Build Your Cap Table

Business Plan Analysis for Startups & Entrepreneurs

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15 Minute Read
Posted by Wade Myers on March 14, 2022

Learn the most important components of a business plan including 50 elements in financial, industry, operational and customer categories.

In our 59 page eBook, we outline a thorough analysis that we recommend all entrepreneurs undertake in order to think through each important business model characteristic and how it might impact the overall business value.

The in-depth analysis covers the 50 most important aspects of a business plan, including the industry, financial, operational, offering, and customer characteristics. The analysis was developed after reviewing thousands of businesses and business plans and the correlations of these 50 characteristics with the success of those various businesses.

Entrepreneurs can save time and capital by analyzing their ideas thoroughly prior to investing in an opportunity that does not have a high potential for success.

The following is a condensed version of our eBook. To download the full analysis, click the link below.

Download the Full Business Plan Analysis eBook

Industry Evaluation Criteria

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How Does the Industry Context Impact the Opportunity?

The industry an entrepreneur chooses to start a business in has a dramatic impact on the potential for success. In fact, one research study found that the industry itself had more influence on a startup's outcome than the skills and experience of the entrepreneur. That is according to the analysis of startups over a 20-year period by Scott Shane, the A. Malachi Mixon Professor of Entrepreneurial Studies at Case Western Reserve University.                                               

Shane categorized the startups by industry and analyzed which ones made the Inc. 500 list, a list of fast-growth, highly-successful startups -- not the only measure of success, but a fair proxy for startups that went on to achieve business success.

It shouldn't surprise us that the industry has such a critical impact on a startup's success --  it is a key component in the overall context. The dynamics of an industry are the external market forces that shape the industry and the demand for goods and services.

The industry you choose to build and operate your business in is much like the ground or foundation that you choose to build your house upon: the characteristics can be relatively fixed with some shifting over time, affecting the stability of what you build and your ability to expand. In a similar way, an entrepreneur should carefully consider their target industry because it is foundational to the potential success of the venture.

This section aims to clarify the issues that an entrepreneur needs to analyze in order to fully assess the value and viability of an opportunity.          

The dynamics of an industry that this section includes are as follows:

  1. 1. Addressable Market
  2. 2. Organic Growth
  3. 3. Technological Change
  4. 4. Seasonality
  5. 5. Regulatory Environment
  6. 6. Other Macro Trends
  7. 7. Competitor Concentration
  8. 8. Competitive Rivalry
  9. 9. Supplier Concentration
  10. 10. Supplier Switching Costs
  11.  

1. Addressable Market

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The "addressable market" is the size of that portion of the market that is likely to have an interest in what your business has to offer. The larger your potential market, the better the opportunity. The larger the market, the easier it will be for you to enter the market and carve out a sufficient amount of business in order to have a viable enterprise.

 

2. Organic Growth          

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The rate of annual growth of the addressable market. The higher your organic growth, the better the opportunity. The faster the market grows, the easier it will be for you to grow your business as a rising tide lifts all boats. (There are other methods of growing your business, such as market share growth and acquisition growth, but for purposes of analyzing the industry, we should stick with the "organic" growth of the industry itself rather than different ways we can grow compared to our competitors.)

 

3. Technological Change      

Startup Guides 5 Key Criteria of a Business Plan-1

The extent to which technology plays a major role in shaping the market conditions and the competitive landscape; where a new and exciting technology can cause large changes in market share shifting from one competitor to another. The lower the degree of technological change, the better the opportunity. The lower the degree of technological change, the less risk that technological innovation could render your product or service obsolete in a short period of time.

 

4. Seasonality

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The extent to which the ability to produce a product or service or the ability to sell a product or service depends on the time of year or season. The less the seasonality, the better the opportunity. The less the seasonality, the more the potential for consistently higher asset utilization and consistent earnings.

