Freemium Business Model

Customize a ready-made financial model for your Freemium Web Services Business

entrepreneurfinancefinancial modelfreemiummodelingraising capitalstartupsuser acquisitionuser activationventure capital

Description
(This content comes from Giff Constable's blog www.giffconstable.com)

Mark Suster of GRP wrote a post on the importance of having financial models, in an effort to support entrepreneurs when using Excel. I completely agree with Suster, and for that reason I am posting this business model Excel template for startups to download and customize.

I remember the one time I told myself "I dont need a financial model, it's just made up of bulshit"... I still regret that day years later, and swear to never ever make the same mistake again.

On to the model:
o This model provides a layout for modeling out a freemium web services business.
o It utilizes a "cohort" approach and allows you to model churn and change conversion behavior of your monthly cohorts.
o The model has a concept built in of "Active users", this means people that use your site for at least once a month (and that actually use your system)
o Has a simple user acquisition/growth approach that can be swapped into a more complicated user growth model just on the top.
This accounts for virality or marketing spend -- I only encourage you to model user growth from the bottom up.
o If you want to model out microtransactions or goods, a good suggestion would be to break out different user types and crosschecking against industry ARPU and ARPPY rates.


Feel free to make the model your own! -- I hope it is helpful!
If you spot a bug, let me know through a review below!

(Description source: Giff Constable, www.giffconstable.com, 5th November 2009)

This business tool includes
1 Excel Model

Giff Constable offers you this business tool for free!

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Further information

Apart from the obvious fact that you need Investors to understand you, below are a few of the reasons for why you need to have a financial model:

o Further clarifies your goals and assumptions.
o Breaks down your business' pressure points for better understanding.
o Enforces you to truly captivate your scaling cost structures
o Pushes you to look deeper into your cash needs and realize your milestones
o Allows you to have a constantly updated document in which you can track, structure and bring focus to your business analytics- Think of it as a product, it is a continual process.
o It actually helps all your team to understand what it is your firm is aiming at, and helps you set those expectations when something needs to be done and how long it will take to do so. It might take a few guesses, but it is vital that your team is on the same mindset when it comes to goals, assumptions and time management!
o This may not be needed, but you come across it, it provides a document where everyone can sign off on, to reduce potential selective blaming when things don't go so well.

Source: Giff Constable, www.giffconstable.com, 5th November 2009

I suggest a few things that you may need to search for or guess if you are really at a very early stage:

o Further look into comparables on user growth rates, marketing spend and churn
o customer acquisition / sales methods and costs
o price points and customer conversion rates that depends on your business model and category.
o payment processing rates and fraud/chargeback levels
o contractor and salary rates (both “startup discounted” and market) for your hires
o customer support method and costs , and how it scales with customers
o true travel costs (often underestimated)
o expected concurrency rates and visit frequency
o download size per visit
o architecture scaling: owned vs managed hosting vs cloud and how servers and costs scale

Focus your efforts on a model that feels ambitious but doable, but don’t forget to create a conservative “oh shit” version, and if it has to be a sales document, you may need a “$best case ka-ching$” version as well.

Here are a few key things you want to examine out of your model:

o are there any variables where a slight variation makes a massive difference?
o are your fundraising milestones well matched to your product and financial milestones?
o when do you hit monthly breakeven?
o how many users do you need to have acquired / kept to get to breakeven?
o how much money have you spent in total to get to breakeven?
o are you adequately scaling costs to meet the demands of a large user base in later years?
o can you believe any of it! You can make a model spit out whatever numbers you want, so cross-check, second-guess, and don’t buy too deep into your own assumptions and guesses!

Source: Giff Constable, www.giffconstable.com, 5th November 2009

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