Video: Examples of revenue modelsCopy

https://youtu.be/TOScFhTMAwM

Exercise:

Using an Excel sheet, create your revenue and cost model

Transcript

The really important work again happens in the assumptions. If you get the assumptions right or close, then that will help you really drive a good set of numbers that you can then just do math on. Let us look at a couple of other examples. This is a product I wanted to do, so the salon platform, as a service-based business, it’s got, kind of, a different kind of different feel to it. This is a pure product company, a company called simple mills another participant here at the university of Chicago. They make a very high quality natural food, so this is you know one of their early products chocolate frosting. It is actually one of my favorites. We buy this at my house. When you have a product, you’re talking about units sold and what channel you’re selling them through. If you’re selling them through, you know, e-commerce meaning through your own website are you selling them wholesale to be, you know, sold in a store by somebody else? And sort of, you know what kinds of discounts might you be offering okay?

So, we’re going to do the same thing. We’re going to look at some assumptions. So this is a little simpler because there are fewer overall assumptions that go in, but you can, kind of, see what’s going on here. So, these products have a clear retail price. This product was 7.99. Can you believe that eight dollars for a can of frosting? It’s crazy that’s, but that’s what it was, so there you go. It is fancy frosting; so that’s why it’s seven almost eight dollars so it’s eight dollars basically for a can of frosting that’s the retail price that’s going to be important that’s going to be the price that any anyone who sells us is going to charge it doesn’t mean it’s the price that I’m selling it at but it’s the retail price. The price that the store is selling it out, for example, so we’re going to have one kind of retail price so and it looks like what we’re modeling is that in the first year we’re going to stick with that 79 7.99 price. And then we’re going to go up a little bit in year two so remember keep that 8.79 retail price in mind so what we know is that when we distribute through a store (because we know this from the work, you know from it from our assumptions) we’re going to take a 50 haircut meaning, we are only going to earn four dollars.

We are going to sell the can of frosting to, you know, the grocery store at four dollar price because that’s what they expect in order for them to sell the product. They are going to need to buy a whole sale, so this is kind of our wholesale price and we’ll see this come up again and this is important. We are going to sell them the store this for four dollars. We know how many stores we’re adding. You might build in attrition if you’re selling a product. Typically, there’s less attrition when you’re working with stores as the stores won’t necessarily kick you out but you might build an attrition like we did in the other model. I think depends a little bit on how likely it is that, you know, that any particular customer might choose to not sell your product.

So, it’s something important to keep in mind that we’re not modeling attrition here because we’re not we’re assuming that most stores are not going to kick us out. So, then it’s more simple math. In this quarter, in the third quarter her,e we added eight new stores and we had um eight before so we know we had eight negative 16. like that’s pretty simple math. The number of outlets where our product is being sold and number of people whether it’s people selling your product or stores that are distributing product it’s going to be a key driver here. The other key drivers give me that price point at which we sell. The other thing that’s important in this particular model is also knowing the number of units per store. Interestingly, you can see total units sold per store per month. It is an interesting way of thinking about this, you know, we said we started out with 800, and here we’re having a sort of modest growth rate kind of by quarter so something to think about. Meaning that as our product gets more popular the total number of units we think are going to then you know be sold per store is going to go up a little bit each quarter.

It might also be that in any the stores you sell to have more of a limited number, like hey can only have 800 units in that store, and so then it’s going to be more constant so you need to think about whether it’s reflux fluctuation in that number okay. So, we know that by q4 you know we’re selling at four dollars still and we’re going to sell 1065 units per store per month you have to pay attention to that because you’re going to have to multiply this by three because there’s three months and a quarter. We are going to have 24 stores and some of our product is going to have a discount with it. So, some units are going to have a dollar off so if we take four dollars times the number of stores 24 stores number of units 1065 times three because we’ve been three months and then we’re going to take off a dollar for some of those items that leave the store or leave the unit. I’m going to take off basically take off 213 because we had that number of units had a dollar coupon we were left with 96 000 almost 10 000 of revenue right?

You see that here so total units sold without the promo and total units so with the promo with, you know, that’s the minus the one dollar gives you that revenue number okay? That is how the math works; and here we’re kind of mixing building our assumptions with the math. I think you can also do a spreadsheet that way the trick to keep in mind is depends on how complicated your assumptions are. I think if your assumptions are really complicated it’s better to have a separate assumptions page these models the product models tend to be a little simpler because they’re a little more streamlined. The important thing to keep in mind though with a product is the distribution channel so there is where you’re going to have multiple probably multiple either sheets or multiple pages of assumptions.

