Subject line: [Flawless Financials] Single Customer Models

Flawless Financials

the Financial Forecasting Online Newsletter

from Minotaur Financial

and David Brode

October, 2003

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This month: Single Customer Models

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Have you ever started discussing the potential of your business and soon there are so many possibilities and options that people are lost? Often entrepreneurs are unable to smoothly communicate their value proposition to customers and investors. If I had to recommend one tool to present a business model, I would choose the “Single Customer Model.”

The Single Customer Model is a powerful paradigm for both company executives and investors because it provides a simple and concrete way to explain the core aspects of your business. When a company shares a consistent view of its business, meetings speed along since everyone agrees on what part of the Single Customer Model changes for the topic at hand. And for investor meetings, you have a single sheet of paper that explains the economics of your business model.

Below I outline the Single Customer Model approach. After I explain its key components, I offer two concrete examples for use in your organization.

I. What’s in the Single Customer Model?

Simplicity is key. First, the Single Customer Model must fit on a single sheet of paper. Remember the January 2003 newsletter in which Steven Wright is quoted saying "I have a full scale map of the United States. One mile equals one mile."? This isn’t the time to discuss every detail of your business; instead, the goal is to show the profitability of the incremental customer.

To do this you must examine what activities you perform and what costs you incur in dealing with customers. More specifically, you should answer: What revenues are generated and in what categories? What is the cost of goods/services/staff to create that revenue? What capital investment is needed to support that customer? And depending on your business, you may include a Customer Acquisition Cost derived from the sales & marketing expenses and expected customer wins.

Look at what’s missing here: G&A. Hey, it’s called “overhead” for a reason. It really has nothing to do with the core activity of your business: finding and serving customers. Only once we show that your company can do these activities properly, will we see if the business can be profitable with overhead expenses. But for now, we abstract them away.

II. Variations on the Theme

The idea of a single customer is less useful for some businesses, particularly those with thousands of customers. So for the Retail sector, we often do Single Store analysis. For Wireless Services companies we used to do Single City analysis, though as technology has changed to allow smaller discrete systems, we now do Single Neighborhood analysis.

Also, when viewed from the customer’s perspective, this type of model becomes a Customer ROI Analysis which can be used to a) show investors why a customer will buy from you, and b) to show customers the financial benefit of doing so.

III. Where Single Customer Models Fit into the Funding Picture

The Single Customer Model fits into the “Business Model” section of the Financial Summary (see August newsletter for details). For my new client engagements, this is the first piece of work I deliver and begin to refine. I highly recommend this as the key to starting your financial projections.

Below are two examples of Single Customer Models. I encourage you to email yours to me for feedback or to expand the Minotaur library.

Until next month, all the best,

David Brode – Minotaur Financial

Removing Financial Issues as a Deal Roadblock

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Single Customer Model Examples

This first example, though simplistic, was incredibly useful for this client:

Single Customer Analysis: Acquired Customer
	Operating
		Revenue			$ 000/yr	45
			Y1 ramp-up adj. Factor		%	90%
		COS+Opex			$ 000/yr	25		based on steady state EBITDA margin
		Integration Exp			$ 000	8		Includes Opex ($3K) plus Capex ($5K)
	Acquiring
		Price			rev mult.	0.9x
	Results						Y0	Y1	Y2	Y3	Y4	Y5
		Operating Results
			Revenue					41	45	45	45	45
			COS/Opex					25	25	25	25	25
			Integration exp + capex				8	-	-	-	-	-
				Operating Cash Flow			(8)	16	20	20	20	20
				Acquisition Pymts			41
				Cash Flow			(49)	16	20	20	20	20
				Cum. Cash Flow			(49)	(33)	(13)	7	27	47
				IRR	26%

This second example goes into greater business model detail:

Single Customer Analysis: Example #2

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