How many customers will buy your product?
Let's build an operating model.
The first step is for Big Dean's to estimate how many total new customers will buy their product each month. For now, we're not factoring in customers that cancel, which would give us our net customer base. We derive cancels (and net customers) by combining total new customers and the customer decay curve.
It's important to separate the assumption for total new customers and the decay curve. The decay curve can vary quite a bit between different products. In other words, two products with the same amount of customer additions can have quite different net customer bases.
What to do for pre-launch products?
Back to estimating total new customers. Being pre-launch makes this quite challenging for Big Dean’s. Our best bet is to use comparable products and hope it puts us in the right ballpark.
The Big Dean's team finagles their way into talking with other food-oriented newsletters. Some are food critics, others are diet aficionados. The most comparable are a few restaurants that started operating a paid newsletter. It's a tight-knit community of operators, who are more than generous providing guidance and sharing best practices. Beyond being incredibly insightful, these conversations provide a narrow range for new customers. As usual when there’s limited data, it’s probably safe to err towards being more conservative.
[Pizzana's Tomato Sauce & Cheese on Dough // Gjelina's Gjam // Big Dean's Newsletter // Cafe Gratitude's Question of the Day... TOTAL new customers during the first year in green chart... squiggly lines for actuals showing that it fluctuates... BD's with a stable curve - "our best guess"]
Take Rate on Existing Audience
Besides using comparable products, we can also assume a take-rate by pre-existing audiences. "Audience" may refer to traffic to your website, Instagram followers, etc. Take-rate refers to the share of that audience that will buy your product.
Big Dean's assumes that Twitter and Instagram will be the primary marketing channels. These are also solid sources of customers for the other operators mentioned above. They provide ballpark estimates for take-rates, which we apply to our own audience. Hopefully this provides support for the range above, or perhaps even exceeds it. If the estimates are lower, it may signal potential customer acquisition challenges. In this scenario, we may want to revise down estimates.
[follower count... avg monthly take rate for twtr & ig... monthly new customers, showing it going down over time - mo 1 vs mo 3 vs. mo 12]
[free audience on Substack]
What to do after we launch?
Though still hard to forecast the future, performance data takes quite a bit of the guesswork out of it. Over time, our month-over-month growth ("MoM") will likely stabilize. Same for year-over-year growth ("YoY"), which can help account for seasonality (i.e. if there's a Q4 holiday bump). As growth becomes increasingly stable, using data to drive assumptions becomes increasingly helpful. On the other side of the same coin, in the early stages of growth, there are a few pitfalls to avoid.
Growth is often gradual with intermittent moments of step-function increases. These growth bumps are usually driven by major product improvements or marketing efforts. Moments of step-function growth are more common early on, before the law of large numbers kicks in. There are a few things to keep in mind during these periods of step-function growth.
[image showing bumpy growth w/ callouts for notable mktg events]
First, step-function moments are tough to predict and risky to include in forecasts. There will be key product and marketing moments, surrounded by excitement & optimism. And that's important. But compartmentalize the positive outlook and don't let it cloud your forecast.
[image showing internal optimistic estimates of impact vs our business projection]
After a surge in new customers, we should expect MoM declines in new customers. The key is to stabilize on a higher growth trajectory. For forecasting after these events, bring expectations back towards the previous run rate.
[image showing major bump for few months w/ a forecast of big MoM declines, back towards previous growth rate]
In a similar light, be cautious in using exceptional events to model future efforts. It's inevitable to attempt to replicate the success behind step-function moments. Unlocking new marketing channels and partnerships, or launching important product features. These are important, but don't expect the same degree of impact as previous efforts. Diminishing returns are more likely than back-to-back grand slams.
[image showing don't of using past events to model exceptional events]
The above shows more extreme examples. As performance data flows in and we update forecasts, we'll face more subtle flavors of this dynamic. Like other pieces of the puzzle, we want to be accurate on a blended basis, not the daily peaks & valleys. And we want to pleasantly surprise ourselves, not vice versa. Err towards these and your forecasts will be a valuable tool.
Absolute vs. Relative Growth Rate
Relative growth rates (MoM & YoY) are likely to be higher when the absolute numbers are small, and vice versa. Right after launch, when user volume is low, triple digit MoM growth rates are not uncommon. Rather than use MoM growth, it's probably prudent to use absolute growth (i.e. ~20 customers / month).
