Data provided here comes from our team of experts who have been working on business plan for a startup. Furthermore, an industry specialist has reviewed and approved the final article.
Are startups profitable, and what is the expected income range for startup founders and entrepreneurs?Let's check together.
Revenue metrics of a startup
What is the revenue model of a startup?
The revenue model of a startup is typically based on the sale of goods or services.
What would qualify a startup?
There is no universally accepted definition for what qualifies as a "startup".
Startups are typically characterized by their emphasis on innovation, scalability, and the potential for rapid growth. These companies are often associated with early-stage ventures seeking to disrupt existing markets or create entirely new ones.
While the term lacks a precise definition, startups are generally smaller, more agile, and more focused on growth and innovation compared to established businesses.
The defining trait of a startup lies in its pursuit of innovative solutions and a vision for significant expansion in the future.
What kind of services or products do startups typically offer or develop?
Startups operate across a wide spectrum of categories and offer a diverse range of products and services.
These choices are often influenced by market demand, technological innovation, and the expertise of the founders.
Common categories include technology and software, e-commerce and retail, healthcare and biotech, food and beverage, fintech, travel and hospitality, education and e-learning, green and sustainable products, artificial intelligence and machine learning, entertainment and media, transportation and mobility, health and wellness, space and aerospace, B2B solutions, and consumer electronics.
While startups are known for their innovation and adaptability, certain categories and products have historically been less common due to factors such as high barriers to entry, heavy regulation, or limited market demand. Examples of such products or industries include heavy industrial machinery, large-scale infrastructure projects, and highly regulated financial services like traditional banking.
However, it's essential to note that the startup landscape is continually evolving, and innovation can create opportunities in previously unexplored areas.
Who are the customers of a startup?
Startups typically have a variety of customer types, from early adopters to loyal customers.
Which segments?
We've been working on many business plans for startups. Here are the usual customer categories.
| Customer Segment | Description | Preferences | How to Find Them |
|---|---|---|---|
| Early Adopters | Innovators who embrace new solutions | Value cutting-edge features, willing to take risks | Attend tech events, engage on online forums |
| Price-Conscious Shoppers | Customers focused on budget-friendly options | Seek discounts, promotions, cost-effective solutions | Target online deal websites, price comparison platforms |
| Small Business Owners | Entrepreneurs running small businesses | Value simplicity, cost-efficiency, and scalability | Engage in local business networks, trade shows |
| Enterprise Clients | Large corporations requiring comprehensive solutions | Focus on integration, security, and customization | Partner with B2B sales teams, industry conferences |
How much they spend?
In analyzing the financial trajectory of a startup, we recognize that customers' spending habits can be quite diverse, especially depending on the nature of the service or product offered. However, for the sake of estimation, we'll consider that customers spend between $100 to $300 per transaction with a startup. This expenditure may encompass a range of products, subscription services, or one-time purchases, among others.
Research indicates that the average customer retention period for a startup's customer, especially tech-based or service-oriented ones, usually spans from 6 to 24 months. This range accounts for various engagement levels, with some customers preferring short-term engagement, while others see the value in longer commitments.
Considering these factors, the estimated lifetime value of an average customer for the startup would be from $600 (6x100) to $7,200 (24x300), calculated over the entirety of their engagement period with the business.
Given the variations in customer spending and engagement, we can approximate that the average revenue a startup can expect from each customer is around $2,000. This figure is derived from averaging the extremes of our customer lifetime value (CLV) calculation.
(Disclaimer: the figures mentioned above are broad averages and, given the highly variable nature of startups, may not precisely reflect the specifics of your individual business model.)
Which type(s) of customer(s) to target?
It's something to have in mind when you're writing the business plan for your startup venture.
The profile that typically represents the most profitable customers for a startup are those who exhibit a combination of high lifetime value and low customer acquisition costs.
These customers are usually characterized by a strong fit with the startup's product or service, a willingness to pay premium prices, and a high likelihood of repeat purchases.
To target and attract them, startups should conduct thorough market research to identify this customer segment, tailor their marketing efforts and messaging to resonate with their specific needs and preferences, and leverage channels and platforms where these customers are most active.
Retaining them involves providing exceptional customer service, personalized experiences, loyalty programs, and actively seeking their feedback to continually improve the product or service, thereby fostering a long-lasting and mutually beneficial relationship.
What is the average revenue of a startup?
The average monthly revenue for a startup can vary significantly, often ranging from $5,000 to $100,000. This range is based on various factors including the startup's industry, product or service quality, operational efficiency, and market demand. We will break down these revenue expectations by profiling different types of startups.
You can also estimate your own business's revenue by applying different assumptions relevant to your business model and market with a comprehensive startup's financial plan.
Case 1: A small startup with a niche product
Average monthly revenue: $5,000
This type of startup typically focuses on a niche market with a product or service that caters to specific customer needs. These startups may operate in a specialized market, meaning the overall customer base is limited.
