InTouch Financial Analysis
By: Raquel Van Ry, Danielle Kuelker, Zander von Neudegg, & Firaoll Umar.
Executive Summary
Now more than ever, it is challenging to connect with each other. Whether one’s family, friends or loved ones are next door or across the world, it is important to keep in touch. InTouch is an all-in-one free communication platform that enables its users to enjoy real-time experiences with their loved ones through audio/video calling, streaming and meal delivery services. InTouch users can select their desired InTouch date elements and InTouch staff will organize the logistics so users can sit back and enjoy connecting with their loved ones.
Covid-19 has changed the way people interact with one another, and the market, albeit highly competitive, has an opening for InTouch, with the potential for partnerships between InTouch, Netflix and SkipTheDishes to mutually benefit from. With a diversely skilled founding team, InTouch will be able to bootstrap the initial stages of InTouch’s development by utilizing pre-existing technology. By relying on advertisers and monthly payments from partners that will increase as more users sign up for InTouch, InTouch is projected to generate a net income of nearly $2 million by the end of its first year of operation as can be seen in the Income Statement table of InTouch’s financial statement.
Financial Model Analysis
According to InTouch’s financial projections which are based off of the best-case scenario that InTouch’s growth rate is similar to Bumble’s, the venture is certainly a feasible business opportunity. The major assumptions associated with InTouch’s development and operation can be seen in Appendix A. Prior to constructing InTouch’s pro forma financial statements, the most crucial input that was necessary to predicting InTouch’s future was its user growth rate. By researching similar business ventures like Bumble, InTouch founder’s opted to proceed with Bumble’s past growth rates as they aligned with both the global situation that InTouch would operate in as well as the projections that InTouch founders desired. If InTouch’s growth rate is not at least close to what Bumble’s is, it will likely not succeed. Additionally, in the worst-case scenario wherein Netflix and/or SkipTheDishes do not partner with InTouch, InTouch’s net profit will be significantly lower as can be seen in Appendix B. Additionally, InTouch founders each have roughly $20,000 that they would be willing to contribute to InTouch’s starting equity which would be used to cover initial costs such as marketing, utility, insurance and business license fees. Without such a generous starting equity, InTouch would not be able to gain the exposure it needs to obtain new users, nor would its revenue be enough to cover its necessary costs. One thing that was evident upon first creating InTouch’s financial statements, was the fact that if InTouch’s founders were to be paid an income in the first year of operation, the business would fail. Thus, InTouch founder’s opted to be paid starting from the second year onwards.
After considering the worst case scenario which can be seen in Appendix B, InTouch’s success in both the short and long run is contingent on successfully creating a partnership with Netflix as well as SkipTheDishes as the vast majority of InTouch’s revenue would be generated through royalties. Additionally, InTouch relies heavily on the assumption that InTouch users will desire the services InTouch provides, and will continue to use the platform and recommend it to others. According to a survey that was conducted with potential InTouch customers, over 64% of the respondents stated that they would be interested in using InTouch, and the services that InTouch offers its users is based on the overwhelming preferences of InTouch’s potential customers. These survey responses can be see in Appendix C. Within the first month of operation, InTouch is anticipated to expect a positive cash flow, but this is largely due to the initial starting equity of $80,000 as in the first year of InTouch’s operation, the business would need at least $25,709.74 to break-even. Fortunately, by the end of year 1, InTouch is projected to generate a net income of nearly $2 million as can be seen in the year 2021 of InTouch’s income statement in its financial statement. By the end of year 3, InTouch’s cash balance is projected to be roughly $18,011,283.87 and $20,405,830.29 in retained earnings. InTouch’s rapid growth and sustained profitability as can be seen in Figure 1, is largely due to its low fixed costs and overall operation costs. The initial developmental stages require the most investment in comparison to InTouch’s revenues, however, later on, the biggest expense is simply paying employee wages.
InTouch financial projections suggest that InTouch will be both profitable and promising by the end of the first month following InTouch’s launch, generating just over $10,000, and from there the company looks increasingly more promising as time goes on.