Let’s look at what I mean by that. This page is about distributing through a store and typically when you distribute, this is a grocery store, but really any store they are going to want to buy your product at wholesale and they are going to only be willing to pay some percentage of the retail price. In this case, they’re the typical margin for a store is that 50 the distributor margin they’re going to want to have a 50 discount on the retail price and that’s what they’re going to pay you. But, margins are different depending on the distribution channel. So, here’s another example the retail price you see stays the same it’s still that eight dollars right 7.99 for that can of frosting but if you sell on amazon they’re only going to take a 35 margin so instead of only getting four dollars you’re getting five dollars and nineteen cents or sixty five percent of that eight dollars, right? So, you’re making a little bit more by selling through amazon but it’s then the same math so the number of units that you’re selling via amazon per month.

Now, remember these are quarters so you got to take that by three times three if you’re selling if you’re selling 864 units at and nineteen 5.19. or here, we got five dollars and fifty two cents in q2 and we’re selling twelve hundred forty four units we’re going to make six thousand eight hundred sixty six dollars to take five fifty two times 1,244 times 3 because that’s the quarter, this is per month, to get our amazon revenue of 6866. Similarly, your units sold directly like if you have an e-commerce website consumers are coming directly to your website and buying, where you’re going to get 166 units sold and that’s you’re going to get the full price. So, you’re going to take 161 units sold at 8.49 cents per unit because they’re on your own website.

You get to have the whole amount, right, you get to keep the whole revenue amount of that retail price. You get 1 364. Right? So, oftentimes when I’m going through this example people are like why would you ever sell on a store if they’re going to take 50 of the retail price? Why on earth would I not just sell right on my own website, and, you know, there are certain companies that have made that work and here in the US, there are especially shoe companies. So, these all birds or Rothys are two examples that have really been able to pull that off but you can see if you look back at these numbers. Let’s just go back one 239 thousand dollars is coming from revenue that we get through stores so even though we are only capturing half of the retail price in that q2. We’re making 239,000 in revenue via stores whereas when we sell from amazon we’re only in that same q2 we’re only making 6 000 from amazon and 1 367 from our own website why is that because these assumptions are pretty solid.

It’s very hard to get consumers to go to your own website or even to buy frosting from amazon stores as a distribution model if you’re selling a product. They have a built-in infrastructure, you know? They have built-in customers and all customers have to do is walk in and buy your product and you benefit from the store that’s why they are only willing to pay so much for your product. You’re only willing to pay half say in terms of wholesale but there are companies who’ve been able to make it work selling directly via their website. I’ve also seen a lot of baby and healthcare products that are able to do that but what that means is you really have to spend a lot more on marketing and you really have to drive web uh traffic to your website. You have to have a terrific website that really is great for customers and that’s really going to compel customers, and you have to market to customers to get them to come to your website.  

Typically, those companies only sell on their website and they build a lot of buzz about their product and they get customers to come directly to their website. So, it’s really just about the strategy, but the strategy has to fit the model. You can’t say we’re going to sell directly on our website; we’re going to make all this money because we don’t want to pay, you know, that we don’t want to discount our product for distributors and then not invest in like some really heavy marketing. So, with this, the strategy and the business model really have to go together that’s kind of an important thing to keep in mind I’m not going to spend a lot of time on this.

This is another business model we sometimes see, um, this is an app or you know could be a website but it’s got some kind of advertiser um driven revenue and if you are interested and you can kind of pause the video and look more deeply at this. But, basically, the main assumption here is some dollars you get some you know the amount of money per thousand impressions that’s like a typical way that these kinds of things are charged. The thing to keep in mind is this is all about active users and average impressions and you have to have you can see here in q2 or I guess we’ll do q3 of the second year this company has more than three million total impressions per quarter this is not actually per month this is per quarter and they divide that by a thousand that’s the thousand you know per thousand impressions that we see up here. They have 12 advertisers; this is not an atypical cost per revenue per thousand questions a dollar forty even with three million users active daily users; they’re still only making about five thousand dollars of revenue.

So, it’s not a huge money-making unless you’re going to have like you know unless you’re going to be Facebook and have like billions of people on your website so just something to keep in mind but this is how you would map sort of advertising as part of an app or some other website.