Third lecture in a workshop on business model generation and technology startups. Focuses on metrics.

1. Business Model Workshop
The Startup
Metrics
Keith McGreggor
Director of VentureLab @ ...

2. How do you know you have
product / market fit?

3. METRICS

4. Vanity
METRICS

5. Vanity
METRICS

6. innovation
Lean Startup Methodology

7. Agile Development

8. MVP
Minimum Viable Product

9. MVP
Minimum Viable Product
HIGH
LOW
FIDELITY
FIDELITY
Built to LEARN
Not to SELL

10. Moneyball!
Actionable
METRICS

11. the Pipeline
$$$

12. METRICS
AARRR

13. the Pirate Metrics
Acquisition
Activation
Retention
Referral
Revenue
13

14. acquisition activation retention revenue
referral

15. the Business Model Canvas

16. Channels
Customer Relationships
16

17. Channels

18. How does your product get
to customers?
How do you deliver value?

19. © 2012 Steve Blank

20. Physical vs Virtual Channels

21. Channels
Virtual
Products
Physical
Virtual Physical
21

22. Channels
Virtual
Products
Food
Clothing
Horses
Cars Physical
Radios
...
Virtual Physical
22

23. Channels
Insurance
Stocks & Bonds
Virtual
Shrinkwrapped
Software
...
Products
Food
Clothing
Horses
Cars Physical
Radios
...
Virtual Physical
23

24. Channels
Insurance
Stocks & Bonds
Virtual
Shrinkwrapped
Software
...
Products
Books (Amazon) Food
Movies (Netflix) Clothing
Shoes (Zappos) Horses
Consumer Cars Physical
Electronics Radios
... ...
Virtual Physical
24

25. Channels
Facebook friends Insurance
Twitter feeds Stocks & Bonds
Google searches Virtual
ETrade stocks Shrinkwrapped
... Software
...
Products
Books (Amazon) Food
Movies (Netflix) Clothing
Shoes (Zappos) Horses
Consumer Cars Physical
Electronics Radios
... ...
Virtual Physical
25

27. How Do You Want Your Product to
Get to Your Customer?
ü From You Directly
ü Through a Distributor
ü Retail Stores
ü Wholesalers
ü Bundled with other goods or services
27

28. Web
Channels
28

29. Physical
Channels
29

30. How Does Your Customer Want to
Buy Your Product from your Channel?
ü Same day
ü Delivered and installed
ü Downloaded
ü Bundled with other products
ü As a service
ü …
30

31. Types
of
Channels
Direct Indirect Licensing
– OEM
– VAR
– Reseller
– Distributor
31

32. Distribution Complexity
Global Systems
Evangelists Systems Integrators
WANs
Mainframes
Marketing Complexity
lu me Direct Sales
r Vo Minis
g he
Hi
LANs
VARs
PC Servers d ed
Desktop PCs e Ad
Retail alu
rV
Printers
ig he
Keyboards H
Web, Telesales Service
Technicians
Toner
Solution Complexity
32

33. How
Do
the
Economics
Work
in
Different
Sales
Channel?

34. How
Are
Channels
Compensated?
– Commission
– Percentage of sales price
– Discounted pre-purchase
34

35. Channel
Economics:
“Direct”
Sales
List
Your Revenue Price
End Consumer
Discounts
Cost of Goods
Profit + SG&A + R&D
(Supply Chain)
Selling: Cost of Sales, which includes salaries, advertising expenses, rent, and all
expenses and taxes directly related to producing and selling product
General: General operating expenses and taxes that are directly related to the
general operation of the company, but don't relate to the other two categories
Administration: Executive salaries and general support and all associated taxes
related to the overall administration of the company
35

36. Channel
Economics:
Resellers
List
Your Revenue Price
End Consumer
Discounts
Cost of Goods
Profit + SG&A + R&D Reseller
(Supply Chain)
36

37. Channel
Economics:
Distributors/Resellers
List
Your Revenue Price
End Consumer
EU Discounts
Distributor
Cost of Goods Profit + SG&A +
Reseller
(Supply Chain) R&D
37

