Archives for October 2014

How to Project Potential Affiliate Revenue for Your Website or App

October 30, 2014 by Adam Hoeksema Leave a Comment

For content producing websites there are just a few options when it comes to revenue generation. In order to monetize your content you will likely have to choose one or more of the following 3 options:

Ads
Premium Paid Content
Affiliate Fees

In this blog post I want to outline how to predict the potential revenue you could generate through affiliate fees on your site, and then share a spreadsheet template that I built to help you project affiliate revenue.

What is Affiliate Revenue Exactly?

According to Wikipedia Affiliate Marketing is:

“Affiliate marketing is a type of performance-based marketing in which a business rewards one or more affiliates for each visitor or customer brought by the affiliate’s own marketing efforts.”

As an example, let’s say you operate a cooking blog where you share recipes etc. You might have a particular blender that you love and you write about it. You could post an affiliate link to a website like Amazon where you can buy the blender and if your readers click that link and end up buying that blender, you could earn a commission which would be considered affiliate revenue.

How Much Revenue do Websites Generate From Affiliate Commissions?

Affiliate revenue is a big business. According to Forrester Research the affiliate marketing industry is expected to reach $4 billion this year (2014). As you will soon see though, to generate substantial revenue, you are going to need to have a lot of traffic.

How to Find and Sign up For Affiliate Programs?

There are a number of sites where you can find products to market that will pay affiliate fees. A couple options include ClickBank and Commission Junction. One of the most interesting tools is Skimlinks which automatically takes your links to products and turns them into affiliate links. Here is a short video that explains how it works:

Financial Model for Affiliate Fee Generating Websites

Now that we have covered the basics of affiliate marketing, let me walk you through how to build a revenue model for this type of business.

1. Traffic

The first thing you need to estimate is your website traffic. Obviously this is much easier if you have an existing website with existing traffic. If you are starting a brand new website, you are going to have a more difficult time coming up with a reasonable traffic level expectation. If you expect most of your traffic to come from search, then you might be able to utilize the Google Adwords Keyword Planner to get historical data on the volume of searches for a particular set of keywords. If your traffic is more likely to come from social sources like Facebook, Twitter and Pinterest, then your best bet is probably just to get started producing content and see how many visits you start to get and then refine your revenue model as you go.

2. Conversion of Traffic to Affiliate Link Click

Next you are going to need to estimate the percentage of website visits that will turn into a click on an affiliate link. (Hint: this is likely to be pretty low). Based on this article here are some average click through rates for types of advertising:

Banners generally yield a 0.10-0.13% click-through rate
Emails – 2.8-5.9%
Good CTR for paid search ads is 2%, but I frequently see well-producing affiliates have a lower CTR (0.8%-1.5%)

3. Conversion of Clicks to Purchases

So a very small percentage of visitors will click an affiliate link in the first place, then out of those clicks a small percentage will then purchase the product you are promoting.

4. Average Purchase Price

Next you have to estimate the average purchase price of the items you are promoting. If you have a blog about computers, then your average purchase price will likely be a lot higher than if you have a website promoting baby clothes.

5. Affiliate % Commission

Lastly, different products and different product categories will all have varying commission percentages. Here is an example from Amazon’s Affiliate program that lists different rates for each product category.

6. Total Sales

Finally, we pull all of these numbers together to come up with your total projected sales number. You can use our template for affiliate marketers, on our Revenue Model section of our templates page. What you will find is that you need to have “SIGNIFICANT” traffic in order to make decent money.

7 Ways Startups Should Use What If Analysis

October 26, 2014 by Adam Hoeksema Leave a Comment

We are really excited to announce a powerful new feature for ProjectionHub users – Scenarios

This new feature will allow entrepreneurs to do what if analysis on their projections quickly and easily.

For many entrepreneurs the whole point of creating financial projections is to be able to compare and contrast financial results based on different scenarios and different assumptions. As we release this new feature I wanted to write a short blog post that gives you some ideas of how startups can use “What If Analysis”:

1. What if I Lose My Largest Customer?

This is a question that your banker will likely ask. They want to know whether you can cover your fixed costs and debt service even if you lose your largest customer?

2. What if Google Changes Their Search Algorithm?

This happens all the time. Google Gives and Google Takes Away. Lately ProjectionHub has seen some nice increases in our search results on Google, but it is altogether possible that we could wake up tomorrow to find that Google has changed its search algorithm and a significant portion of our visitors is gone. Here you can see recent search growth for us at ProjectionHub. It is great! But we need to be thinking about how our business changes if this changes?

3. What if the City Starts Construction on our Road?

For retail businesses a major risk can be construction. If all of a sudden it becomes difficult to get to your place of business, what is going to happen to sales? How much of your sales is based on drive by traffic? Or are your customers loyal enough to drive through construction to get to you? If you already know construction is scheduled to happen on your road, you might want to do What If analysis to project what happens if construction goes longer than expected.

