How I “Sanity Check” Financials For a B2C Business Idea
By: Martin Delaney
Tags: Leadership, Entrepreneurship, Business, Startup, Founders

Hypothetically, let’s consider a B2C software app that grows primarily through paid acquisition (advertising) as an example.

In this scenario, it has a “freemium” model wherein the basic functionality is free but heavier usage customers have to pay via subscription.

It’s not a marketplace or a service that gets better with more users, so the only “real” value a customer provides to the business is revenue.

There’s three immediate KPIs that are important to contemplate:

Customer Acquisition Cost: How much it costs to acquire customers.

Conversion Rate: What % of customers convert into paying customers.

Paying Customer Value: How much value paying customers generate in revenue.

This can seem a little abstract to consider without any data, but, it’s possible to inject a sense of reality by using a framework.

By researching the “closest” competitors to the idea or components of the business model in question, and getting a feel for their KPIs, there’s an initial baseline to work with.

At this point, I can whirl up a basic spreadsheet and start to populate it.

Here’s a link to it.

In the top left, in green, I have the major KPI variables. Changing these affects the rest of the spreadsheet.

My “research” returned these figures:

CAC: $10

CR: 10%

PCV (6M)*: $150

*I drop off revenue in months 7–12 to roughly account for churn.

So, once input these figures, it populates the other cells with data.

In the example above, I started off by spending $1,000 in advertising in Month 1 as a one-off injection of capital, and reinvested the returns through to Month 12.

This generated “gross profit” for the year of $1,528.91, and $17,677.71 over two years, which can be used to fund operating expenditure:

But, all we have here is a baseline. Now, it’s time to probe further by “playing around” with the KPIs using a logical basis.

This is unique in each circumstance, so I try to calibrate them realistically and with merit. Otherwise, the process falls apart.

For example, if I’m able to offer my product in a market that is untapped by competitors, I could make the assumption CAC will be lower at varying degrees and explore how that changes the financials.

If my product delivers more value to the customer than the competition, I could make the assumption PCV (6M) will be higher in varying degrees and explore how that changes the financials. This is where a unique value proposition can really shine through.

The reverse is also true — catering for the “unknown” and factors that are “overlooked” or “underestimated”.

What happens if CAC is doubled — $20?

What happens if the Conversion Rate is halved — 5%?

What happens if PCV (6M) is 50% less — $100?

Doing this helps me build “quick narratives” around the business model.

Not just by changing numbers randomly, but by deliberately adjusting them depending upon what I believe to be the strengths and weaknesses of the business in that unique context.

It’s possible to “get a feel” for what KPIs are most likely to deviate based upon the research, and to roughly what degree. This can be used to map out a minimum and maximum threshold for each KPI.

You can also use a sensitivity analysis chart to consume this data better visually, where Conversion Rate is on the x-axis and PCV is on the y-axis:

Image supplied by author.

In the above example, the KPI range where a business can hit and “win” (green) is larger than the red area (where it “loses”).