 

5. Regulatory Environment

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The extent to which the target industry is subject to government regulation. Generally, the less the regulation, the better the opportunity. The less the regulation, the less the potential for unfavorable laws being passed that curtail demand or that unnecessarily drive up costs.

 

6. Other Macro Trends

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The extent to which major trends in customer behavior or demographics play a critical role in shaping the market conditions and customer demand. These “macro trends” are major trends that tend to affect the entire industry and typically come in the form of trends in customer behavior or customer demographics, but can also stem from slowly shifting dynamics in the industry that are detected over a period of years that are not related to growth, technology, seasonality or regulation.

The more favorable the macro trend, the better the opportunity. The more favorable the macro trend, the more the potential demand for your product or service.

 

7. Competitor Concentration

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The amount of market share concentrated among the largest competitors within an industry; an indication of the market power of the largest competitors. The less concentrated your potential market, the more "competitive" the industry, but the better the opportunity for a new entrant. The less concentrated the marketplace, the easier it will be for you to enter the market and compete against the existing competitors that lack concentrated market power.

 

8. Competitive Rivalry

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The intensity with which the target industry competitors compete with each other over customers. The less the competitive rivalry, the better the opportunity. The less the competitive rivalry, the higher the margins tend to be in the industry as competitors invest in their current customers rather than fighting over them.

 

9. Supplier Concentration

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The amount of supplier market share concentrated among the largest suppliers within an industry; an indication of the market power of the largest suppliers. The less concentrated the suppliers in your potential market, the more "competitive" the suppliers and the better the opportunity.

The less concentrated the suppliers, the easier it will be for you to negotiate favorable raw materials or input costs for your product or service from suppliers that lack concentrated market power.

              

10. Supplier Switching Costs

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The costs involved in switching from one supplier to another. The lower the switching costs, the better the opportunity. The lower the switching costs, the easier it will be for you to negotiate favorable input costs for your product or service from among the various suppliers with the real threat of switching to a different supplier and without being held captive by your current supplier.

 

Financial Evaluation Criteria

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How Do the Financial Characteristics of the Business Model Affect the Opportunity?

The financial aspects of various business models can vary dramatically depending upon how the business model works including the investment required, profitability, timing of cash flows and other such criteria.

It is critical to sit down with deliberate effort to count the cost,which includes a careful analysis of all financial aspects of a potential business venture to ensure that: a) We are good stewards of the resources entrusted to us and b) We are able to complete what we set out to do.

The financial dynamics of a business model that this section includes are as follows:

  1. 11.  Total Investment
  2. 12.  Fixed Asset Investment
  3. 13.  Cash Cycle
  4. 14.  Breakeven Timing
  5. 15.  Fixed Costs
  6. 16.  Gross Margin
  7. 17.  Earnings Multiple                                  

    11. Total Investment         

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  8. The total size of the investment or capital required to buy or build the company, fully develop the opportunity or fully fund the business plan. The smaller the total investment amount required, the better the opportunity.

    The smaller the total investment amount required, the more likely the opportunity will get funded (either by your personal resources or other investors), the more likely the entrepreneur will retain control and the less the risk for the entrepreneur and investors.

                              

    12. Fixed Asset Investment

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  10. The total size of the investment required to assemble the fixed assets needed to operate the business. The smaller the fixed asset investment required, the better the opportunity.

    The smaller the fixed asset investment required, the less risk of not being able to repurpose your investment or change direction with your business opportunity, since fixed assets can be difficult to use for other purposes and rarely retain a high resale value.

     

    13. Cash Cycle

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  12. The average amount of elapsed time between when you experience the costs of the product or service you are delivering and when you collect from your customer for the product or service.

    The more efficient the cash cycle (the faster you get paid), the better the opportunity. The more efficient the cash cycle, the more cash flow is generated and the less the need for external financing for working capital and growth.

