Before reading this help article make sure you have seen the blogpost, in which we explain what the calculator is, what its purpose is and what it can do.
This calculator allows the user to punch in a number of items in the blue fields (the parameters) and automatically, the calculator will produce projections. This calculator supports a case in which three distinctive propositions or service plans are on offer. It allows users to price those offers and add assumptions on the distribution of those offers across the subscriber base. Also, each offer can include a cost of sale, which is now a capitalized cost of sale.
Main input variables:
Length of the business case: up to 24 months.
Target number of subscribers.
Warm-up period: the amount of months it takes to reach the target number of subscribers.
Depreciation period for write-offs of cost of goods sold.
VAT% or Tax.
Step-by-Step
First, you will need to fill out the input variables.
Then you will have to fill out the subscriptions you would like to offer. For example;
low-end washing machine
top-end washing machine
top-end washing machine with dryer
3. Thirdly, you will have to fill out how you think your subscribers will be divided over the propositions/subscriptions. Furthermore you will have to make an assumption on the churn and the amount of non-paying customers. These are standard set at 2% but depending on your sector/branch this can either be lower or higher.
4. Fill out the revenue. This is the input for each monthly subscription fee including VAT.
5. Fill out the one-off cost variables:
Project costs: these can include any one-off fees Firmhouse might charge for on-boarding, or other back-end systems you will have to set up (like CRM/ERP).
Any implementation fees or R&D.
Any contingency fees, being unforeseen or one-off advice.
Marketing budget.
Other cost specific for your sector.
6. Fill out startup cost; like cost for Firmhouse business license or other licences you will need.
7. Fill out total fixed costs; these are all fixed monthly costs to operate a subscription proposition and includes any fixed license fees by Firmhouse.
8. Fill out total one-off variable costs; a bit of a deceptive description. These are any costs the company makes for servicing the entire install base of subscribers each month. These are fulfillment costs for shipping a device as well as any one-off return logistics in case a customer cancels their subscription. Also, credit checks could be such a cost (like our partners Focum or EDR supply).
Payment fees, typically 0,30€ for SEPA direct debit.
Subscriber fees, these are the fees Firmhouse charges as a percentage. The subscriber fee is dependent on the subscription you will have and the amount of turn-over your companies makes. The more revenue you will make, the lower the percentage to be paid to Firmhouse.
Credit card processing fees, this is a percentage of the total and depends on whether the subscriptions have to partially be paid or will be paid using credit cards.
9. Fill out any other variable costs; start with the cost price of each subscription/product. Make sure to also factor in the cost of any service component here.
10. Fill out the total depreciation; these are all the monthly depreciation costs for all three products in a subscription offer. In case the Cost Of Goods Sold (COGS) doesn't go through a depreciation, you can also treat this a total cost of goods over the entire business case period for delivering the goods.
Result:
If you have done this all correctly and to your liking, the tool will automatically provide you with the break-even month (shown in green), the CLTV, the monthly Average Revenue Per Account (ARPA), the churn and your Cost of Acquiring Customer (CAC). You will have to check yourselves if CLTV = 3 times the CAC. Lastly, in the last rows and columns you can see the profit% and the total profit for your pilot. This article closes with the workings of the formulas and projections.
We hoped this helped you gaining a better understanding of the workings of a PaaS-model. If you have any further questions, please feel free to reach out to us.
Additional workings of the formulas and projections
Here are the used formulas and projections to help you understand how the business case is calculated.
Revenue:
The new subscribers are spread across all the months in the warm-up period.
The next month's churn is calculated based on the percentage of subscribers which we're active subscribers last month.
The next months' non-paying customer rate is calculated based on the percentage of subscribers which we're active subscribers last month.
This will produce an active amount of subscribers each month. Which is then distributed across all subscription offerings. This will result in a monthly revenue calculation, of which the VAT is subtracted.
Costs:
Any startup costs are sunk at the start of the project and also do not influence unit economic metrics such as CLTV, ARPA and churn.
The CAC is calculated based on the startup cost, divided by the number of subscribers.
All fixed monthly costs are spread evenly across the business case period.
All one-off variable costs are calculated on either the number of new subscribers in a month or the number of churning subscribers in a month.
All variable costs are based on the active number of subscribers in a month and/or the monthly revenue.
The depreciation costs are calculated on the total amount of customers served covering the depreciation period. Even churned or non-paying customers are included as these might still bear costs for shipped devices or goods.
Unit economics calculations
The CLTV is based on the intermediate metrics of:
ARPA (Average Monthly Revenue Per Account) albeit that this ARPA calculation is the gross margin after subtracting the monthly costs (but not the startup cost).
Average churn over 24 months.
The CLTV estimates the total earnings over the entire lifetime of the subscriber ever beyond the 24-month projection in the spreadsheet.
The CAC is based on the startup costs and this includes a capitalized marketing budget. This calls for some sanity with regards to marketing expenses versus the expected success in terms of number of new subscribers.