Sensitivities
One of the major risks in the financial analysis of InTouch is the fact that InTouch’s financial success is largely dependent on the company’s partnership with various vendors and companies such as Netflix and SkipTheDishes. In the event that these partners decide to opt out, InTouch will be forced to liquidate. Another risk is that InTouch will only be operated by four individuals for the first year. A software application of this magnitude could require more resources to build and therefore, more individuals to build. If InTouch limits itself to four individuals for the first year, it could result in a product with low functionality and efficiency. Should this occur however, InTouch founders are prepared to pivot their approach. Further, the growth rate of InTouch which can be see in Figure 2, samples that of the growth rate of Bumble (Curry, 2020). This could prove to be inaccurate given that Bumble has established itself as one of the leading dating platforms in the market.
InTouch’s revenue source is extremely dependent on advertisers and partnerships with Netflix and SkipTheDishes. Based on InTouch’s current financial model, InTouch is projected to generate a revenue of approximately $2,016,826.62 within its first year of operation via its partnerships with SkipTheDishes and Netflix and advertisers. It is evident that these partnerships are vital to InTouch’s success and/or failure.
Key Factors
One of the most potentially detrimental factors to the success of software application is the frequency of downtime. InTouch’s hardware, software and database downtime could incapacitate the business, resulting in major revenue loss. Additionally, InTouch collects a large magnitude of personal data, so a system outage resulting in the loss of data could result in both financial and legal implications. For instance, an outage of an unplanned data centre could change an end-user productivity and result in loss of revenues. Another key factor that contributes to the success or failure of the business, is InTouch’s partnerships with other companies such as Netflix and SkipTheDishes as mentioned earlier. A sustained partnership with various other companies could positively contribute to InTouch’s success. It is not possible to determine whether the cost of partnership with Intouch will be inelastic or elastic in the foreseeable future. This will be dependent on the demand for online communication services as InTouch’s operation progresses.
Pricing Strategy
InTouch will use a combination of a competitive pricing strategy and a value-based pricing strategy. This is due to the nature of InTouch’s revenue stream, as revenue will come from advertisers and platforms such as Netflix and SkipTheDishses and will be based on the amount of viewer activity InTouch generates.
InTouch will charge Netflix a royalty fee of 2% of Netflix’ subscription fee for each user that is signed up for InTouch, in 2021 this would come to approximately $0.30 per user user per month (Netflix, n.d.). This is subject to change as Netflix’ monthly standard subscription cost increases. Similarly, InTouch would charge SkipTheDishes a royalty fee as well which can be seen in InTouch’s financial income statement. SkipTheDishes and Netflix would also benefit through InTouch’s advertisements and increasing brand awareness, and pre-existing Netflix SkipTheDishes users would find more reason to continue subscriptions after using InTouch, thus increasing their lifetime value. Additionally, non subscribers would need to subscribe to Netflix, and since Netflix’ churn rate is 9% and their customer lifetime value is $291.25, the small fee that InTouch charges Netflix will benefit them in both the short and long run (Patel, n.d.). This reflects a value-based pricing strategy.
InTouch plants to implement a competitive pricing strategy when charging advertisers. Based on CPM rates charged by similar platforms in the social media industry, InTouch will price at $5 for every 1000 impressions of the ad on InTouch’s platform (Curry, 2020).
Key Cash Flow and Profitability Risks
Key cash flow risks for InTouch would include shifts in market conditions as well as changes in the social media industry; these are also directly related to the company’s profitability risks. During times of economic downturn or crisis, the risk of market conditions are particularly relevant. Investors may be less willing to risk capital, customers may not be willing to pay prices that InTouch has asked for and users may reduce their disposable income spending.
Key costs for InTouch are minimal compared to other startup company’s as InTouch will use the resources and skills of their team that are available to them. Key costs will include the cost of cloud hosting, general and administrative expenses such as telephone and internet expenses of employees, insurance, laptops, and marketing.
In order to mitigate the company’s risks related to market conditions, InTouch plans to diversify their revenue stream by partnering with social media platforms that require paid subscriptions from customers, such as Netflix, and with companies that allow InTouch to remain free for users that are more conservative in their spending, such as advertising companies that do not directly require payments from users. This will allow InTouch to attract users that desire to use the service without charge and those that are willing to spend more money.
InTouch has also chosen to build their business model without requiring additional investment or debt after start up. Because of the company’s relatively low startup and operational costs, it is more realistic for InTouch to pursue this strategy. If market conditions experience a sharp decline, InTouch will not be at risk of lost investment or inability to pay off debts.
