strategies, (3)Team Focus
I found the following link to be of value, with a view to your query (there's even a link to some spreadsheet templates that may accelerate your process):


It also sounds like you're looking for a robust P&L template to capture COGS, and non tech related expenses. There are a plethora of templates out there; here's a link to one:


good luck to you!
DS


Chris Hundley
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Chris Hundley Entrepreneur
Entrepreneur in Residence at Madrona Venture Group
Not quite ready for prime time yet - but I'm working on a little side project in this area after getting frustrated with spreadsheet versioning hell while hacking through dozens of startup financial models (also wanted to learn AngularJS).

Would love feedback and suggestions from folks who've done this a million times: http://funded.io

Be kind, I started on this less than a week ago, tons left to finish ;)


Chris Hundley
0
0
Chris Hundley Entrepreneur
Entrepreneur in Residence at Madrona Venture Group
By the way, it's only tested in the latest Chrome. I noticed someone already tried accessing the application with IE 6 (seriously... IE6?).

Monica Borrell
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0
Monica Borrell Entrepreneur
CEO and Founder at Cardsmith
I've created a big harry spreadsheet that has the following components which drive a 60 month financial projection with bookings, revenue, cash and investment needs.

it is for a cloud based SaaS product that is low-touch sales.
here is a list of inputs. feel free to message me and we can talk more if a discussion would prove useful.

revenue side:
pricing at pay by month, by quarter and by year.
mix assumptions on sales (free vs. pay by month,quarter,year)
attrition % assumptions by product and month - these drive rebuy units projection
unit sales -- new and rebuy
installed base
bookings $
revenue $

cost side:
salary, benefits and other employee related cost assumptions for each major component
customer service headcount assumptions like how many support calls we envision for each 1000 users in installed base.
headcount & costs for network operations, r&d, customer service, marketing, sales, management and admin.

I decided to allow several assumptions to vary by month so I could decrease pricing over time, or decrease the attrition % overtime as our product improves. this make the model more complex, but I think is necessary.





Stan SF
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0
Stan SF Entrepreneur
Manager
Thanks all for your input here. Very, very helpful!!!
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