Projecting Financials: Revenue Models, Pricing, and 24-Month Forecasts
Book: Entrepreneurship in the Wild: A Startup Field Guide
Author: Felipe G. Massa
ISBN: 9780262542579
Previous: Validating Your Solution | Next: Pitching Your Startup
Investors do not just want a good story. They want numbers. Not perfect numbers. Believable ones.
Chapter 8 is Massa’s guide to building a rough financial picture for your startup. Revenue model, price, market size, and a 24-month profit-and-loss projection. He is clear that this is not a full pro forma statement. It is a starting point you refine as you learn more.
Privy Label: the revenue model question
Jessica Osborn built Privy Label to help clothing brands access design, fabric sourcing, and manufacturing through a turnkey service. Business took off fast. She and director of operations Cristina Contreras had to turn clients away.
To scale, they considered an online platform connecting brands directly with vendors. But first they had to answer a basic question: subscription access or transaction fees?
After dozens of customer interviews, the answer was clear. Customers needed to browse vendors and see the value before paying. A per-transaction fee on top of vendor costs made sense. A good revenue model should not fight your value proposition.
That is the whole theme of this chapter. How you charge has to fit how customers want to buy.
Step 1: Pick a revenue model
Massa lists six common models:
| Model | How it works |
|---|---|
| Transaction | One-time payment per purchase |
| Ad-based | Free product, revenue from ads |
| Service add-on | Free product, paid for setup/training |
| Freemium | Free basics, paid premium features |
| Subscription | Recurring fee for ongoing access |
| Club | Recurring fee for the right to buy at discounts |
Three questions to ask for any model you consider:
- Is this how your customer would ideally want to buy?
- Does it strengthen or weaken your value proposition?
- Will it still work when funding runs out?
If you are building a nonprofit, grants and donations can supplement revenue, but Massa warns they are rarely reliable long term.
Step 2: Set your price
Most founders either add a margin to costs (cost-plus) or copy competitor pricing. Both have limits for startups creating something new.
Massa recommends a simplified value-based pricing approach in four steps:
- Focus on one beachhead segment. You cannot price for everyone.
- Find the next best alternative. What would this customer buy if you did not exist? Or how much do they currently spend solving the problem?
- Identify differentiated features. What does your solution do that alternatives do not?
- Put a dollar value on the difference. Ask customers what they would pay, what feels “too high,” and what signals “cheap quality.”
Use unit cost as a price floor if you can calculate it. If not, add that later.
Step 3: Size your market
Three layers, from biggest to smallest:
TAM (total addressable market): everyone who could conceivably use your solution. Calculate bottom-up (your own data, channel partner lists) and top-down (industry reports, census data). Use bottom-up for short-term forecasts and top-down for long-term ambition.
SAM (serviceable available market): the portion you can actually serve given your resources, geography, and production limits.
Beachhead: the customers you will target in the first 24 months. This is your sales target and your first persona group.
Aim for profitability within about 24 months. At some point, revenue should exceed costs (positive EBITDA).
Step 4: Project revenue
Massa provides a companion Excel workbook on the MIT Press site. The basic logic:
- Enter your TAM and expected market growth rate.
- Estimate leads per month from your go-to-market plan.
- Apply a conversion rate (what percentage of leads become paying customers).
- Multiply by your price to get monthly revenue.
Example: 1,000 leads/month, 5% conversion, $15,000 average price = $750,000/month in sales.
Every assumption should be defensible. Start with best guesses, then tighten as you learn about seasonality and channel quirks.
Eric Ries gets quoted here: founders cannot forecast accurately because they are trying something new. You will probably be behind plan. That does not mean you are failing.
Step 5: Project expenses
Three categories:
Prelaunch costs: software development, equipment, construction. One-time expenses before you open.
Operating expenses: rent, software subscriptions, bank fees, utilities, marketing materials. The recurring stuff that sneaks up on you.
Salary expenses: often the biggest line item. Hire too late and revenue stalls. Hire too early and you burn cash without results.
The workbook has separate tabs for each. Fill them in honestly.
Route monitoring: key metrics
Once your tabs are complete, check the graphs and income statement. Step into an investor’s shoes. Does this look like good stewardship of their money?
The “Metrics” tab covers numbers experienced investors watch:
- Lead conversion rate: leads that become real opportunities
- Customer churn: percentage who stop using your product (critical for subscriptions)
- Customer acquisition cost (CAC): total sales and marketing spend divided by new customers acquired
- Customer lifetime value (CLV/LTV): expected profit from a customer over the whole relationship
CAC versus LTV tells you how much you can afford to spend acquiring each customer.
What comes next
As your business grows, financials get more complex. Massa suggests finding an accountant who works with early-stage companies, moving from Excel to something like QuickBooks, and deciding early how and when you share financial data with your team.
My take
This is the chapter where a lot of creative founders check out. Spreadsheets feel boring next to product design. But investors read these numbers to judge your thinking, not your accounting skills.
The Privy Label story is a good reminder that financial decisions start with customers, not formulas. Jessica did not pick a revenue model from a textbook. She asked dozens of people how they wanted to pay.
If you are dreading this chapter, start with just the revenue model and price. Those two decisions shape everything else. The workbook does the heavy lifting once you have those figured out.
Previous: Validating Your Solution | Next: Pitching Your Startup