4. What if We Don’t Raise More Capital?

For many high growth startups you have a limited amount of time before you will run out of cash. Your Burn Rate is the amount of negative cash flow per month that your company is experiencing. You should know your burn rate so that you know how many months you have before you will need to raise a new round of capital, and you might want to run some scenarios to see what happens if it takes longer than expected to raise money. What adjustments will you need to make?

5. What if We Hire Another Person?

What happens if you hire a new person? Obviously expenses will increase, but what about sales? Will you be able to produce more, or sell more? How much more?

6. What if We Don’t Hire Another Person?

Another question that you might want to ask yourself is what happens if we don’t hire another person? Maybe you won’t ever be able to reach breakeven with your current sales volume so you almost have to hire a new person. Or maybe hiring another person will actually make your current employees less efficient.

7. What if Fuel Prices Increase?

Finally, what if your input cost increase? What if your business is highly dependent on fuel prices, what would happen if gas goes to $5 a gallon? Is the business still sustainable? Think about other input costs like labor costs or steel costs etc.

We believe that it is incredibly important for entrepreneurs to ask questions, do what if analysis with your financial projections and determine how you need to mitigate certain risks, and what decisions to make to help grow the business or increase sustainability. What other scenarios do you like to run for your business?

How to Create a Revenue Model for a Retail Business

October 20, 2014 by Adam Hoeksema Leave a Comment

Are you considering opening a retail business? Before you buy a building, or sign a lease to set up shop, you will want to run some numbers and determine whether you can generate enough sales to run a profitable business. According to a report published by the US Census Bureau, US Retail and Food Service sales for September 2014 reached over $442 billion. Out of $442 billion each month, how much revenue will you be able to carve out in your retail business?

Before we dig into the details of creating a revenue model for retail businesses, there is a question we have to answer first:

What Types of Businesses are Considered Retail Businesses?

Well according to the Census Bureau Report the following businesses are considered retail:

Motor vehicle & parts dealers
Furniture stores
Electronics and appliance stores
Building material and garden supply dealers
Food and beverage stores
Health and personal care stores
Gasoline stations
Clothing stores
Sporting goods, hobby, book and music stores
General Merchandise
Miscellaneous store retailers
Food services and drinking places

If your business falls into one of these categories, then you are a retail business. Retail businesses will typically build a revenue model in a similar way. Now I am going to outline the key aspects of a retail revenue model and then provide an Excel template that you can use to create your own revenue projections.

Retail Revenue Model

1. Establish your Target Market and Monthly Leads

The first thing you need to do is establish your target market. So in retail what is your target market? Let me give you some examples:

A store in the mall – if you are a store in the mall, maybe your market is the number of people who visit the mall each year. Then you would probably narrow it down from there to get a target market. For example if you are a women’s clothing store, your target market is probably the number of women who walk into the mall. To get this data, simply call the mall you are looking to open in and you should be able to get this data.

A Gas Station – for a gas station, your market is the number of vehicles that drive by your station each day. You can find this data from your state’s department of transportation website. They will typically provide traffic data that will help you estimate your market.

A Grocery Store – this is probably based on geographic location. Your market is probably the population in a particular radius around your store. This can vary drastically depending on where you are located. In the middle of Wyoming your market might be a 100 mile radius. In New York City, your radius might be a few city blocks.

A Car Dealership – this is a tough one. Your market could be anyone within a 50 mile radius, but if you are a Ford dealership, it might be that your market is only individuals willing to buy a Ford in your radius. There are probably many people in that radius that would never buy a Ford.

Once you have you target market estimated, you should estimate the number of new leads you will get each month from that market. You might decided that everyone in the market is a lead, or maybe just the cars that exit off of the interstate if you are a gas station.

2. Conversion Rate of Leads to Customers

Once you have your target market identified, then you need to determine a percentage of your potential customers that will actually become customers. This is probably the most difficult thing you will have to estimate within your revenue model. For every other number there is data that you can find, but your conversion rate is so unique to your specific situation. In order to make your initial estimate it might be best to go do some first hand research. For example, spend some time at a competing gas station, grocery store, coffee shop, etc and count the number of customers they have in a day. This will at least give you a frame of reference for what to expect.

3. Percentage of Customers that are Repeat Customers

For many retail businesses they have a base of repeat customers that come back day after day, week after week, month after month. You will need to make an educated guess at the percentage of customers who are repeats. There will be some percentage of customers who try your establishment once and then never come back, but hopefully many will come back again and again.

4. Average # of Purchases per Month per Customer

Next you need to estimate the number of times you expect customers to purchase each month. If you are a grocery store you might estimate once a week. A coffee shop, maybe 3 days a week. A high end restaurant maybe once a year for special occasions.

