Monkeys,
I am practicing doing a model for an app, the business derives their revenue partly from ads and partly from subscription. How would you build this out in practice?
I realize I would have to start w. the number of users and the subscription price, but how would you factor in that some users end their subscription after 2 months and others stay longer?
And what would drive the revenue from ads if it’s a detailed revenue build (i.e., projecting based on a growth rate applied to historicals is not an option).
Talk with the mgmt team and align your model with how they envision the business. Subscription model is pretty straightforward- would put together a waterfall so that new subscribers are captured in forward periods and layer on as the subscriber base grows. Assume a certain churn rate based off what the company normally does.On ad revenue, not super familiar with that kind of modeling, but would think about how they make money off ads and the timing of the realization. Do they earn a certain amount if things are bought through the ads? Do they get paid on placements? Capture underlying KPIs based off ad placement rate / CTR / or something like that and roll that forward
You’d have two separate revenue builds (1) subscription revenue and (2) ad revenue.
The second build is relatively straightforward, though I suspect ad revenue increases as the number of customers increases.
(1) Subscription revenue, you’d need to make two assumptions here (a) renewal rate and (b) customer acquisition growth rate or number of customers acquired. (a) Tells you the number of customers that will cancel (for a more mature business, this trends tend to hold steady; although, macroeconomic factors, market landscape, and other disruptions could be factored in). (b) tells your the number of customers you are acquiring every month. You can start with a base, say 100 customers, and growth by X percentage every month. For a new app, this number will increase exponentially until it reaches its peak, then it will begin to marginally decline. You can also make a similar assumption about renewal rates. At first, you may experience more cancellations, but as the business stabilizes, you just have a steadier renewal rate.
(2) It depends on the compensation model. You can use the number of users derived in (1) as a proxy for views / variables fees, depending on the ad revenue agreement.
(1) + (2) = Total Revenue
Simple enough. The more information you have, the more granular you can get with assumptions. However, the above approach should be robust enough for decent operating model.
Thanks a lot! Super helpfull
1) This is called churn, this is the rate at which users turn over.
2) It is more complicated than just projections based on old numbers.
You need at least the following information
1) Number of current users
2) Expected user growth rate
3) Current revenue distribution
4) Current ad revenue per user
5) Expected growth (positive or negative) in the ad revenue per user
6) Expected average life of a customer
7) Cost of customer acquisition
8) OPEX current and growth
9) CAPEX current and growth
10) Cost of capital
Note this list is not inclusive, but it covers the most critical things to start with.
Another note: In this business it is very possible that the valuation of the company will be $0 based on a DCF model due to the fact that revenues are smaller than expenses.
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