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ForestTreesBark.com is a Blog by Dave Parker @DaveParkerSEA
I get to help companies grow in two professional areas of my life, through the Founder Institute that helps early stage entrepreneurs to launch meaningful technology companies. And through OneAccord Partners, that helps mid-market companies scale profitable top-line sales.
Have a question on venture ready financial models or startup ideas? Add a question or comment using the link to your left.
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Which program is right for your startup? The answer to that question depends on a number of factors, including you, your idea and your team. I recently gave a talk at the Northwest Entrepreneur Network University (NWENU) about Accelerators, Incubators and the Startup Ecosystem, specific to Seattle, but the general rules apply as well. Here are the slides from the program.
Start with You
Where are you in your startup life cycle?
- Pre-Idea – do you have two or three ideas that you’re working on and you don’t know which one is best?
- Pre-Product – you have a market and an idea, but you need to know how to build a product and/or find a technical co-founder
- Pre-Revenue – you’ve built a product, but you need to know how to do go-to-market sales and marketing as well as financial modeling
I love engineers and developers! But sometimes they build a solution that is in search of a problem.
I recently read a headline on a LinkedIn post that reflected the headline above. I didn’t get a chance to see the author or article (I think it was about QuickBooks or Quicken), but the headline struck me given my interaction with technical founders. Often I’ll have Founders and Entrepreneurs that come into the Founder Institute with an idea for a product or an app, it’s a solution. But does that idea solve a customer problem and can you build a company around the idea?
Some people seem to think that if they just call their idea “Dead Simple” that it actually makes their idea or product Dead Simple. They’re wrong.
Every semester at the Founder Institute starts with a four-week sprint to the Mentor Idea Review. Where each of the Founders get to pitch their idea to a group of mentors. If they score well, the founder gets to continue in the program. Score poorly, the founder will get invited back to the next semester for free.
Founders come into the program in three stages at the start of the program:
- Idea Stage – maybe one or up to three ideas
- Pre-Product Stage – they are generally committed to an idea or a market
- Pre-Revenue Stage – the product is ready, but the company is pre-revenue and needs to work on their go to market strategy
What is Dead Simple?
The saying goes – You can always lower your price – but it’s difficult to raise it. So start testing before you become fixated on a price.
When you’re doing a startup it’s tempting to start your pricing low. In fact, many founders will become fixated on a price or a specific percentage of margin before testing their assumptions. Avoid that temptation. I talked before about startup pricing metrics, categories and comparisons. This is an important part of building your financial model, but it’s not the only part.
Your sales price has to be large enough to cover three additional expenses:
- Cost of customer acquisition – what does it cost to acquire a PAID customer to your site? As an example:
- How much does it cost to get 1,000 uniques to your site in a month
- What percentage of that traffic will register and give you email, name and phone number
- What percentage of those registered will give you a credit card and purchase your product
- How much churn will you have
- Margin – is the difference between that revenue and the cost of acquiring your customer
- You obviously can’t price gouge – unless you’re the only product with no competition – which isn’t going to be your problem
- You will need as much margin as you can eek out of the sale, because you’re going to be wrong with your other assumptions
- Cost of Building your product -
- How many hours for developers
- How much time for sales people
- How much general and administrative costs
The problem with starting your price too low is that it establishes a value that is in direct correlation to your belief in the product. Let the market give you the value through testing, not from a lack of belief. Besides, you’ll need all of the margin you can find to answer these other questions.
Dealing with startups and financial models is one of the areas of discussion that always comes up in product pricing. What’s generally astounding is the lack of thought or time that has gone into the process. I know, I know, you’re busy building a product and can’t be bothered by such triviality. But, when it’s time to prepare a venture ready financial model, you’re going to need to input your pricing hypothesis into your pro-forma document. So let’s get to that hypothesis. But first:
- SAAS isn’t a price – software as a service is a delivery model (Compared to shipping boxes of software on disks).
- Freemium isn’t a price – it’s a go-to-market strategy that is designed to acquire customers and convert some percentage of these customers to a paid version of the product.
- In App Purchase isn’t a price – it’s a way to monetize the sale of virtual goods within a game. Read More…
How does your pitch compare to:
“I’ll genetically engineer miniature pot-bellied rhinos for pets and sell diamond-plate wainscoting on the side”
Tell us how you’ll change the world, in one simple sentence @GeekWire. The deadline to have your pitch online is 9PM Pacific Saturday night. You’re limited to 30 words – but you’ll get some mentor feedback on your idea to improve your pitch.