5. Average $ Amount of a Purchase

The final major assumption is the dollar amount per purchase. You can probably estimate this pretty easily. At a furniture store you can just take the average price of your furniture items. At a bar, what is the price of a drink x the number of drinks the average person orders.

6. Total Monthly Sales

Once you make all of these assumptions, you can put them all together to get your total monthly sales. I put together an Excel template with this revenue model. The yellow highlighted cells are the cells that you need to enter in your assumptions, and it will calculate your total monthly sales. See below:

To access the Excel file template, see our templates page here and download the “Retail Business” revenue model template.

Want to Get Into the Rental Home Business? Know Your Numbers First!

October 14, 2014 by Adam Hoeksema Leave a Comment

It seems like a no-brainer right? The house down the street has been on the market for 24 months and the price continues to go down, and you just know that you could get a mortgage, buy the house and rent it out at a profit.

Before you put in your 2 weeks notice at your stable job, let’s just run some numbers and look at the realities of the rental home economics.

The goal of this blog post is to walk you step by step through the thought process for creating financial projections for your rental home business. I will be using our financial projection web app – ProjectionHub – and then at the end of the post I will share an Excel template you can use to create a financial model for your own rental home business.

Step 1 – Finding a Home to Purchase and Rent Out

The first thing to do is find a home that you can purchase and that you think you will be able to rent out to a tenant. A good place to start is the real estate website – Zillow. Using Zillow you can find a few key pieces of information:

What houses are available
How much do they cost to purchase
Rent price listing for a similar house nearby

Below you can see a screenshot from Zillow with homes that are listed for sale along with prices. You can then do a similar search for rentals nearby and find listed rental prices to get a feel for what the market rent is for a similar home.

So let’s say you identify a $100,000 house that you will purchase, next you need to determine how much you can charge for rent.

Step 2 – Set a Rent Price

According to an article by Home Guides landlords should charge between .8% and 1.1% of the value of the home as the monthly rent. So for your $100,000 house you can expect to charge between $800 and $1,100 per month. Let’s assume you are able to demand $1,000 per month in rent.

Step 3 – Estimate a Mortgage Payment

As a general rule of thumb you will need to come up with a 20% down payment to purchase a home for the purpose of renting it out. So you will need to invest $20,000 in cash into the home right off the bat. Then you will have an $80,000 mortgage. Your monthly mortgage payment would be around $400 per month according to Bank Rate’s Mortgage Calculator:

Step 4 – Estimate Normal Monthly Expenses

Your operating expenses will include the following:

Property Taxes
HOA Fees
Lawn Care
Insurance
Maintenance

There is an excellent article on Zillow that helps you estimate your rental property expenses. As a rule of thumb they suggest that your monthly expenses excluding your mortgage payment will be 35% to 80% of your monthly rent. So in this case, let’s say you end up on the low end and it costs you 40% of your $1,000 monthly rent. Now you have $400 in a mortgage and $400 in operating expenses. This leaves you $200 per month in profit, but we have not considered unexpected expenses yet.

Step 5 – Budget for the Unexpected

So you have $200 in profit per month right? Sounds pretty good… until the furnace goes out, or the roof starts to leak, or the refrigerator dies, or the tenants notice that you have termites, etc, etc. As a rule of thumb Zillow suggests that you budget 1% of the value of the home per year for maintenance and miscellaneous expenses. So for a $100,000 home you should expect $1,000 per year for those unexpected expenses, or $83 per month. But you need to remember that these expenses won’t come in $83 increments. You may not have a major expenses for months or even a year, and then all of a sudden you may need to dish out $3,000 for a new furnace.

Creating a Financial Projection for a Rental Home

Now that we have all of the data we need I entered it all into our financial projection tool to come up with a 3 year financial projection.

The Result?

The rental home business is a long term game, and the economics improve as you increase the number of properties you own. Really the goal for rental home owners should be to pay off the mortgage as fast as possible because when you no longer have a mortgage payment, that extra cash flow is yours to keep. Secondly, with just one property it is really just a game of luck. Will the furnace last another few years? Will the roof hold up? Will the termites stay away? Will a pipe burst? When you only own 1 property if anything bad happens during the year, there goes all of your profit. If you own 100 properties, the averages will play out and you should be able to make a nice profit, but with just a few properties anything can happen.

Our projections show that you will have a net loss on this house every month, but that is because of depreciation expense. You will have a positive cash flow of a couple hundred per month on average. But with only one house, you won’t get rich quick.

I used our financial projection tool to model this rental home business, and I have published the resulting Excel template here for you to download and use for your own projection.

Zero to One Book Review

October 12, 2014 by Adam Hoeksema Leave a Comment

I just finished Peter Thiel’s book Zero to One and wanted to spend some time to review the book and put in writing what I have learned and how it relates to ProjectionHub.

