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We are happy to show you a new business case calculator that we’ve built here at Firmhouse. This calculator allows you to test your Product-as-a-Service (PaaS) proposition, see what margins you can achieve and what metrics are important when starting a PaaS-proposition or pilot. You can find a link to the business case calculator here.
The calculator can be used for two main purposes:
- Scoping the order of magnitude of a pilot project including return on investment (ROI) on the initial and monthly Firmhouse fees.
- Calculating the profitability and unit economics of a subscription model at a certain scale.
For a more elaborate overview how this business case needs to be filled-out and how it works we wrote a help article which can be accessed here.
What is is the calculator and where can it be used for?
The calculator allows anyone to produce realistic business cases of PaaS propositions and pilots and get a grasp of the:
- Absolute profitability at a certain scale.
- The potential Customer Lifetime Value (CLTV) of the subscription proposition.
- The break-even month of the business case.
- The Customer Acquisition Costs (CAC)
The most important metrics are the Customer Lifetime Value (CLTV) and the Customer Acquisition Costs (CAC). You will see it at the top of the sheet.
CAC = all out-of-pocket costs you make to get organized acquire customers. In a pilot, these are mainly the project costs including one-off fees from Firmhouse at the start.
CLTV = is a somewhat more complicated calculation, in which all running costs and product depreciation must be included. Ultimately, this is your profit per customer over the term of the subscription. The churn and fraud rate is decisive in this. The longer a customer remains a subscriber, the more a monthly margin is earned on that customer (ARPA).
The pilot scenario assumes a low-key pilot effort without substantial marketing costs. Typically these pilots should deliver crucial insights in the key metrics such as the CLTV, churn and non-payment percentages. Insights in these numbers can also help you in getting financial investments for your pilot or PaaS-propositions. Since financing this business model still remains one of the crucial factors in the success of it, calculating a solid business case can aid in this process.
The purpose of the calculator
A healthy business case should typically meet the following requirements:
- You need to have a positive CLTV, which also is a factor 3x higher than your CAC. Especially since you also have return logistics and a service component to factor in.
- Break-even month is in the foreseeable future. It depends on the context or sector/branche of your PaaS on what period is acceptable.
- At scale the absolute profitability should make a significant impact on the business.
Factors which can impact the above significantly and are there for a part of the calculator:
- The pricing of the offering.
- The average monthly churn percentage, these are the subscribers which cancel their subscription.
- The percentage of non-paying customers.
- We have partners in our ecosystem than can help mitigate non-paying customers. One of the main ways to do this is to set acceptance checks and set relatively high risk indicators for clients you don't want to serve.
- The costs of service delivery, including any depreciation of hardware or other production costs.
- The marketing budget and any other one-off fees to launch a proposition.
- At Firmhouse a pragmatic launch can be relatively cheap and done within 2-4 weeks.
There are also a lot of other, less significant factors which this business case takes into account, such as at what pace new subscribers join the platform, one-off fulfillment costs and payment processing costs.
These are also important but are less relevant for initial calculations of your business case. If you want to know more about this, get in contact with us.
What can the calculator do?
The calculator can help companies’ gain insight in the validity and scalability of their business case. A pilot scenario assumes a low-key pilot effort without substantial marketing costs. Typically these pilots should deliver crucial insights in the key metrics such as the CLTV, churn and non-payment percentages.
A scaled up scenario will give you some insights into the potential of PaaS vs current gross margins. This can potentially be an order of magnitude higher over the long run. Let’s assume you’ll averagely make 45% gross margin on this in regular channels.
The CLTV compares to this margin and can be as much as 3 to 5 times higher (assuming industry standard churn and fraud rates). This is explainable as you eliminate a lot of layers and costs for servicing these customers over the long run. This could mean a gain in one PaaS-customer can compensate for a couple regular customers.
It is also interesting to learn what is already included in the cost price calculation. Are the Dead-on-Arrivals’ (DOAs) and B-stock already included? In that case, servicing your PaaS customers with free hardware replacement would cost you nothing extra, while building a very loyal customer base. This can be comparable to a lifetime warranty.
Got interested in launching a (pilot) PaaS proposition?
Got interested in launching a pilot or product-as-a-service proposition? At Firmhouse we can help you start your proposition on our platform. We can fully automate all back-end processes and help you launch in no-time. Sign up for free today or contact us for scheduling a demo.
For the article on how the calculator works, and how it has to be filled out find the help article here.