Revenue Streams

I’ve been using Alex Osterwalder’s business model canvas and Ash Maurya’s lean canvas for exploring business models for a while now. The canvas breaks down a business into component parts —

Historically I’ve started by defining customer segment and problem first. Attacking these two boxes has been good because it gives me an actionable starting point — I can go out and start researching people and their problems. This has gotten me moving and I think it’s the right place to start on validating a business idea… however, I wanted to try something else today that may be helpful in planning which customer segments to investigate.

That thing I want to try is to start by working on the revenue streams section. The basic idea is that I need to be clear on what I want to get out of the project and by doing so it can help focus me and narrow down the universe of potential customer segments I am considering.

So let me define a MINIMUM success criteria as the company generating $500,000 in revenue each year. This is very small and do-able. This would allow me to pay myself a nice salary (in-line with what I could make working for a tech company in the silicon valley) and work on the project with 1 or 2 other people. Ideally this business would be able to scale into more like the $2 million range but $500,000 is a good starting point.

Let me now calculate the customer production rate for each of these targets. I’m assuming a customer has an average lifetime value of 2 years and I’ve picked a few different price points that I can sell my software for.

$500,000 / year
$500,000 / ($50 / month * 24 months) == 416 customers per year
$500,000 / ($100 / month * 24 months) == 208 customers per year
$500,000 / ($200 / month * 24 months) == 104 customers per year
$2,000,000 / year
$2,000,000 / ($50 / month * 24 months) == 1664 customers per year
$2,000,000 / ($100 / month * 24 months) == 832 customers per year
$2,000,000 / ($200 / month * 24 months) == 416 customers per year

Assuming a 1% conversion rate from visitor to customer these numbers give me some guesses about the size of the markets I’d need to go into and the severity of the problems I’d need to be tackling. For instance, I would need to drive 100 customers to my product each day to sell that $200/month product and hit my $500,000 per year target. This could be very manageable or unmanageable depending on the size of the market I’m addressing and the sales channels I can access. I can definitely play with the price points and customer creation metrics a bit. $200 might actually be low depending on what I’m positioning against. Alternatively I might be able to drop the price if I stumble on a larger market.

Overall, this seems useful. I feel it helps me understand the size and scope of the problem I need to look for. This is assuming a SAAS business model so it might be a good idea to do the same thing for a transactional business model (which I have some experience with), but I will do that another time.