     

    14. Breakeven Timing        

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  14. The amount of time it takes for your opportunity to break even from the time you launch until your net income is zero or positive. The shorter the breakeven timing, the better the opportunity. The shorter the breakeven timing, the less the risk of business failure due to not ever reaching breakeven.

                               

    15. Fixed Costs       

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  16. The costs that stay constant and do not vary based on the quantity of products produced, services delivered or the level of sales. Fixed costs typically include costs such as rent, debt payments, lease payments, insurance, salaries of supervisory personnel, etc.

    The lower the level of fixed costs, the better the opportunity. The lower the level of fixed costs, the shorter the breakeven timing and the less the level of sales required to be profitable.

     

    16. Gross Margin        

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  18. The difference between net sales revenue and the cost of goods sold (COGS, also known as variable costs or direct costs). Gross margin is also commonly referred to as gross profit and is usually expressed as a percentage as follows: (Net Sales Revenue - Cost of Goods Sold) / Net Sales Revenue.

    Therefore, $100 of net sales revenue with COGS of $50, results in a gross margin of 50%. Gross margin is often measured on a unit of sales (unit gross margin) as well as a total gross margin for a given period.

    17. Earnings Multiple          

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  20. The value of peer companies expressed as a multiple of earnings as in (Earnings Multiple = $ Value/$ Earnings). The earnings measure for private companies when determining earnings multiples for acquisitions is typically EBITDA, which means Earnings Before Interest, Taxes, Depreciation and Amortization.

    The earnings multiple is usually expressed in terms of a number and the letter X, e.g. a 5X earnings multiple, means 5 times EBITDA. The higher the earnings multiple a peer company has fetched in a private acquisition, the better the opportunity. The higher the earnings multiple for companies just like yours, the better the chance that the value of your company will be high as high acquisition multiples means high value and high demand.

     

    Operational Evaluation Criteria

    How Do the Operational Characteristics of the Business Model Affect the Opportunity?

    The operational aspects of various business models can also vary dramatically depending upon how the business model works including the risk of the business operations, the number of distinct capabilities that you need to develop to operate the company, how quickly and easily your business can grow, etc.

    The operational dynamics of a business model that this section includes are as follows:

    1. 18. Operational Risk
    2. 19. Capability Development
    3. 20. Ability to Test Prior to Full Development
    4. 21. Intellectual Property
    5. 22. Scalability
    6. 23. Repeatability
    7. 24. Labor Pool

    18. Operational Risk

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  22. The risk that the business venture will not be able to operationally deliver on its product or service due to risks such as weather, pests, natural causes, supplier stability, labor relations and political instability.

    The lower the operational risk, the better the opportunity. The lower the operational risk, the better the chances of being able to operate your business without disruption.

    19. Capability Development          

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  24. The number of distinct internal capabilities or different business processes you plan to develop as part of your product or service delivery. The fewer internal capabilities required to be developed in order to operate your business, the better the opportunity. The fewer internal capabilities to be developed, the less the investment, time and risk of the opportunity.

    20. Ability to Test Prior to Full Development   

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    The ability to meaningfully test your product prototype or service with a representative sample of pilot or beta customers prior to investing the resources necessary to gear up for full production or launch. The more your ability to test prior to full development, the better the opportunity.

    The more your ability to test prior to full development, the less the investment and risk of the opportunity and the greater the chance to "reorient" your product or service as necessary to better meet customer requirements.                          

    21. Intellectual Property

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    The ability to develop a registered copyright, trademark or patent around whatever may be proprietary about your product, process or business that protects and extends the value of your business opportunity.

    The more your ability to create intellectual property, the better the opportunity. The more your ability to create intellectual property, the more potential value your business opportunity will create through licensing, royalties or other residual income.                     

    22. Scalability         

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  28. The ability to increase the number of units produced (either products or service engagements) and experience a decrease in the average cost of each unit (economic scalability or "economies of scale") and the ability to rapidly grow your new venture with few - or at least manageable - operational constraints on growth (operational scalability).

