By Steven Plappert, Cofounder & CEO of Forecastr (Techstars 2020)

Hey y’all! If you caught my last post, you’re familiar with all the basics about what a revenue formula is, how it’s built, and why it matters.

Today, we’ll dive down into the nitty-gritty to show you how you can build a great revenue formula for your business from the ground up. This isn’t rocket science — anyone can do it. Just follow along, get your scratchpad ready, and let’s start building!

The First Step

Start by writing out brief “common English” answers to the 4 questions from my previous post. I’ll provide an example, by answering the questions for my own company, Forecastr, to build our revenue formula.

• How do you generate leads?

  • Forecastr Example: At Forecastr, we generate leads from partnerships with venture communities. We do webinar events with them and collect leads through a demo request form. We also do a lot of evergreen content which drives leads through organic/SEO channels. We do a bit of paid ads too.

• How do you acquire customers?

  • Forecastr Example: At Forecastr, we acquire customers through a live demo of our product with an Account Executive. Those demo calls lead to new customers, typically a one-call close, sometimes there are follow-up calls. No self-service sign-up, everyone talks to a sales rep.

• How do you turn those customers into dollars?

  • Forecastr Example: At Forecastr, we monetize customers through monthly subscription plans ranging from $500 to $4,500 per month. Customers can pay annually for a discount.

• How do you turn those dollars into more dollars?

  • Forecastr Example: At Forecastr, our monthly subscriptions auto-renew each month, unless the customer cancels their subscription, so each month a customer sticks around we make more money. We track every cancellation and use them to find our churn rate at the end of each month.

Boom. Done. Next, we have to figure out how to express those answers with math and metrics. To guide you through this, we’ll continue with the Forecastr example!

Lead Generation: How do you generate leads?

At Forecastr, we generate leads from partnerships with venture communities. We do webinar events with them which generate leads through a demo request form. We also do a lot of evergreen content which drives leads through organic/SEO channels. We do a bit of paid ads too.

To turn this into a math equation, we need to recognize each “channel” through which we generate leads and describe how that channel works. There are three (3) channels here, partnerships, organic/SEO, & paid advertising.

Leads from Partnerships: # of Active Partners x Monthly Leads per Partner

Leads from Organic/SEO: (Direct Traffic + Organic Traffic) x Traffic-to-Lead Conversion Rate

Leads from Paid Ads: (Monthly Budget / Cost per Click) x Traffic-to-Lead Conversion Rate

TOTAL LEADS: Leads from Partnerships + Leads from Organic/SEO + Leads from Paid Ads

Customer Acquisition: How do you acquire customers? 

At Forecastr, we acquire customers through a live demo of our product with an Account Executive. Those demo calls lead to new customers, typically a one-call close, sometimes there are follow-up calls. No self-service sign-up, everyone talks to a sales rep.

Now that we have the leads, we have to describe the process through which we acquire the customers. Since all our customers get sales demos, and those demos convert at a certain rate, we can describe the customer acquisition process like this:

New Customers: Total Leads x Lead-to-Demo Conversion Rate x Demo-to-Customer Conversion Rate

Pricing: How do you turn those customers into dollars?

At Forecastr, we monetize customers through monthly subscription plans ranging from $500 to $4,500 per month. Customers can pay annually for a discount.

At this point, we have customers, but now we need to describe how they pay us money. Since all our customers are on monthly subscriptions, at various prices, we could use an “average price” to keep things simple:

Revenue: ( Customers [Last Month] - Churned Customers + New Customers) x Average Price

To get more detailed, we could have a copy of the above for each one of our pricing tiers, with its own set of customers and price points. We could also have separate versions for our annual subscriptions, with annual churn dynamics. We advise all founders to start simple and build out more detail over time as you get comfortable with your revenue formula.

Customer Retention: How do you turn those dollars into more dollars? 

At Forecastr, our monthly subscriptions auto-renew each month, unless the customer cancels their subscription, so each month a customer sticks around we make more money. We track every cancellation and use them to find our churn rate at the end of each month. 

With our monthly recurring subscriptions, retention happens automatically unless a customer decides to cancel their subscription. To understand our retention, we could write the equation for churned customers as:

Churned Customers: Customers [Last Month] x Average Churn Rate

All the other customers that did not churn are the ones that we “retained” and will make more money from next month. We could describe them like this:

Retained Customers: Customers [Last Month] - Churned Customers

Next Steps

Do this yourself! See if you can flush out a formula that describes how you generate revenue like we did here today for Forecastr. 

Once you have that in front of you, ask yourself if you have visibility into all the metrics that feed into that formula. Do you have a way of knowing what each metric is, to see if you hit or miss the goals you set for those metrics each month?

If so, amazing. You’re all set. If not, you need to build a system for tracking and reporting on your revenue-driving KPIs.

Once your revenue formula is built, and your metric tracking is in place, you’re ready to build out your full-blown financial model. I’ll have a full post walking you through that process here very soon.

If this isn’t your thing and you want to skip straight to having a great financial model, that’s what we’re here for! Click here to schedule time with a modeling specialist at Forecastr today.

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