Week 7 Update
- Week 6 Recap
- Digital Marketing Takeaways from EIR Workshop
- Pricing Deep Dive
- Pro-Forma Deep Dive
- The “Entrepreneur” in “Entrepreneurship”
- Additional Resources
Many thanks to Marcus Johnson-Smith and Cody Damon for the Digital Marketing workshop, and to Dr. Ali Hill for sharing original content on the “Entrepreneur” in “Entrepreneurship”
Week 6 Recap
Last week, you kicked off the second sprint of the accelerator. In this sprint you will do a deep dive on every area of your business, starting with marketing and sales last week. Marcus Johnson-Smith and Cody Damon, Entrepreneurs-in-Residence at DEC, ran a digital marketing workshop where they went over tools of the trade. Read on to review key takeaways from this highly practical workshop.
This week, the focus is on financials and personal development for yourselves as founders. We are pleased to pilot the personal development module under the leadership of Dr. Ali Hill, Managing Partner, Sound Advice Consulting Services and Founder, Sound Advice Women.
Digital Marketing Takeaways from EIR Workshop
To acquire customers for your business, in today’s marketing universe, you will need a digital marketing strategy that aligns with your sales goals, as well as where your audience lives.
Here are some of the ideas and takeaways that were discussed in the workshop this week that you can use later on as you think about customer acquisition through digital marketing.
Start with experiments to test your hypotheses
Unless you have a large budget, getting your product/service in front of people will take some time and experimentation. As in any scientific experiment one would endeavor into, similarly, you’ll want to approach your digital marketing work as a scientist conducting an experiment would.
At a basic level, you’ll want to come up with some assumptions about your audience (who they are, where do they live online, what marketing message might appeal to them in order to get their attention). You’ll then want to test these assumptions across the appropriate digital channels (i.e. LinkedIn, Google Ads, etc.) to determine how well the performance lines up with your hypothesis. If things are working, go deeper. If they are not, you pivot and test a new hypothesis.
Establishing an audience to target
One of the most important concepts in digital marketing is audience targeting, so that you’re getting your message in front of the right people. You can easily go blow through real money, with little to no results, when you’re advertising across digital channels and you’re not targeting the appropriate audience.
Some methods for defining a target audience across digital channels include selecting a narrow age group and geographic area to target that you might see fit for your product or service. You can also target audiences across interest areas that align with your business offerings.
Test with an “offer” before scaling up marketing spend
Test advertising and digital marketing content with an offer, when applicable.
We are all consumers of digital marketing content in this day and age. Whether it’s a social media app we use, or a popular news website we read, we’re constantly being bombarded with advertisements of products and services that we oftentimes don’t need.
As you shift from being a consumer of digital content being marketed to you, to the producer of goods you are marketing to consumers, you need to keep in mind what messages and what “offers” get the attention of your audience when you’re marketing to them, so that they take an action to inquire more about your business offerings.
Utilize data to make informed decisions about marketing
Your audience, your business model and your model for customer acquisition will be determined by the experiments you take with your marketing strategy, and the data you will collect from these experiments.
EIR Marcus Johnson-Smith shared how he uses data to inform his advertising campaigns across Google Ads. Marcus has a business with a physcial retail location. Marcus drives most of his data through Google Analytics and Google Search Console. He then utilizes reports specifically around keyword use and keyword volume to develop keyword lists to include in his campaigns.
Marcus’s strategy is unique to his business model, which includes physical retail locations. Marcus focuses on keyword specific search ads in a geo-targeted radius within 15 minutes of his retail location, as well as ads on the Google Maps platform, where buy intent is usually higher.
Pricing Deep Dive
Pricing Strategies and Price Testing
If the revenue model is the architecture of charging customers for your products or services, then pricing strategy is the thought process with which you actually pick a number to charge.
Be thoughtful about your pricing strategy
First time entrepreneurs often under-invest in this process. They pick a number and move on – and they almost always lowball themselves. This is not optimal. The better way is to be thoughtful about picking one of the many options for pricing strategies, and make sure you don’t fall into the trap of cost-plus mentality, and instead use value-based pricing to capture the full value that your customer thinks you have delivered to them.
Price testing with surveys is not a panacea
Once you pick a number, you have to see if your prospective customers are down for paying that price for your solution. There are lots of ways to do price testing, including Monadic surveys, sequential Monadic surveys, the controversial Van Westendorp Pricing analysis, conjoint analysis and more.
However, people are not held to what they say in an interview or a survey. These results are just directional but not a great predictor of purchase intent or pricing preference because your respondents do not have skin in the game.
A better way: Offer to sell your product or service before it is built
The only real way to test a price is to offer to sell your solution at that price. You can do this without having built the business! Simply create a description of your product or service. Then you can do all sorts of experiments (digital or otherwise) with this description.