    The more scalable (both economic and operationally) your venture, the better the opportunity. The more scalable your venture, the more you will be able to grow your business and your earnings.                                        

    23. Repeatability         

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  30.  

    The ability to sell the same product or service over and over again with the same product or process content. For a services business, this typically means the ability to use service templates or "productize services" in order to deliver the same consistent service over and over again.

    For a product business, this typically means the ability to produce and sell the same product many times over and to have less product line proliferation. The more repeatable your product or service, the better the opportunity. The more repeatable your product or service, the more efficient your business and the more consistent and higher the quality of the product or service.                

    24. Labor Pool

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  32. The impact of the labor pool or employees on your overall business opportunity, which includes the availability of labor, the market cost of labor, the character traits of the labor and whether or not the labor is unionized.

    The more favorable the labor pool, the better the opportunity. The higher the availability of labor, the lower the cost of labor, the better the character of the labor and the less unionized the labor, the better the opportunity.         

    Offering Evaluation Criteria

    How Does the Offering Characteristics Affect the Opportunity?

    The aspects of the actual product sold or service delivered will also have an important impact on an opportunity. While these characteristics may vary from product to product or service to service within a company, a company will typically have a portfolio of products or services with similar characteristics.

    The offering dynamics of a business model that this section includes are as follows:

    1. 25. Unmet Needs Identification
    2. 26. Concept Risk
    3. 27. Development Time Frame
    4. 28. Technology Leverage
    5. 29. Value Proposition Distinctiveness
    6. 30. Price Relative to Competitors
    7. 31. Quality Relative to Competitors
    8. 32. Service Relative to Competitors
    9. 33.Perishability
    10. 34. Adjacent Opportunities

    25. Unmet Needs Identification

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  34. The ability to identify the target market's needs that are not currently being met or that are being under served by an existing product or service. The greater your ability to identify unmet needs, the better the opportunity.

    The greater your ability to identify unmet needs, the more precisely you can design your product or service to meet the customer demand, the easier it will be to acquire new customers and the easier it will be to grow your business.                          

    26. Concept Risk          

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  36. The risk that the value proposition will not be easily understood, accepted and adopted by the potential customers. The more difficult it is to articulate the value proposition, the more complex the product or service, the more unsophisticated the understanding of the customer decision making unit (DMU) and the more difficult the pricing mechanism, the more the concept risk.

    The lower the concept risk, the better the opportunity. The lower the concept risk, the shorter the sales cycle as there is less of a "concept" sale process.

    27. Development Time Frame         

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  38. The total time that it takes to bring your product to market or perfect your service so that your service is ready to take to market. The shorter the development time frame, the better the opportunity. The shorter the development time frame, the less the risk, the lower the investment and the lower the development effort.

    28. Technology Leverage          

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  40. The ability to use technology in order to automate a business process and reduce costs, increase productivity and/or increase quality. The greater the technology leverage, the better the opportunity. The greater the technology leverage, the better the chance to create a proprietary "edge" in your industry and to create "outsized" margins.

    When looking for the best ventures to apply technology to, look for industries where a new, perhaps unrelated technology has not been applied in the industry and where there are barriers to competitors utilizing the same technology (i.e. patents, marketing partnerships, etc.)

    29. Value Proposition Distinctiveness         

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  42. The ability to deliver a product or service to your customers that provides value that is decidedly different from other products or services, not just in price, quality or service, but in performance or value created.

    The more distinctive your value proposition, the better the opportunity. The more distinctive your value proposition, the more defensible your market position, the easier the sale, the higher the barriers to exit the relationship and the lower the price pressure.         

    30. Price Relative to Competitors          

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  44. The ability to deliver your product or service at a lower price compared to similar products or services provided by your competitors. The lower your price (for comparable products or services) relative to competitors, the better the opportunity. The lower your price relative to competitors, the higher the value for your customers, the easier it is to grow your business for high demand items.

