January 20, 2013

Cost of sales and average order value

In order to create a company with a high operational leverage structure, the business model needs to nail cost of sales (in terms of capital and staff) and average order value.

Many businesses can grow large, but not with a high operational leverage structure. The sales structure doesn't allow it. Internet startups relying on brand advertising sales fall into this category. Traditional enterprise sales-driven companies (as well as most larger SaaS companies) have the same issue.

A salesperson, including support staff, might be able to average more than €1 million in revenue per person. But keeping above that number when taking product and engineering staff into account is nearly impossible.

My sense is that an online company needs to have a paid for by user revenue model to hit €1 million in revenue per employee. The user might be a consumer or a business user. If the user buys a one-off license, an on-going subscription or pays a commission likely don't matter.

The other aspect is to have an average order value that assumes a reasonable number of customers.

If you sell an app for $0.99, you need to sell 15-20 million units to book €10 million in revenue after commission and VAT has been deducted. Which forces some aggressive assumptions.

If you sell software directly on your web site for $20, you need 500,000 customers. Which still is a lot of customers, but more reasonable.

An online business service might charge $100 to a few hundred dollars per year for a Premium upgrade, which lowers the customers needed to less than 100,000.

To have anywhere from 100,000 to millions of people paying for a product requires a strong product. But the marketing, sales and monetization strategy have as big an impact on the bottom line.

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