What are some generally overlooked costs aside from SEO that are likely to blindside a first time startup?
There’s unlikely to be a single cost that will muck your financials. Instead, it will be a series of assumptions that fail to match reality. (I purposely avoided using “failed” or “wrong” assumptions, because they are in fact assumptions…)
A couple of places to target for variance in your model:
- Revenue/Volume projections: As an entrepreneur and owner, you believe in your product. But until you launch, you won’t know for sure if your distribution model will work (i.e. how much is self-serve vs requiring a sales rep; the sales timeline and seasonal effects, a single call close versus a multi-call process).
Advice: Show your financials to several advisors – both people in the industry and outside of it. Tell them your assumption and then let them fire questions at you to defend your numbers. If you can’t, then make adjustments.
Think about capacity for sales relative to technology, people, and support. You might be able to drive $1mln in sales with good technology and a salesperson, but every $500k in revenue might equate to another customer service person required. It’s easy to nudge the top line number in a model without considering the true downstream costs to supporting more customers or users.
- Cancellation Rates/Retention: You’re going to lose customers. Everyone does.
Advice: Be conservative on retention rates in your model, and once you start selling, track your rates so you can adjust your model to reflect reality.
- Price: The market tells you what it’s willing to pay but you won’t really know until you start selling. You might also have 2-3 packages in mind with different price points, assuming more sales of one product over another.
Advice: Run 2-3 scenarios with different price points to see how these play out over the long run for your business.
Experiment with pricing as you launch. Propose different prices at the time of sale with different customers to see what kind of resistance or acceptance you get. A few qualified customers can tell you a great deal about the price points in your model.
- People: Recruiting, retaining, and managing talent is really, really, really hard. It will take longer to fill the open positions than you think, and you’ll have turnover in key positions either because the person you hired was the wrong fit or for their own reasons. Account for these lost weeks and months of sales in your plan.
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The price of people is also frequently wrong in models. You might for a sales rep for $35k base and $20k bonus or Q/A Engineer for $75k, but the talent pool at that labor price might not meet your requirements.
Advice: Research labor costs this during the modelling process – post an ad on Craig’s List ($75 in the Bay Area) with the job description and compensation clearly articulated to see what type of resumes you get. Plus do some testing with your job descriptions. For a job we posted, a few minor tweaks to the job description and compensation structure both decreased the number of submissions AND increased the quality of the talent pool. But of course, those people were more expensive.
After the hire, have very specific metrics to assess performance and act quickly to make changes if the performance doesn’t meet plan. Of course be flexible if you are selling a new product into a new market and you can see a path to growth by the people you hire, but it’s better to replace under-performers sooner than later. It’s not personal, it’s just business.
**This Q&A article was originally posted on Quora. Check out Scott’s Quora page here.