Building a basic revenue model (financial model) complete with an example.

1. Creation of a Basic Revenue
Model
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2. Why a revenue model?
 When building a model for a startup or other
company with limited history, it’s usually advisable
to start with a revenue model.
 A revenue model is a piece of a larger financial model
which, as the name might suggest, presents how
revenue will be obtained.

3. Step 1 – Determine Appropriate Units
 The example case is a company which sells razors
and razor blades
 The unit is a single razor as opposed to a case of
razors.
 Razor blades are assumed to be sold in a package of
blades must be purchased each month,
 Razor blade sales will be driven by the number of
current and prior customers.

4. Step 1 – Determine Appropriate Units

5. Step 2 – Understand How Sales Will Occur
Through the Year
 In order to add a little complexity to our model:
 We assume that 25% of our razor sales come in December
(holiday gifts)
 The rest of the razor sales occur equally throughout the year.
 Our razor blades will be sold to existing customers only, since
new customers will receive a one-month supply with the initial
razor purchase.

6. Step 2 – Understand Per Unit Revenue

7. Step 3 – Understand Internal and External
Drives
 We’ll assume that our annual sales are 10,000 units
of razors
 1% of our customers will “churn” or, in other
words, that we will lose 1% of our razor blade
customers each month
 This is a new business, so the company has no sales
in month 1.

8. Step 3 – Understand Internal and External
Drives

9. Step 3 – Understand Internal and External
Drivers
 We’ll assume that our annual sales are 10,000 units
of razors
 1% of our customers will “churn” or, in other
words, that we will lose 1% of our razor blade
customers each month
 This is a new business, so the company has no
customers at the beginning of month 1.
 The result is a customer roll forward

10. Step 3 – Understand Internal and External
Drivers

11. Step 4 – Calculate Monthly Revenue
 Calculate revenue for our “razor” and “razor blade”
product lines.
 The razor revenue is just the number of razor sales in
a given month times our $5 price.
 The razor blade revenue is calculated as the
(beginning balance of customers less churn) times
the razor blade price per unit.

12. Step 4 – Calculate Monthly Revenue

13. Thank You
 For further information, make sure to check out
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