38. The
Channel
as
a
Customer
– Some products are embedded in others (OEM)
– Some products are resold by others (VARs)
– Some products are distributed by others
– Who’s the customer?
38

39. Channel
Economics:
OEM
or
IP
Licensing
List
Your Revenue Price
End Consumer
EU Discounts
Distributor
Distributor
Cost of Goods
Master
(Supply Profit + SG&A + R&D Reseller
Chain)
Cost of
Goods Profit + SG&A + Reseller
(Supply R&D
Chain)
Your
Product
Becomes
Your
Customer’s
Cost
of
Goods
39

40. How
Are
Channels
MoKvated
or
Incented?
– Money! – what makes them the most?
– Training
– Marketing to the channel
– SPIF (Sales Performance Incentive Fund)
• pay the channel’s sales rep a bonus
40

41. Customer
Relationships

42. How do you Get, Keep and Grow
Customers?

44. Priming the Engine
44

45. Customer Archetypes Drive
Get/Keep/Grow
What’s their role?
How this person is evaluated / promoted /
compensated?
Who are they?
Buyer’s name
Position / title / age / sex
How do they buy?
Discretionary budget (name of budget and
amount)
What matters to them?
What motivates them? Lab Manager: Brian
Who influences them?
What do they read/who do they listen to?

46. Creating Demand
46

47. Paid Demand Creation Activities
“Paid” Media
Public Relations
Advertising
Trade Shows
Webinars
Email marketing
On-line SEM
Biz Dev

48. Free Demand Creation Activities
“Earned” Media
Publications in journals
Conference speeches/papers
Educational seminars
Public relations
Blogging / Sharable content
Social Media
Communities

49. Physical & Web Mobile Are Different
Physical
Web/Mobile

50. Physical
50

51. Customer Relationships
Physical Products – Get Customers
© 2012 Steve Blank

52. Customer Relationships
Physical Products – Get Customers
CAC = Customer Acquisition Cost

53. Sales Complexity
High Touch Field Sales
No Touch Light Touch
Freemium Inside Field Sales
Self-Ser vice Inside Sales
Sales with SE’s
vs
$0- $50 – $1,000 - $3,000 - $25,000 – $75,000 –
$10 $200 $2,000 $8,000 $75,000 $200,000
Customer Acquisition Cost

54. Customer Relationships
Physical Products – Keep Customers

55. Customer Relationships
Physical Products – Keep Customers
Attrition/Churn

56. Customer Relationships
Physical Products – Grow Customers

57. Customer Relationships
Physical Products – Get/Keep/Grow
LTV = Customer Lifetime Value

58. Web/Mobile
58

59. Customer Relationships
Web/Mobile Products– Get Customers

60. Web/Mobile Products– Get Customers
CPM = cost per thousand hits

61. Web/Mobile Products– Get Customers
CPA = Cost per Action

62. SaaS Products– Get Customers
Registered Visitors
Raw Leads
Qualified Leads
Inside Sales
Closed Deal
Organic
Traffic,
SEM,
Other
Paid
Sources

63. Web/Mobile Products– Keep Customers

64. Customer Relationships
Web/Mobile Products– Grow Customers

65. Customer Relationships
Web/Mobile Products Get/Keep/Grow

66. SaaS Example
66

67. Paid Demand @ $1500 / 1k Clicks = $1.50 per Visitor
Google Adwords
Organic Traffic @ $0.00 = $0.00 per Visitor
67

68. Paid Demand = $1.50 / Visitor
50%
50%
Organic Traffic = $0.00 / Visitor
68

69. Cost per Visitor = $0.75
69

70. Cost per Visitor = $0.75
Visitor to Raw Lead
3%
70

71. Cost per Visitor = $0.75
Visitor to Raw Lead
Raw to Qualified Lead
3%
20%
71

72. Cost per Visitor = $0.75
Visitor to Raw Lead
Raw to Qualified Lead
3%
20%
0.75
Qualified Lead Cost = = $125
0.03 * 0.20
72

73. Cost per Visitor = $0.75
Visitor to Raw Lead
Raw to Qualified Lead
Qualified Lead to Closed Deal
3%
20%
10%
0.75
Closed Deal Cost = = $1250
0.03 * 0.20 * 0.10
73

