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Predicting revenue for online startups

Written by Mihai Dragan on Thursday, February 25th, 2010 ( One response )
Tags: economics, entrepreneurship, online startups, Running the business, studies

Online startups are interesting micro-economies. Most of the systems are based on several variables like number of users, conversion rate and others, directly depending on the type of business systems they do (or do not) develop.

I have been studying the whole concept and focused on some of the variables that are usually left out.

The assumptions

The online startup I’ve studied to get a glimpse into this was an hypotetical online game. I’ve assumed the the game will be launched with a PR/advertising campaign, delivering an initial traffic to the website.

The game would sell power-ups to gain revenue. Other assumptions I have based my study on are that users would enter the website, register if they feel like, drop out and erase their account if it is just not their cup of tea, invite friends which would might or might not respond and of course, play.

The conventions

In order to test the user’s behaviour we will use several conventions, following Registration Rate (RR), Spread Rate ( SR – number of invited users / month / user ), Response Rate ( ReR – number of invited users actually visiting the website / month ), Dropout Rate ( DR – users cancelling / abandoning their ), Conversion Rate ( number of registered users buying upgrades), Medium cost per product (MCP).

I have also thought of a formula to determine purchase intent (PI), directly proportional to monthly visitors increase, RR and Influence rate of registered users (SR/ReR).

The Purchase Intent is Inversely Proportional to Dropout Rate (DR) and Medium Cost per Product (MCP).

The results

Although the concept hasn’t been tested on real life scenarios (I am looking for entrepreneurs willing to share some data for the study – 100% confidential) I guess I can outline some conclusions:

1. Number of initial users is important but not the most important
2. Spread rate (SR) is the single most important Indicator to be taken into account. Incentivize potential users to spread news and you have a booming business. Fail to do that and all the money in the world spent on advertising won’t guarantee safe revenue returns
3. The response rate (ReR) is not actually that important. It doesn’t actually matter users being influential but rather willing to share information with their microcomunities
4. Conversion rate (CR) is important but it will take more than that to have a really successful product. A tenfold increase in conversion rate is useless unless the registrants numbers goes up.
5. Micropayments are the best choice. Increasing Medium Cost per Product (MCP), while having a steady increase in user base, means decreasing potential revenue. Increasing cost by tenfold will decrease potential sales by more than 50%
6. Dropout rate (DR) is basically irrelevant as long as the dropouts are outpaced by new registrants.
7. So, if it is something you should be focusing on as an online entrepreneur this is Spread Rate, Micropayments, and number of initial visitors.

I hope this helps.