MOoNEZATION

Show ME the MOOney

Welcome to the first guide in the LAND series. Monetization is the art of establishing a business model to generate revenue from your venture. If launching your idea and discovering what product to build are big steps, monetization is one giant leap towards landing success. Business model generation is no easy task, but it is an essential step to close investors. Thus, the sooner you can monetize, the better, as it will be the proverbial fire investors will want to fuel. Once a business model is established, you will then need to measure whether there is Product Market Fit (PMF). This guide will first cover a high level view of different business models, and then cover how to measure PMF.

Business Modeling

Business model generation is both an art and science. Similar to the opportunities and solutions you design for your product, you will need to decide and design a business model or models that make the most sense for your product and market. There are 3 main types of business models. These are typically framed based on who your customer is. You are either selling to a consumer or another business. Sometimes that business is then turning what they buy from you and selling the same product to consumers.

B2B

A B2B model means that your business is selling to other businesses. While these business models have bigger deals and budgets at bay, they come with the trade off of longer sales cycles and typically require you to build a sales force of account executives.

B2C

A B2C model means that your business is selling directly to consumers. B2C is often referred to as Direct to Consumer (DTC). These business models require you to sell the right product at the right time and right price. While the sales cycle is smaller and you don’t need to build up a team of salesmen and women, marketing and distribution are typically the biggest nuts to crack.

B2B2C

A B2B2C model means that your business is selling to other businesses who in turn sell to your customers. These businesses are usually complementary to your value chain, often providing customer service or other distribution and marketing services that enhance your ability to sell to customers.

Revenue Streams

Within each of these different business models, you can then further qualify your business model based on how it generates revenue streams. For an example, you could be a B2B marketplace or a B2C Marketplace. This would mean you are providing a platform for buyers and sellers to exchange good or services. In exchange for the value of providing the infrastructure, network, marketing, overhead and other services for both sides, you charge a percentage of each transaction. Or, you could qualify as a B2B or B2C Software as a Service (SaaS) business where your customer (consumer or business) pays you a monthly fee for being able to access tools that provide them value they otherwise would not be able to unlock. The reason your customers are paying you is because you are providing value. This is your transaction of value that we will further in a bit. Revenue is driven from a purchase price, which represents the demand for your good or services (willingness to pay) and the volume value you can sell. Typically volume is represented by either a finite number of units you are selling or an infinite or finite access to a service bound by time (eg. access per month in the example of SaaS).

Unit Economics

Investors will want to understand the unit economics for your business. The unit economics break down the cost of acquiring a new customer (CAC) compared to the lifetime value (LTV) of revenue this customer contributes to your business. As previously discussed in the Rocket Science guide, it is important to design, implement and track metrics for the Awareness (acquisition) and Revenue stages of your product and business analytics. A simple way to calculate CAC would be to take the total investments spent to generate awareness and divide such by the number of users/customers that came into your product or business from said investments. As for LTV, this is less straightforward as you will need to define what an average “life span” is for your business. For simplicity, let’s decide the average life span for such is 5 years. Next, we need to calculate the average value this customer contributes to your business, which is a function of their average purchase price multiplied by the average number of purchases. Once you derive the average customer value, you can extend it out to the determined average life span to get to your LTV. Understanding your LTV can help you understand how much to spend on your CAC.

Product MARket Fit

Transaction of Value

A transaction of value is the exchange of value for money that you are creating for your customers. In the Jobs to Be Done framework, your transaction of value is why your business is being hired to do the job. This is typically related to the value your product has an effect or outcome on your customer. Thus, it is very much aligned to the Activation and Revenue metrics that relate to your business we previously discussed in the Rocket Science guide.

Transaction Frequency

Once your transaction of value is defined, you can then determine the frequency of value. This is how often the same customer is coming back to your business and paying you. Thus, it is very much aligned to the Retention and Revenue metrics that relate to your business we previously discussed in the Rocket Science guide. Your transaction frequency should be a relative context for your business. For an example, a business in the travel and experience industry would likely set their frequency of value to be quarterly or annually. A business in enterprise software may set the frequency of value to be weekly or even daily.

COHORT Analysis for PMF

Ycombinator suggests measuring PMF via tracking a cohort of users who transacted value over the established frequency of value. A cohort allows you to group a specific sample of users and then track and compare how these users track relative to earlier or later cohorts of users who joined. Plotting this percentage of how many users within a cohort transacted over the frequency of value for your business will ultimately show you whether your transaction of value is improving.

The goal of this measurement is to see retention stay as flat as possible for the same users who initially gave your business a try. If you were to plot the same cohort for each frequency of transaction that makes sense for your business (year, month, week, day), you should naturally see churn. A small percentage of churn is normal and OK. Typically, in the beginning of a startup, you will see significant churn as many people gave your business a try out of curiosity. This could be due to a relative lack of feature parody with alternatives, buggy experiences, poor customer service, or most likely just not enough value for the price (value of transaction is not quite there yet. As you do more discovery to learn how you can improve your product and value of transaction, you should see improvements in the churn from new cohort retention relative to previous cohorts. This is when you know your transaction of value and outcome on your customer has improved.

When the retention line becomes relatively flat over a significant number of plotted frequencies (years, months, weeks, days), you should pat yourself on the back and celebrate. You have established something that is incredibly challenging for startups. You have reached PMF!