74. Cost per Visitor = $0.75 Marketing Cost
Sales Cost
Visitor to Raw Lead
Raw to Qualified Lead
Qualified Lead to Closed Deal
3%
20%
10%
Marketing Cost = $1250 Sales Cost = ?
74

75. Visitors
Sales Cost
1,667 Raw Leads (RLC)
Qualified Leads (QLC)
50 Closed Deals (CDC)
10 1
Sales Cost = (1,667 * RLC) + (50 * QLC) + (10*CDC)
75

76. Visitors
Sales Cost
1,667 Raw Leads $2.00
Qualified Leads $20.00
50 Closed Deals $200.00
10 1
Sales Cost = (1,667 * $2.00) + (50 * $20. 00) + (10 * $200. 00)
= $3,334 + $1,000 + $2,000 = $6,334 76

77. Customer Acquisition Cost (CAC)
3%
20%
10%
CAC = $1,250 + $6,334 = $7,584
Marketing Cost Sales Cost 77

78. Lifetime Value of a Customer (LTV)
LTV = ? 78

79. Lifetime Value of a Customer (LTV)
Average Revenue Per User (ARPU)
Total Revenue
ARPU =
Customers
79

80. Lifetime Value of a Customer (LTV)
Average Revenue Per User (ARPU)
Total Revenue Revenue - Cost
ARPU = Gross Margin =
Customers Revenue
80

81. Lifetime Value of a Customer (LTV)
LTV = ARPU * Gross Margin
not quite...
81

82. Churn
leave
churn =
stay 82

83. Lifetime Value of a Customer (LTV)
ARPU * Gross Margin
LTV = Churn
83

84. Lifetime Value of a Customer (LTV)
Suppose ARPU = $500 per month
& Gross Margin = 40%
& Churn = 1% per month
1%
$500 * 0.4
LTV = 0.01
= $20,000
84

85. CAC = $1,250 + $6,334 = $7,584
Marketing Cost Sales Cost
ARPU Gross Margin
$500 * 0.4
LTV = 0.01 = $20,000
Churn 85

86. Balancing CAC/LTV in a SaaS model
LTV > 3x CAC
Months
to
recover
CAC < 12 months
Required
for
Capital
Efficiency

87. What Investors are Looking For
A
well
balanced
business
model
MoneKzaKon
(LTV)
Cost
to
Acquire
a
Customer
(CAC)

88. The Balancing Act
• Viral effects
• Inbound Marketing
• Free or Freemium
• Open Source
• Free Trials
• Touchless conversion
• Inside Sales
• Channels
• Strategic partnerships
Cost
to
Acquire
a
Customer
MoneKzaKon
(CAC) (LifeTime
Value
LTV)
• Scalable Pricing
• Cross Sell/Upsell
• Product line expansion
• Lead Gen for 3rd parties

89. The Balancing Act
• Viral effects
• Inbound Marketing
• Free or Freemium • High Churn Rates
• Open Source • Low customer
• Free Trials satisfaction
• Touchless conversion
• Inside Sales
• Channels
• Strategic partnerships
Cost
to
Acquire
a
Customer
MoneKzaKon
(CAC) (LifeTime Value LTV)
• Field Sales • Scalable Pricing
• Cross Sell/Upsell
• Outbound Marketing • Product line expansion
• Lead Gen for 3rd parties

90. Customer Relationships
Web/Mobile Products– Keep Customers
© 2012 Steve Blank

91. Churn
• 1%
to
2.5%
churn
per
month
is
acceptable
• Higher
than
that,
you
are
filling
a
leaky
bucket
–Need
to
understand
why
you
have
low
customer
saNsfacNon
and
address
the
problem

92. the equation that matters...
infrastructure offer customers
activities relationships
partners value
segments
prop.
resources channels
financial
COST
< REVENUE

93. ... is this one: CAC << LTV
acquisition activation retention revenue
CAC LTV
referral

94. CAC << LTV
if and
COST < REVENUE
then COMPANY!