For B2C ventures, you can run a landing page test. You can either offer your solution for pre-order, or failing that, you can offer to sign them up to be notified when your solution is available. Or if you are able to, you can offer to sell them a limited beta, and actually collect money from them.
For B2B ventures, the best way to test purchase intent is to enter into an unpaid or paid beta program with a potential paying customer. This starts with getting one or more prospective customers to sign a Letter of Intent (LOI) or Memo Of Understanding (MOU) indicating that they are interested in entering into a pilot program, proof of concept, or alpha/beta testing program with you. It is very important to get this in writing – enterprise sales cycles are very long with a lot of proof points, but the pilot or proof of concept is almost always a first step towards “closed won”. A signed LOI or MOU indicates true purchase intent and gives you tremendous validation that you are on the right path.
Pro-Forma Deep Dive
Let’s do a simulation so we can work through the key concepts, terms, and equations you need to understand in order to create a pro-forma P&L, starting with revenue projections.
Imagine we are a marketing insights company (like CBInsights), and we do specific industry research in, say, the business trends for robotics and AI. We offer a subscription service to companies requiring this type of research, at a company-wide license starting at $5,000 per month, or $60,000 annual recurring revenue (ARR)per year.
For this business, we can model our revenue for our second year in business as follows: (you will see in a minute why we chose the second year and not the first year.)
- Unit: In this case the unit is a company that acquires a license with our Marketing Insights company
- ARPU (Average Price Per Unit): In this case, it is $60k per year.
- # New customers acquired this year: Let’s say for our second year, we will sell this to 10 new customers through direct sales.
- # Customers last year: Let’s say last year we sold to 5 customers.
- Churn: Churn refers to the percentage of customers who do not renew. We are so new that nobody has had time to cancel, so we have 0 Churn this year.
- Install base: Based on the above, the “install base” is the # of customers last year plus the # of customers this year, minus churn. In order words, our install base is (5 + 10 – 0) = 25.
- Cost of Goods Sold / Cost of Sales: This is the cost of providing the service to the customer and includes server costs, cost of the devOps department (i.e. engineers who keep the server running so people can download reports), customer support and the like. It does not include the actual analysts’ salaries or general web development costs or marketing costs – that goes into the operation expenses section (see below). Let’s say this is $250,000.
The gross revenue in Y2 is the install base multiplied by the ARR: (25 * $60k) = $900k.
The COGS in Y2 is $250k.
The gross profit is the gross revenue minus COGS: ($900k – $250k) = $650k.
This is the basic recipe for projecting revenue out to year 5. In year 1, churn is typically 0 and the install base is simply the “net new customers” in Y1. Moving into the out-years, churn will increase – but so will your install base because you are hopefully keeping 95% of your customers year over year (YOY). With this, you can project revenue by changing the number of new customer acquisitions, changing ARPU, or changing projected churn. You can now easily model different scenarios to help you make business decisions every step of the way.
Modeling Operating Expenses
For this type of business, most of your operating expenses fall into the following departments:
- Product development – this includes the analysts who conduct the research, data scientists helping them manage and visualize the data and writers who turn data insights into reports)
- Marketing and sales – these departments are often combined in the beginning but will usually separate into two departments over time
- General and Administrative – this includes finance, human resources (HR), legal and the like.
For each department, there will be a few types of expenses that dominate the spending.
- Product Development will spend the lion’s share of their annual operating budget on headcount.
- Marketing and Sales would have significant budget for doing direct sales, going to tradeshows and the like, in addition to their headcount expenditure.
- G&A will likely have significant expenses in professional services like legal expenses.
Putting it together: Revenue – Expenses = Bottom line
Once you have modeled your revenue and expenses, you are ready to put it together into the same spreadsheet which has the three sections mentioned above:
- Money you make (revenue)
- Minus money you spend (expenses)
- Minus things like taxes, depreciation of capital equipment, etc.
- Equals money you keep or lose (bottom line)
The “Entrepreneur” in “Entrepreneurship”
During the intense weeks of a summer accelerator, there is so much to learn, create, and put into action for your venture. This focus on the business itself can leave a gaping hole in building the foundation of your entity, namely, how YOU, the founder, are connected with what you are creating.
Here are questions for you to consider, as you continue to grow your business:
Following are some resources that will help you accelerate your progress this week.
- For a lighthearted take on how to model revenue: watch this 7-minute video in which we show you how to model your revenue if you were selling hoodies in the clothing section at Whole Foods.
- Download a template for a 5-year pro-forma with examples for different revenue models and operating expenses.
- Module 5 of the Learning Center is a good reference for the material covered in Weeks 6 and 7.
- Knowledgebase section on Basics of Finance. This section of our searchable knowledgebase provides answers to the same topics.
- Read the following selected chapters of MIT Professor Bill Aulet’s new book on entrepreneurial finance.