Creation of a basic revenue model

WWW.WHATISFORECASTING.COM

Creation of a Basic Revenue Model

Why a revenue model?

When building a model for a startup or other company with limited history, it’s usually advisable to start with a revenue model.

A revenue model is a piece of a larger financial model which, as the name might suggest, presents how revenue will be obtained.

Step 1 – Determine Appropriate Units

The example case is a company which sells razors and razor blades

The unit is a single razor as opposed to a case of razors.

Razor blades are assumed to be sold in a package of blades must be purchased each month,

Razor blade sales will be driven by the number of current and prior customers.

Step 1 – Determine Appropriate Units

Step 2 – Understand How Sales Will Occur Through the Year

In order to add a little complexity to our model: We assume that 25% of our razor sales come in

December (holiday gifts) The rest of the razor sales occur equally throughout

the year. Our razor blades will be sold to existing customers

only, since new customers will receive a one-month supply with the initial razor purchase.

Step 2 – Understand Per Unit Revenue

Step 3 – Understand Internal and External Drives

We’ll assume that our annual sales are 10,000 units of razors

1% of our customers will “churn” or, in other words, that we will lose 1% of our razor blade customers each month

This is a new business, so the company has no sales in month 1.

Step 3 – Understand Internal and External Drives

Step 3 – Understand Internal and External Drivers

We’ll assume that our annual sales are 10,000 units of razors

1% of our customers will “churn” or, in other words, that we will lose 1% of our razor blade customers each month

This is a new business, so the company has no customers at the beginning of month 1.

The result is a customer roll forward

Step 3 – Understand Internal and External Drivers

Step 4 – Calculate Monthly Revenue

Calculate revenue for our “razor” and “razor blade” product lines.

The razor revenue is just the number of razor sales in a given month times our $5 price.

The razor blade revenue is calculated as the (beginning balance of customers less churn) times the razor blade price per unit.

Step 4 – Calculate Monthly Revenue

Thank You

For further information, make sure to check out http://www.whatisforecasting.com