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Start-Ups: A Realistic Approach To Calculating Clients’ Count & Revenue

Thursday, 3rd September

Over the last decade, online start-ups have become a very hot topic evoking a series of networking events and enlightening webinars, and attracting all sorts of business angels and far-sighted funds. And of course - a great number of adventurous entrepreneurs. Running an online business myself and always open to new opportunities, I am a member of several start-up business groups. One of the most thrilling things being part of these associations is the chance to see young entrepreneurs making their first steps into the business world.

Recently, I had some interesting chats with a few enthusiasts about their SaaS start-ups. One of the many questions we discussed was how to properly calculate the potential revenue from new SaaS businesses. Whatever brilliant idea stays behind a start-up, the funds and profit issues need to be addressed. As my own practice shows, it is easier to calculate the costs than the expected income. Start-ups are often rather small and young on the market, hence they have very scarce experience and know-how so as to make a precise sales forecast. That is why I find this particular question about revenue calculations a pretty important milestone for start-up business plans. And I am always keen to find the answers!

Technically speaking, to estimate the potential income from a SaaS business is easy - it is a derivate of the total number of clients expected and the monthly fee that they will pay per account. This is what people I ask usually say:

"It won't be so difficult to find 50 clients per month. So in the first year I will attract 600 clients paying $10 per month which is $72 000 for the first year."

That would sound good, if it was true. But it's not!

I have noticed two mistakes in calculations like the one above. Based on my experience and encouraged by the response I got from my interlocutors when I raised my points, I will share the conclusions we came to.

First, you will not have the expected number of clients start paying you from month 1. It may not be so difficult to find 50 customers, but it might take time. So start with calculating 10 customers for the first month and grow that number according to your expectations. Growth is natural, but be realistic. It is very likely to win just a few customers during the first few months and grow that number (even more than the average 50 in our example) by the end of the year. So take this into consideration and you will see how it will change the yearly total income. You should also bear in mind the smaller budget you will have at the beginning when you plan your operations.

Second, the dropout rate is often left out of sight. You cannot expect to keep every client. A typical dropout rate for the first month will be 20%, then in the third month at least another 10% of customers will leave and in the sixth - another 5%. Any customer that stays with you for more than six months might be considered a long-term customer who likes your services and will not easily leave you, unless a better competitor shows up on the horizon.

Calculate Clients' Count & Revenue Yourself

I have created an XLS template to illustrate all this. Below I will explain the logic behind the numbers - some sort of a guideline how to “read” and use the table.

Feel free to download the table and play around with your own numbers. This will help you estimate the potential income based on your own expectations. Download XLS file

How To Use The Table

Let's consider the above statement again:

"It will not be so difficult to find 50 clients per month so in first year I will attract 600 clients paying $10 per month which is $72 000 for the first year."

As noted, an important point to consider is that the number of new customers per month can be expected to be low at the beginning and will increase over time. So, if we expect to have 600 paying customers at the end of the year and this is a realistic forecast, then we will not have 50 new customers each month. Instead you can start with 20, then make them 45, then 60, etc. Based on your market research you should be able to specify some doable numbers.

Now it's time to consider the dropout rate. If you have 25 clients in the first month then in second you are likely to have only 80% of them (20% dropout rate) which means 20 clients. Then in the fourth month the number will go down by two (another 10% dropout) and there will be 18 clients only. Then in seventh month you will most probably lose another customer and that makes 17 paying customers. The same will happen with customers who register during month 2, 3, 4 and so on.

The XLS table illustrates how the total number of customers increases over time from month 1 to month 12.

I've made the number of new clients increase progressively each two months: month 1 and 2 - 20 new clients per month; month 3 and 4 - 45 new clients per month. Then 60, 75, 90, 100. At the end of the 12-month period we have a total of 600 clients. Due to the dropout rate we've had a total of 784 paying customers during the year, but 184 left us. With all these numbers in mind we now have a more precise sum for the expected income, which equals $31,558.60. As you can see, this is only 44% of the initially miscalculated $72,000 income, although we have the same number of customers at the end of the year.

This table is just a stepping stone which can help you out making a tentative estimate of the total number of clients and the income your start-up would generate. Of course, the web space is flooded with a myriad of start-up advices and sources you can also make use of. I'm just stepping on my own experience and personal observations.

And again, nobody says it's going to be easy to start your start-up, but if you believe in your business idea and have a great team on your side, it's worth trying. There is a whole new world ahead of you.

Good luck!