    31. Quality Relative to Competitors         

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  46. The ability to differentiate the quality of your product or service from your competitors at a similar price. The higher your quality compared to your competitors, the better the opportunity. The higher your quality, the fewer complaints, the higher your customer satisfaction, the fewer the returns and the better your market reputation.

        

    32. Service Relative to Competitors                                       

  47. image48
  48. Definition: The ability to deliver a higher level of service compared to your competitors at a similar price. The higher the level of service relative to competitors, the better the opportunity. The higher the level of service relative to competitors, the higher the value for your customers, the higher your customer satisfaction and the better your market reputation.                               

     

    33. Perishability          

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  50. The extent to which you have to sell a product or service in a short period of time or before a certain specified time, without the flexibility to store it or preserve it for a later use. This is usually because the service is produced and delivered at particular moments in time or because the product has a short life.

    The lower the perishability, the better the opportunity. The lower the perishability, the more the sales flexibility, the lower the capacity risk, and the less the price pressure as the expiration date looms.              

     

    34. Adjacent Opportunities

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  52. The potential for adjacent market growth; the ability to enter new, adjacent markets where you can address similar needs with the existing product or process infrastructure. The higher the availability of adjacent opportunities, the better the opportunity. The higher the availability of adjacent opportunities, the better the chance of growing your business and leveraging your existing infrastructure investment.              

     

    Customer Evaluation Criteria

    How Do Customer Characteristics Affect the Opportunity?                                       

    The aspects of how you acquire customers and interact with customers will have an enormous impact on an opportunity. Everything from how to find potential customers, to how sensitive they are to pricing, to how long it takes to work them through the sales process from prospect to customer and many other characteristics will all have implications for a venture’s required level of investment, ability to grow, profitability and more.                                   

    The customer dynamics of a business model that this section includes are as follows:         

    1. 35. Target Identification
    2. 36. Customer Concentration
    3. 37. In-market Timing
    4. 38. Sales Channels
    5. 39. Decision Making Unit Accessibility
    6. 40. Substitutes
    7. 41. Network Effect
    8. 42. Price Point
    9. 43. Price Sensitivity
    10. 44. Sales Cycle
    11. 45. Customer Acquisition Cost
    12. 46. Customer Life
    13. 47. Customer Switching Costs
    14. 48. Cross-sell
    15. 49. Sales Frequency
    16. 50. Relationship Type

    35. Target Identification          

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  54. The ability to identify the name and contact information of those potential customers in your addressable market. The higher the ability to identify targets or customer prospects, the better the opportunity. The higher the ability to identify targets, the better the chances of being able to grow your business.                                

     

    36. Customer Concentration

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  56. The amount of market share concentrated among the largest customers within an industry; an indication of the market power of the largest customers. The less concentrated the customers in your potential market, the more "competitive" the customers and the better the opportunity. The less concentrated the customers, the easier it will be for you to negotiate favorably with customers that lack concentrated market power.                                

                         

    37. In-Market Timing          

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  58. The ability to identify the timeframe in which the customer prospect is most likely to make the buying decision regarding your product or service. The higher the ability to identify the in-market timing, the better the opportunity. The higher the ability to identify the in-market timing, the better the chances of being able to grow your business.

       

    38. Sales Channels          

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  60. The ability to drive sales via channel partners such as a referral network, distributors, resellers, wholesalers or retailers in order to more rapidly grow your business by leveraging the sales and marketing infrastructure of those channel partners.

    The more sales channels you can leverage, the better the opportunity. The more sales channels you can leverage, the easier it will be for you to grow your sales at a lower risk.

                  

    39. Decision Making Unit Accessibility          

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  62. The ability to gain access to all of the decision makers that will influence the buying decision for your product or service. The Decision Making Unit, or “DMU: is composed of all the people involved in the decision-making process from the customer's view point and is an indication of the overall complexity of the sales process.

