Without a revenue hypothesis your business model is just a list of activities users are engaging in. You need to map customer actions to revenue and costs.
Revenue Hypothesis Is Essential To Your Business Model
Q: I am building an app that helps people build nearby interest groups (e.g. local model railroaders, quilters in your town, etc…). I am trying to establish a baseline for my value hypothesis testing and am considering the following metrics:
- Registration rate of those who come to landing page
- Rate of registered users who join or create an interest group
- Rate of interest group members who interact (post etc) in a group
- Rate of interest group members who log in again after a month
Even if I estimate the each of these rates at 50% I cannot tell what this would mean in terms of validating my business. Also I cannot determine how to use these metrics to determine the features to put in my MVP.
Any advice for where to start in a minimum set of metrics and features for an MVP for this service?
A: For the sake of an initial model let’s accept your estimate of a 50% rate for those four metrics. There are two key sets of hypotheses that you are missing:
- What are your hypotheses for how you generate revenue? What will your customers pay for and why?
- What are your hypotheses for the cost of acquiring and servicing a paying customer? How much will it cost to get them to the landing page and to maintain the service?
Your answers to these two sets of hypotheses interact to tell you how long you can stay in business.
Revenue Is The Proof Of Your Value Hypothesis
Q: Those are great questions but I feel like they are related to growth, something I think I should explore once I have figured out the value testing.
A: Getting paid is proof of your value hypothesis. You need to map your path to revenue. Once you can do that then planning how to do it in a repeatable scalable way is your growth hypothesis. Given that you are zero revenue you need to grow to at least break even to keep running experiments. What is your revenue hypothesis?
Q: OK I understand the importance of the monetization strategy in the hypothesis testing, but I don’t think it’s relevant to my original question. Suppose I added a another metric:
- Rate of interest group members who convert to a premium account (e.g. for unlimited messaging)
And I assume it costs me $1 to get new visitors to my landing page. So now I have six hypotheses:
- It costs $1 to get a visitor to the landing page
- 50% of visitors register
- 50% of registered users join or create an interest group.
- 50% of interest group members interact in a group.
- 50% of interactive group members login after a month.
- 50% of persistent interactive group members upgrade to a premium account
What does that tell me? I still cannot tell if I have a good starting point.
A: I think it makes all of the difference in the world, now you are optimizing for revenue in your experiments. The others are all vanity metrics if you don’t have hypotheses for their relationship to revenue and impact on cost.
You can enter whatever you think your conversions will be a priori, and now you can construct a hypothetical business that is profitable.
Without that you don’t have a (profitable) hypothetical business, you have a list of activities that users are engaging in.
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