Industry-specific risks are also relevant to InTouch as the company relies on users to be willing to engage with other platforms and companies within the industry. For example, if users became unwilling or uninterested in using Netflix, InTouch would not be able to collect royalty revenue from that company, which directly relates to the company’s profitability risk. In order to reduce this risk, InTouch has diversified the companies they aim to work with as mentioned earlier. To reduce this risk further, InTouch will continue to diversify by partnering with companies in unrelated industries.
Overall Analysis of Feasibility
For a business to be viable it requires a few key elements. It needs to possess a product or service that is in-demand within a market that has been proven to exist for InTouch through primary research. It needs to be an idea that can grow and scale to remain in demand far into the future, which is fairly inherent with internet-based services. Further, it needs competent founders with the skills and drive to create and maintain the business. Fortunately, InTouch founders have a wide range of complimentary skills. Finally, and most importantly, the business needs to be profitable, or at least sustainable, and InTouch has shown that this will likely be the case as can be seen in Figure 1.
Critical Risks
There are a few critical risks to InTouch. The most critical risk is likely the chance that once InTouch hits scale, other brands might not want to partner. This could mean the dissolution of not only the ability to offer certain services but also generate the revenue projected from partnerships. This risk is being mitigated, like any solid investment strategy, through diversification. This means that the more services offered with more brands, the more opportunities InTouch has for partnering. In the event of any partner breaking the relationship for any one of the services that InTouch offers, there are at least two more potential companies that InTouch could work with. Being the middleman in these deals allow for flexibility and pivoting when navigating the service.
InTouch Feasibility
Based on the financial feasibility analysis of InTouch, the company will be profitable and create value for the owners. By the end of 2021, InTouch is expected to experience a net income of 1.95 million dollars, this would yield approximately a 2300% ROI. From this measure it can be noted that the company is expected to be profitable and also create value for the owners. Additionally, the company will create value for other stakeholders including the customers (advertisers and social media platforms) by increasing brand awareness and platform activity and users by connecting them to loved ones through innovative ways.
Competitive Advantages
An important distinguishing aspect of InTouch is the timing of the business’ launch. As much as Covid-19 has proven to be devastating to some small businesses, online companies have been soaring higher than ever (Aston, 2020). This shows a great opportunity within the sector that InTouch is planning to enter. Not only that but the idea of connecting people in new and more tangible ways has never been more valuable to society. This advantage is one of the main contributing factors to the InTouch’s optimistic growth projections; during Covid-19 times, they have become realistic. One of the other main competitive advantages that InTouch has over its rivals is its ability to bootstrap development and scaling. As discussed before, this allows for startup costs to be very low, making ROI’s much higher. Even in the event that external financial support is needed, it would only be during the scaling stage, at which point a foundation would have been established and investors would be easier to obtain. For a more in-depth competitor analysis, please see Appendix D.
Final Verdict
In the path of claiming not only profitability but a net income of 88 million by year 5, InTouch has also supplied a detailed breakdown of this number for support. The financial statements shown with a growth curve that follows similar companies in the sector, along with reserved calculations of partnership deals, profitability can be achieved. One of the key reasons for this profitability is its low start-up capital needs, with the platform planning to grow purely through founder funding and reinvestment. This makes the capital risk very low, and upsides easier to achieve. InTouch is a service that will fill a hole in the market and hopefully fulfill the goal of its founders, which is to bring people together.
References:
Aston, J., Youssouf, O., Virgin, K., & Vipond, O. (2020, July 24). The COVID-19 pandemic triggered decisions at all levels of government. Retrieved December 01, 2020, from https://www150.statcan.gc.ca/n1/pub/45-28-0001/2020001/article/00064-eng.htm
Curry, D. (2020, October 30). Business of apps: Bumble revenue and usage statistics. Retrieved from https://www.businessofapps.com/data/bumble-statistics/
Netflix. (n.d.). Plans and pricing. Retrieved November 29, 2020, from https://help.netflix.com/en/node/24926
Patel, N.(n.d). How Netflix maintains a low churn rate by keeping customers engaged & watching. Retrieved from https://neilpatel.com/blog/how-netflix-measures-you/#:~:text=Based%20on%20their%20lifetime%20value,a%20Netflix%20customer%20is%20%24291.25.
