#50 - How To Build a Revenue Model
Matryoshka Dolls in Excel
Unlike boiling water or tying your shoes, building a revenue model isn’t an everyday life skill. Yet even if you’re not a financial analyst, constructing a model framework is a useful way to learn about a business.
Below is a blueprint for modeling revenue for Hopin, a virtual events platform founded in 2019. The company turned heads last week when The Information reported that it was discussing raising a Series B at a $2 billion valuation. While this post focuses on Hopin, the process could be applied to other businesses.
Deconstructing a Conversion Funnel
A revenue model is like a Matryoshka doll, unpacking a business layer by layer. Hopin sells monthly subscriptions and annual subscriptions, so its revenue model should distill these two streams into their building blocks.
A useful aspect of many internet and software as a service (SaaS) companies is that you can touch and feel their products. Signing up for a service highlights the key steps needed to build a model. Hopin’s self-serve flow looks like this:
The first step to generating a sale is getting a customer in the door. For Hopin, this means someone visiting their website. A user then needs to create an account, create an organization profile, create an event, and potentially pay for it. Every step would become a line in the model.
Only a fraction of visitors complete each step, so numbers get whittled down throughout the process. That’s why flows like this are called conversion funnels. The percentage that moves from one stage to the next is a conversion rate. For example, if a site has 100 visitors in a month and 20 create an account, the account conversion rate is 20%. There’s a conversion rate between each step, like the percentage of traffic that creates an account or the percentage of accounts that create an organization (a precondition for hosting an event). Only the customers that make it all the way to the bottom of the funnel are monetized.
Small improvements in conversion rates can translate into meaningful uplifts to revenue, so product and engineering resources are typically devoted to testing and optimizing the funnel.
In broad strokes, a revenue model boils down to a price metric and a volume metric. How many widgets are sold and how much does each widget cost? The conversion funnel provides the volume metric. For Hopin, this is the number of organizers that purchase a monthly subscription.
The pricing metric for self-serve internet and SaaS services is generally easy to find online. Here’s Hopin’s current self-serve pricing model:
This page gives a ton of useful details for modeling revenue and thinking through growth drivers. For example, it shows that there are three components to Hopin’s self-serve revenue:
Monthly subscription revenue: $99 per month for up to 100 registrations;
Registration overage revenue: $0.50 per registration for each registration beyond 100; and
Ticket revenue: 7% of ticket value sold through Hopin’s ticketing platform.
For building a revenue model, you’d collect and analyze data for these three items. The key variables are the number of monthly subscribers, the number of registrations, and value of tickets sold. In turn, each of these could be decomposed into metrics like subscriber retention and average ticket price. This is the Matryoshka doll quality of modeling. Ultimately, the model should help answer questions like:
How many new subscribers do we acquire every month?
What is the subscriber retention rate?
How many registrations are there per month?
At a minimum, Hopin’s self-serve revenue model would look something like this:
Annual Subscriptions
Hopin’s self-serve product is geared towards individuals and small organizations. The company also offers annual subscriptions for large organizations and enterprises. These subscriptions are sold through a sales rep, so can’t be test driven as well as the self-serve product. However, most companies provide lots of useful information on their websites. For more detail, you can always contact sales. Thanks for your help Andrew W!
Here are Hopin’s annual plans:
This page outlines what’s needed to model annual revenue subscriptions. Similar to the self-serve plan, there are three revenue streams:
Annual subscription revenue: Starting at $18,000 per year for Pro and Business plans and $50,000 per year for Enterprise plan;
Registration overage revenue: Ranging from $1-$18 per registration overage depending on the plan and service level; and
Ticket revenue: 2% of ticket value plus Stripe fees for tickets sold through Hopin's ticketing platform.
Because the bulk of revenue likely comes from annual subscriptions, this will be the most important part of the model. Breaking out the Pro, Business, and Enterprise plans separately would be a good idea. For each plan, the key questions center on customer acquisition, retention, and growth. Important metrics include annual recurring revenue (ARR), net revenue retention, and subscription renewal rates or its flipside churn.
Below is a simple framework for modeling Hopin’s annual subscriptions. The Matryoshka doll nature of revenue models means that you could go several layers deeper:
A key constraint in the process is data availability. Many of the metrics above won't be available outside of the company, but even without the data, thinking through a model helps shed light on the drivers of business performance.
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