Earlier this week, Google expanded its Google Docs functionalities with a new and promising Drawing Tool. Who is Board of innovation?Our innovation consulting services are designed for large corporates to avoid their Kodak-moment. We try to avoid corporate theatre at all cost (read: writing 100 page business plans & bloated financial sheets). Experience with social and emerging media channels such as Twitter, Facebook, Google + and Pinterest a plus! I would like to propose that in addition to team, product, and market, there is actually a fourth, equally important, core element of startups, which is the need for a viable business model.
Successful web businesses have long understood these metrics as they have such an easy way to measure them.
To compute the Lifetime Value of a Customer, LTV, you would look at the Gross Margin that you would expect to make from that customer over the lifetime of your relationship. It doesn’t take a genius to understand that business model failure comes when CAC (the cost to acquire customers) exceeds LTV (the ability to monetize those customers.
Another reason for stressing the point using diagrams is that many entrepreneurs have realized that since the web provides some amazing new ways to acquire customers at low cost, several new businesses have become possible. To be an entrepreneur requires great optimism, and a very strong belief in how much customers will love your product.
A common scenario is an entrepreneur that has dreamt up a cool new service that they can offer via the web.
A quick look around all the B2C startups shows that, although viral growth is often hoped for, in reality it is extremely rare.
Far more common is a need to acquire customers through a series of steps like SEO, SEM, PR, Social Marketing, direct sales, channel sales, etc.
For example, if you are using Google Ad Words to drive traffic to your site, take a look at the following interactive spreadsheet. One of the more interesting things that this model shows is how rapidly cost of customer acquisition climbs If your leads require human touch to convert them, (compare cell B23 with cell B22.) This human touch can be as light as email follow ups, or as much as inside sales people doing multiple sales calls and demos. This shows is that it is not unusual for the cost of acquiring a customer to be as high as $100,000. My advice to entrepreneurs working on a new business plan is to build a model similar to those above to estimate the cost of customer acquisition. Aim to recover your CAC in < 12 months, otherwise your business will require too much capital to grow.
In the early days of the business, you will not be able to accurately predict your conversion rates, and the viability of your entire business may depend on this.
The good news is that if you can monetize your customers at a higher rate than the cost to acquire them, you probably have a great business on your hands. Because a number of smart entrepreneurs realized the importance of lowering CAC, they created new business models such as Open Source, SaaS, Freemium, etc. These new business models focused heavily on how buying behavior has changed because of the power of the web. Use of a free product or service to attract web visitors, and aim for a viral spread as they tell their friends. Use of a free trial, where the customer can easily download, or use a SaaS version of the full product to see if it works for them.
Extensive use of software to automate all processes such as SEO, SEM, social networking, lead scoring, lead nurturing, CRM, etc. Metrics on all aspects of the customer acquisition process to find out what can be improved. The way in which these techniques can work together with other techniques to drive up monetization (e.g. List the common sales objections that come up in the sales cycle, and provide answers to these on the web site.
If your customers are going to compare you to the competition as part of their process, consider doing this for them, with a section of your site that has a comparison matrix with appropriate check marks. If you have a light touch sales model, consider setting yourself the goal of a “Touchless Conversion”, i.e. If you are currently using a field sales organization that sells direct, look at whether it is possible to sign up OEM deals with strategic partners to leverage their customer base and distribution power. Consider converting to a channel sales model at some stage in the lifecycle of the business. Another option is to evaluate whether you can move from field sales to inside sales people.
If you are entrepreneur planning your next business, you can’t afford to ignore the cost of customer acquisition. It is also important to ask yourself the question: can my business realistically expect to acquire customers for considerably less than the amount that I can monetize them?

