How Do I Create Projections For My New Web Service?

Question: How do I come up with projections of a web service that is not being done yet?  I know make it up.

Actually, please don’t just make it up. That’s a waste of your time.  In answering this question, I’m going to assume that you haven’t built your new web service yet and you don’t really have experience with how the economics of the business will evolve over time.

In every web service, you should be able to determine the drivers for the underlying costs of building and deploying the initial system.  In addition, you should be able to make some assumptions about how it will scale up with users / traffic / whatever-your-measure-of-growth-is.  I’m interested in seeing these assumptions, understanding how you came up with them, and why you think they are valid.

The cost side of the equation helps me understand a piece of the puzzle.  The more interesting piece is the user adoption – how it’s going to work, what is going to drive it, and how this links back to the underlying costs. 

Recognize that the costs are not just hardware / software / bandwidth / hosting costs.  These are going to relatively minor in most cases compared to your “user / customer acquisition cost.”  How are you going to get new users?  If your answer is “they’ll just come”, that’s probably wrong (although not always – you might have one of the insanely effective web services that spreads rapidly by word of mouth and nothing else.)  So – assume you are going to have to spend some money somewhere getting users – what do you think that actually looks like.

There’s no template for what a VC wants to see – the better ones want to understand how you think about things.  Hopefully this is a recurring theme – there is no right answer in almost all cases, but there are lots of wrong answers, and the effort you put into thinking about things in advance will usually show through pretty quickly.

Our recent post answering the question Should You Hire Someone To Write Your Business Plan has some useful and relevant comments that relate back to this question.  The value of putting real effort upfront into thinking about the ultimate economics of your business usually pay off pretty quickly, even if you are initially wrong, since you’ll have a framework for adjusting your point of view.

  • Until recently I was marketing director at an established Software as a Service company. One number you need to estimate is Average Revenue Per User (ARPU, pronounced ‘are poo’). We sold monthly subs so we could easily determine this number (features purchased x price per feature). We also tracked our cost to deliver the service by user. This should drop as you scale but there will be points where infrastructure costs have to jump to accomodate more users so you’ll have the occasional downward blip until users catch up to capacity (you usually can’t scale in a linear fashion).
    Next I’d look at how you’re going to build your user base, what it costs to acquire a user, estimate life of a user and then annualize all the numbers to create projections.
    If you plan to monetize with ads, you need to do a similar calculation based on pageviews- be prepared to be discouraged if this is your model- contextual advertising does not work on service sites, IMHO (and based on experience).