First of all the book was excellent. It was a quick read and it outlined a number of concepts that I have never heard or thought of in the past. There were a ton of concepts that I thought were incredibly valuable for startup entrepreneurs. Here were a couple concepts I noted and how they relate to ProjectionHub:

1. Create a Monopoly – Much of Peter’s premise in this book is that in order to build a successful, sustainable, profitable company, you should look for opportunities to create a monopoly. He explores several examples of companies that are large today that started by controlling a small niche market and then moved to other markets once they understood the model in a small market. Examples include:

Facebook started by dominating Harvard’s campus first then moved to other universities one a time.
PayPal started by dominating payments for eBay power sellers
Amazon started by dominating book sales

Taking this lesson to ProjectionHub I think we need to focus on creating the best financial model for one industry at a time. Rather than trying to create a financial projection tool that is the best for everyone, create a great model for SaaS, then Mobile, then eCommerce etc.

2. Think about Quantum Leap Improvements – Peter really pushes back against the Lean Startup philosophy which is to make small incremental improvements quickly. He suggests that all of the great companies built a solution that was 10x better than the alternative. For example, PayPal was 10x faster than paying by check for items on eBay. Amazon had 10x the number of books than even your largest book store.

So at ProjectionHub we have to make sure that our financial projection tool is at least 10x as good as an Excel template.

I would definitely suggest that you pick up a copy of this book and learn some great counter intuitive concepts about taking your business from Zero to One.

Do Underwriters Hate Financial Projections?

October 8, 2014 by Adam Hoeksema Leave a Comment

We want to hear from the commercial underwriters of the world. Don’t you just hate dealing with financial projections?

We aren’t underwriters, but we imagine the process to look something like this:

1. The bank policy or SBA requires financial projections for certain business loan applications.

2. The business then submits a set of projections in one of a million different possible formats. Just look at all of the different templates you can find out there with a simple Google search offered by the following organizations:

SCORE
Microsoft Office
Biztree
CDC Loans
Butler Consultants
Common Capital
And 100’s more

3. Then the underwriter has to take the projections provided by the client and find the specific numbers needed to enter into spreading software. Let’s say that you need to enter 10 different numbers like:

Sales
Cost of Goods Sold
Operating Income
Net Income
Cash on Hand
Inventory
Accounts Receivable
Fixed Assets
Current Liabilities
Long Term Liabilities

So you should probably be able to find all of these numbers somewhere on the client’s set of financial projections, but the problem is that the numbers could be anywhere, in any format, they could be called something different. There are so many different terms and ways to say the same thing with financial statements, so it could be really difficult and time consuming to transfer the numbers from the financial projections to the spreading software.

Then what happens when the projection template doesn’t quite have all of the numbers that you need to complete your analysis to satisfy SBA or the underwriting team? You have to write up an email to send back to the client explaining what you still need and then go back and forth with the client until the projections are complete.

4. Then after all of that, most client financial projections are completely unrealistic anyway.

It seems like such a terrible process.

A Potential Solution

So at ProjectionHub we think we might be able to help banks and underwriting teams make this process more efficient, but we need your feedback. Here is how we think it could work:

We create a unique URL for your loan applicants to use to create a set of financial projections. For example, www.projectionhub.com/bankxyz
Loan applicants create their financial projections with our simple web application.
Then the final product is an Excel file that is formatted specifically for your bank.
- You simply tell us what numbers you need to enter into your spreading software and we create a custom tab on the Excel file that puts those exact numbers in the order that you need them to enter into spreading software.

This would solve several problems for the bank:

It would standardize the financial projection process so that you can easily analyze the projections
It would speed the process of data entry from projection to spreading software
It would ensure that the client projections are always completed with the numbers that you actually need
It would allow the underwriters to quickly analyze whether the projections are realistic or not because of the standard format

We want your feedback on this. Would this be helpful for a bank? Please leave us a comment below of send me an email at adam@projectionhub.com

You can also test out ProjectionHub here.

StartupCatchup Features ProjectionHub

October 1, 2014 by Adam Hoeksema Leave a Comment

We were excited to be featured on StartupCatchup this week! The team published a great interview that dove into why we created ProjectionHub, what we have done so far, and where we are going.

Just a little bit about StartupCatchup:

“We’re a passionate team of bloggers located in London, Washington DC, Florida and Amsterdam, dedicated to writing about and featuring the latest and greatest startups from around the world. We feature articles on startup companies and interviews with startup founders; giving a unique insight into the beginnings of a statup company and the entrepreneurs behind them.”

So if you are a startup looking to share your new product or service with the world, reach out to the team at StartupCatchup, they were fast, easy to work with, and did a great job sharing our story.

Here is the full interview for your reading pleasure.