Once you have completed the product, you will want to familiarize yourself with all the latest techniques involved in the low cost sales model, or Sales 2.0.
From a funding standpoint, it is useful to know that your ability to raise capital will dramatically improve as soon as you have proven that you have a viable business model. Once you have proven out the business model, hit the accelerator pedal, and invest as much as you can afford. If you found this blog post useful, I highly recommend reading the following post which adds a lot of additional thinking around this topic: How Sales Complexity impacts your Startup’s Viability. Hi Brad, you would take your annual subscription value and divide it by your annual churn rate. You might want to do a separate LTV calculation for each of your two customer types, so you can better understand your business. For example, a business with three subscription levels may have different costs to acquire a customer for subscription A vs subscription B vs subscription C.
I see potential value in doing this as it could surface helpful information when considering new subscription levels or modifying existing ones (ie.
Although I believe business plans are most important for the mental process they make an entrepreneur go through, this post is largely an experiment with Google’s new cost-per-action text link ad units.
I haven’t tried their bizplan template, but I do remember looking for models when I started my first company.
Beyond a business plan template, it looks like they also have marketing plan templates, business letter templates, cover letter templates and even resume templates. I’d be interested to hear from anyone else who has tried to embed Adsense Text Link Referrals into posts, whether it worked or not.
Go to the drawing tool, sign in at Google if not signed in already, and create a personal copy via the menu to start editing.
We use a structured innovation process to guide teams of intrapreneurs from the first ideation phase to an executive pitch.
Gross Margin should take into consideration any support, installation, and servicing costs.
The goal is give the reader a sense of the balancing act required to create a profitable business. The only thing that you have to consider is can you monetize your customers at a higher level than the cost to acquire them. Unfortunately this same attribute can also lead entrepreneurs to believe that customers will beat a path to their door to purchase the product. As a VC, I have sat through many presentations like this, and in most cases the service is actually interesting and compelling.
When it does happen, the associated businesses are usually extremely attractive, provided they have a way to monetize their customers. This example shows a cost per click of 50 cents, and the resulting website visitors converting to a trial at the rate of 5%.
I have seen this cost vary from around $400 to $5,000 per customer acquired, depending on the level of touch needed. So I recommend building an execution plan that focuses on finding out what these numbers will be as soon as possible in the lifecycle of the business. Think about your own behavior: if you are like me, you hate having to deal with sales people, and greatly prefer to do your own research starting with search engines, and leveraging free trials, on-line videos, blogs, reviews, and your social network. In particular, the best practices include using Inbound Marketing to build traffic, instead of paying for traffic with search ads. Examples of free products include Open Source software, services like HubSpot’s Website Grader, free versions of a SaaS service that have limited, but still valuable, feature sets, etc. Web traffic can be easily split so that parts are fed to different landing pages with different offers, and the resulting conversion rates measured. Some products are easily understood, while others may require a careful walk-through by a sales person. The high salaries and commissions for sales people, sales engineers, travel costs, and office costs add up to an extraordinarily high figure. What generally works best here is allowing the OEM to sell only a base layer of your product with co-branding. Many times this requires that you “prime-the-pump”, as most resellers won’t sell a product until they see clear customer demand.
Insides sales people are not only less expensive in direct salary costs, but also in travel costs.
The earlier you work on this the better, as many of the best techniques require you to build your product differently. You’ll want to grow the business as fast as possible before a competitor realizes what you have done, and tries to steal your market! Given that your costs there are substantial, you might consider looking at the CAC for New Customers separately to the CAC for Expansion Revenue.

However, I’ve struggled with a valid way to attribute some acquisition costs to a specific subscription levels.
If the template truly saves time, takes care of the mundane of bizplan creation and helps you focus on the most important startup questions (e.g. I’d be interested to hear in the comments whether you found any value in the referral. After a few iterations of removing and republishing, I’ve decided to leave the post as-is for now. My Adsense Text Link experiments in the sidebar show just fine, but these post-embeds are goofed.
While you might have used our business model template (ppt) or the print and cut-out version (pdf) before, check out the new Business Model Drawing Tool to test GDocs new functionalities.
Business models created with the Drawing editor can be downloaded in most standard formats (PNG, JPG, SVG, and PDF).  Please note that the drawing editor only works with Firefox, Safari, and Chrome (you can also use it in Internet Explorer if you install Chrome Frame).
When a disruptive business case gets funded, we coach venture teams to get traction into the market. However in all these articles, I have not seen any discussion about what I believe is the second biggest cause of startup failure: the cost of acquiring customers turns out to be higher than expected, and exceeds the ability to monetize those customers.
Hopefully the value will become more obvious with the third version of the diagram that shows the different factors that affect the balance. This frequently causes them to grossly underestimate the cost it will take to acquire customers. What shocks and surprises many first time entrepreneurs is just how high the numbers are for CAC using these kinds of techniques. Good numbers will enable you to raise funding easily, and bad numbers may indicate that this is not a viable business. For more on this topic, please refer to the Building a Sales and Marketing Machine part of this web site. And this is before you factor in the failure rate (the percentage of sales people hired that don’t become productive). Channel sales models usually only work when the company commits to them fully, and passes all orders through the channel, so be prepared for the loss of margin this will represent to your current order flow. Other advantages of inside sales people is that they are far more efficient due to remaining in one location, and can contact more people in a typical workday. Given that it can be hard to exactly allocate expenses, I would recommend using your judgment and coming up a best guess as to how to allocated the expenses. Google has also included new Google Wave-like features such as real-time, character-by-character editing for multiple users, and a spell check as-you-type.  In the sidebar you can discuss and share your business model thoughts with other editors in the document.
What the sheet shows is that each customer is costing you $100 in just lead generation expense. Once others started to see the success these companies were having, they started copying the techniques. With certain complex products, this will need an on-site installation by a sales engineer, which sends costs through the roof. Owning the customer base is an important way to control your own destiny, and will also earn your company a higher valuation.
At a minimum, look at combining inside sales with field sales to improve the efficiency of field sales people.
There is a lot that you can learn about which of these products is most profitable, which need work to make them more profitable, etc. Unfortunately, something is amiss and this gives me an opportunity to learn GOOG’s ad-serving a bit better. After creating a number of business models, I found the drawing tool easy-to-use and functional for quick business model ideation. For many consumer facing web sites, it can be hard to get the consumer to pay more than $100 for the service. In addition to distribution power, these kinds of relationships solve the “safe choice” concern of many buyers, and can transform your business. In addition, the new features are a big step forward in making this an excellent collaboration tool (up to 50 users can edit and comment simultaneously). Ideally suited to co-design new business models with your business partners, online and real-time.

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