Freemium Business Model Template

Giff Constable metrics, startups

Update: you can still download the model if you want and see if there are any pieces you can use, but I am working on a new version that is a little more cash-oriented. Right now, it isn’t explicitly modeling out annual subscriptions but rather averaging a monthly revenue level, and I think that should be fixed.

Mark Suster of GRP just wrote a post on the importance of financial models, and in an effort to be helpful to new entrepreneurs finding their way around Excel, I thought I would post a business model Excel template for anyone to download and customize (bottom of post).  I completely agree with Suster.  The one time I told myself “I don’t need a financial model yet because it will all be made up bullshit,” I completely embarrassed myself a few months later and swore never ever to make that mistake again (seriously, it still hurts years later).

breakeven-chart

Why must you create a financial model? Beyond the obvious of needing to speak your investor’s language, here are a few reasons:

  • it helps you better understand your assumptions and goals
  • it helps you better understand your business’ pressure points
  • it forces you to  better understand your scaling cost structures
  • it forces you to examine the realism of milestones and cash needs
  • it gives you a working document to track and structure/focus for your business analytics (like a product, it should be a continually iterative process and tool)
  • it gets everyone on the same page as to what the business is shooting for and sets expectations as to what needs to be accomplished and how long it might take. EVEN IF IT IS GUESSWORK, you still need to make sure your team and investors are on the same page when it comes to assumptions, goals and timing!
  • hopefully this one isn’t necessary, but it also creates a document everyone can sign off on, which can reduce finger-pointing later if memories become revisionist should things turn sour

Focus your efforts on a model that feels ambitious but doable, but don’t forget to create a conservative “oh shit” version, and if it has to be a sales document, you may need a “$best case ka-ching$” version as well.

I find that with every startup/product I model out, a lot of customization goes into the user acquisition/growth model, the revenue model, and to a slightly lesser extent, the infrastructure/hosting scaling model.  I like building user growth from the bottom up, focusing on active users (someone who uses your product at least once a month).  I don’t much like simplistic “viral multiples” or top-down approaches like market share penetration.

This particular model came out of an exercise for a freemium Web application startup that wanted to monetize through premium subscriptions.  The model takes a “cohort” approach (more information on cohort analysis over at Fred Wilson’s blog) and applies churn and conversion assumptions to each month’s new users over time.  It also allows you to model out the growth of your team by role and employee type (full time vs contractor).  I have zeroed out most of the assumptions and the staffing plan so that you can start with a clean slate.

Every business is different and you’ll no doubt end up ripping some stuff out and adding some stuff in, but I hope the attached model is a useful starting point for some of you out there.

Here are just a few of the things you’ll need to research/guess if you are just starting out:

  • comparables on user growth rates, virality, and churn
  • customer acquisition / sales methods and costs
  • price points and conversion rates for customers, given your business model and sector
  • payment processing rates and fraud/chargeback levels
  • contractor and salary rates (both “startup discounted” and market) for your hires
  • customer support method and costs , and how it scales with customers
  • true travel costs (often underestimated)
  • expected concurrency rates and visit frequency
  • download size per visit
  • architecture scaling: owned vs managed hosting vs cloud and how servers and costs scale

Here are a few key things you want to examine out of your model:

  • are there any variables where a slight variation makes a massive difference?
  • are your fundraising milestones well matched to your product and financial milestones?
  • when do you hit monthly breakeven?
  • how many users do you need to have acquired / kept to get to breakeven?
  • how much money have you spent in total to get to breakeven?
  • are you adequately scaling costs to meet the demands of a large user base in later years?
  • can you believe any of it!  You can make a model spit out whatever numbers you want, so cross-check, second-guess, and don’t buy too deep into your own assumptions and guesses!

I’ve tried to pepper the model with notes to make it a little easier to understand.  Please let me know your comments on the model, whether they be improvements, corrections, or just a note on if it helped.

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Freemium model v1-2.xls