[show blue font for drivers - customers over relative growth rate early on]
As relative growth becomes more stable, we can start to favor it more in our forecasts. Like other pieces of the model, we can gut-check absolute & relative growth against each other. Perhaps we're holding MoM growth consistent and we see massive customer volume. We can start to peel back off those assumptions.
Growth & Gravity
As an extension of the above, it's hard to maintain growth rates over a long period of time. With most products or businesses, year-over-year growth tends to fall towards 0%. Like an apple falling from a tree, "gravity" places downward pressure on YoY growth.
[revenue growth for FAANG & M companies over past 10 years?]
This is important for longer-term planning. First, it's probably safe to assume YoY declines when looking out over multiple years. Second, from a strategic view, it's important to think about how to combat gravity. This usually returns us to the two main levers of growth:
Grow the number of customers.
Increase the value of those customers (“CLV”.
Perhaps we explore launching products to reach new audiences or unlock new revenue streams. Or building partnerships with complementary products. Depending on the relationship, bundling can expand audience or drive up APRU. The key is to explore how to create new layers of growth that combat gravity in a cost-effective way.
[5-year plan w/ key strategic levers?]
107. Building an OP Step 2:
What are my fixed costs?
We've arrived at the final step of building the first draft of our operating plan. Because we can't force (most) people to buy our product, a lot of the assumptions so far are outside our control. We have much more control over our fixed costs. It's usually a conscious decision to invest in growth or making our product better.
If we're making effective investments, it should accelerate revenue growth. This exercise paves the way towards exploring different levels of investment. Let’s bring our friends over at Big Dean’s back and explore how fixed costs could evolve over the first year.
Launch - Month 6
Big Dean's is hoping to launch while keeping initial investments low. Across all categories, there’s an inherent skew away from deploying cash. Only investing in the bare essentials needed to get the product out in the wild.
Employees / Outsourcing Costs. To get started, Big Dean's hops on Fiverr to get help designing their brand style guide and logo. Although the team does a ton of outreach, they also pay for a competitive research analysis. It’s a modest investment ($500) in the first month. Because it's more of a side hustle for the moment, no team member is spending too much time on it. It's either a natural extension of their existing work, or it's less than 10% of their total mindshare. For the first half of the year, we're not considering any cost for employees, either part-time or full-time.
Marketing. After launch, the Big Dean's team spends the first 6 months being as resourceful as possible. They spend most (if not all) of their social capital asking friends and family to spread the word. The team has been assertive, but not annoying, in nudging its audience (IG, TWTR, etc.) to the newsletter. They're bartering with other newsletter operators, exchanging value in any way possible. Guest appearances on podcasts, guest posts on newsletters, and so on. Tons of blood, sweat, and tears - but zero cash out the door.
Month 6 - Month 12
By the end of June, Big Dean's has passed over 1,000 paid customers for its newsletter. A big milestone that leaves the team eager to accelerate growth. The team outlines a plan of thoughtful, yet ambitious, investments for the next 6 months.
Employees (FT / PT) / Outsourcing Costs.
To get started, Big Dean's hops on Fiverr to get help designing their brand style guide and logo. Although the team does a ton of outreach, they also pay for a competitive research analysis. It’s a modest investment ($500) in the first month. Because it's more of a side hustle for the moment, no team member is spending too much time on it. It's either a natural extension of their existing work, or it's less than 10% of their total mindshare. For the first half of the year, we're not considering any cost for employees, either part-time or full-time.
Marketing. After a relentless push, Big Dean's is bringing in hundreds of new customers per month. The team is feeding data into their CLV model and growing more confident in the assumptions. Using the CLV model, they etch away at an initial comfort zone for a target blended CAC of $5. (This is a crucial concept which we'll return to later.) Using that goal and the new customer run rate, they earmark a few thousand dollars in marketing investment for each month.
If we've found traction, marketing can be an effective tool to pour fuel on the fire. For our purpose, at least to start, the primary goal of marketing is to drive new customers. To assess effectiveness at a high-level, we'll use a blended customer acquisition cost ("CAC").
To start, the team experiments with search and social media marketing. Encouraged by early results, the team pushes forward with retargeting campaigns. In Q4, SEO improvements and expanded marketing creative amplify efficiencies. The team is able to exit the year spending a few thousand in marketing, and having driven up new customer growth into the low single-digit thousands. Solid momentum heading into next year.
Hire someone for graphics
Bring on someone to help w/ marketing. experimenting with
After seeing traction, hire person part-time to ramp up digital marketing efforts.