Financial Model - Freemium Startup - 5 Year Forecast

A freemium business model is a type of strategy that many organizations have adopted or started as. I have done some for different clients and it really ties into some of my most popular builds (SaaS and Mobile App). I have never put the logic together in this way and the main value-add is having revenue logic for ad revenue, better visuals, and better cash flow summaries / return logic.

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So, let's first describe what a freemium business model means. It can exist a few different ways, but the general concept is you get people to join some kind of free service and in return for them getting this free service the user has to watch display ads. The company then makes ad revenue from this.

Then, you have some mechanism where users can choose to move from the free version to a paid version. The paid version may include more advanced services or simply not include ads or some combination.

This has come into existence for all kinds of large organizations and starting with something free has been a highly successful customer acquisition strategy for new businesses that have services that may be hard to expose people to if they weren't first given free access. Everyone loves free, even if it means being exposed to ads.

Your model may be that the ads are just about better paid services that users can sign up for.

Looking at the financial model itself, this build has a clean and comprehensive flow from start to finish. You have revenue assumptions that give inputs for monthly traffic, conversion of that traffic to some free pool and then conversion of users in the free pool to the paid subscription pool.

There is logic for traffic growth, changes in conversion %'s over time, churn, movement from paid back to free, and the price charged for the paid service.

The user can dynamically change the start month for traffic, free pool, and paid pool. The idea is to enable all kinds of strategic planning features.

Next up is the expense assumptions. I have included the primary cost categories (G&A, S&M, and R&D). There is also two types of COGS (cost of goods sold). One relates to a direct % of revenue while the other is defined by a $ amount per user. You can easily zero out any of the revenue or expense assumptions if they are not applicable to you.

Startup costs, CapEx, and financing options are also included.

All of this gets aggregated to a monthly and annual pro forma detail and that is rolled into an executive summary so just the main high-level information is available and if you want to dig down into it, you can.

I have included a place to enter monthly depreciation and income taxes if applicable and that all enables the user to get down to a true expected free cash flow. From that, you can then calculate an equity requirement and the free cash flow return on that equity requirement.