    The higher the accessibility of the DMU, the better the opportunity. The higher the accessibility of the DMU, the better the chances of being able to grow your business.

           

    40. Substitutes          

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  64. The availability of substitute products or services for the products or services that you offer. The lower the availability of substitutes, the better the opportunity. The lower the availability of substitutes, the fewer the customer choices and the more inelastic the demand.

                                                                             

    41. Network Effect          

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  66. The market effect when one customer draws in other customers via word of mouth because the value to that initial customer is higher if others also join the network. The higher the network effect, the better the opportunity.

    The higher the network effect, the lower the cost of customer acquisition, the faster the growth and the more powerful the customer affinity due to their affinity with each other.

                                                                     

    42. Price Point

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  68. The average price of your average product or service increment or unit. The higher the price point, the better the opportunity. The higher the price point, the more you can invest in the customer relationship and the higher the potential unit gross margin.                                

                      

    43. Price Sensitivity          

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  70. The awareness of the customer to what they perceive to be the range of prices within which they will buy a particular product or service. Customers with high price sensitivity will exhibit purchasing behavior that is directly tied to pricing and affected by relatively small movements in price (a condition called an elastic price or price elasticity), whereas customers with low price sensitivity (inelastic price or price inelastic) will exhibit behavior that is either not linked to price or will actually buy more as the price goes up, rather than less.

    The lower the price sensitivity of the customer, the better the opportunity. The lower the price sensitivity of the customer, the higher the price point, the more you can invest in the customer relationship and the higher the actual unit gross margin.                                

                                         

    44. Sales Cycle          

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  72. The average length of time of the overall sales process from initially contacting a customer prospect to finally making the sale. The shorter the average sales cycle, the better the opportunity. The shorter the average sales cycle, the lower the cost of the sales process and the less risk of the opportunity.

                                

    45. Customer Acquisition Cost          

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  74. The total marketing and sales costs to convert a prospect into a new customer. The lower the customer acquisition cost, the better the opportunity. The lower the customer acquisition cost, the lower the up-front investment risk in each customer prospect and the higher the customer lifetime value.

                              

    46. Customer Life          

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  75. The length of the average customer relationship; typically associated with recurring revenue or repeat sales business models; indicative of the ability to experience repeat sales. The longer the customer life, the better the opportunity. The longer the customer life, the more the revenue per customer, the greater the leverage of the cost of acquiring the customer, and the more valuable the customer.                                                                            

    47. Customer Switching Costs          

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  77. The costs that a customer experiences when they switch to another provider or supplier. The higher the customer switching costs, the better the opportunity. The higher the customer switching costs, the lower the customer churn and the higher the customer profitability, as they are more committed to your products or services.

                                          

    48. Cross-Sell          

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  79. The ability to expand the customer relationship from selling the initial product or service to selling additional products or services; sometimes called expanding the wallet share of the customer. The higher the likelihood of cross-selling, the better the opportunity. The higher the likelihood of cross-selling, the more leverage you gain from the customer relationship and the more profitable the relationship.                                

                                                        

    49. Sales Frequency          

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  81. The measure of the time intervals between purchases for repeat or recurring sales. This attribute is distinct from customer life in that a customer with a ten year life that buys a product or service every five years is not nearly as valuable as a customer with a ten year life that buys a product or service every month.

    The higher the sales frequency, the better the opportunity. The higher the sales frequency, the stronger the potential customer relationship and the higher the chance to leverage the relationship into additional products and services.                                

                  

    50. Relationship Type          

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  83. The type of customer relationship you are able to develop with your average customer ranging from a casual one-off non-contractual relationship to a deeper contractual relationship to a committed partner relationship.

    The deeper the customer relationship, the better the opportunity. The deeper the customer relationship, the more committed the customer, the more stable and predictable your revenue and the more profitable the relationship.

      

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