Such businesses often face challenges in scaling and may not offer a wide range of products or services. They rely heavily on the core audience and word-of-mouth for their sales.
Assuming the product or service is priced at $50 and they acquire 100 customers per month, the revenue for this startup would amount to $5,000 monthly.
Case 2: A growing startup with a competitive product
Average monthly revenue: $50,000
This startup stands out with a competitive product or service, operating in a larger, more accessible market. They are likely located in urban areas or tech hubs where they can attract skilled employees and have better access to clients.
Unlike the small, niche-focused startup, this business invests in marketing and branding initiatives, driving a higher customer acquisition rate. They also reinvest their earnings into research and development to innovate and stay ahead of competitors.
Providing a product or service with a value of $100 and managing to secure 500 customers a month, this startup could generate $50,000 in revenue monthly.
Case 3: A high-tech startup with innovative solutions
Average monthly revenue: $100,000
This type of startup thrives on innovation and cutting-edge technology, offering unique solutions not readily available in the market. These startups often attract significant investments and partnerships, enabling them to scale rapidly.
They differentiate themselves through intellectual property that may include advanced software, revolutionary platforms, or new technology patents, which drives their valuation and customer interest.
Their offerings often come with a premium price tag due to the research, development, and innovation involved. This allows them to generate more revenue per sale.
With a superior product or service priced at $200 and an active customer base of 500 clients per month, this high-tech startup stands to bring in $100,000 monthly.
It's important to note that these figures are hypothetical and actual revenues can vary based on multiple factors including market dynamics, consumer preferences, operational efficiencies, and the overall economic environment. Each startup may have different revenue streams, and these should all be taken into account for a comprehensive view of potential earnings.
The profitability metrics of a startup
What are the expenses of a startup?
Operating a startup involves expenses for product development, marketing, staff salaries, office rent or lease payments, and technology infrastructure.
| Category | Examples of Expenses | Average Monthly Cost (Range in $) | Tips to Reduce Expenses |
|---|---|---|---|
| Office Space | Rent, utilities, maintenance | $1,000 - $10,000+ | Consider co-working spaces, negotiate lease terms, use energy-efficient utilities |
| Salaries and Wages | Employee salaries, benefits | $5,000 - $50,000+ | Consider remote or part-time staff, offer competitive benefits to retain talent |
| Marketing and Advertising | Digital marketing, advertising campaigns | $500 - $5,000+ | Focus on targeted marketing, utilize cost-effective online channels, measure ROI |
| Product Development | Software development, prototype creation | $2,000 - $20,000+ | Use agile development methods, outsource certain tasks, prioritize MVP development |
| Legal and Compliance | Legal fees, licenses, permits | $500 - $5,000+ | Seek legal advice for cost-effective solutions, be compliant but not overly so |
| Insurance | Business insurance, liability coverage | $100 - $500+ | Shop for competitive rates, review coverage regularly |
| Technology and Tools | Software subscriptions, hardware, IT support | $500 - $5,000+ | Opt for cloud-based tools, lease hardware, consider managed IT services |
| Travel and Entertainment | Business travel, client meetings, team outings | $200 - $1,000+ | Minimize non-essential travel, use virtual meetings when possible |
| Miscellaneous | Office supplies, miscellaneous expenses | $100 - $500+ | Buy in bulk, track expenses closely, minimize wasteful spending |
When is a a startup profitable?
The breakevenpoint
A startup becomes profitable when its total revenue exceeds its total fixed and variable costs.
In simpler terms, it starts making a profit when the money it earns from its products or services becomes greater than the expenses it incurs for office space, development, salaries, marketing, and other operating costs.
This means that the startup has reached a point where it covers all its expenses and starts generating income; we call this the breakeven point.
Consider an example of a startup where the monthly fixed costs typically amount to approximately $30,000.
A rough estimate for the breakeven point of a startup would then be around $30,000 (since it's the total fixed cost to cover), which would require selling a product or service that generates that amount of revenue each month. Assuming the startup offers a software subscription at $300 per month, it would need at least 100 subscribers to reach the breakeven point.
It's important to understand that this indicator can vary widely depending on factors such as industry, scale, pricing strategy, operational costs, and competition. A startup with high development costs or one that operates in a competitive market would obviously have a higher breakeven point than a lean startup with fewer expenses.
Curious about the profitability of your startup? Try out our user-friendly financial plan crafted for startup businesses. Simply input your own assumptions, and it will help you calculate the amount you need to earn in order to run a profitable business.
Biggest threats to profitability
The biggest threats to profitability for a startup can be summarized in several key challenges.
Firstly, insufficient cash flow, which means not having enough money to cover daily operations and expenses, can quickly lead to financial trouble.
Secondly, fierce competition in the market can erode profit margins as startups struggle to stand out and attract customers.
Thirdly, poor product-market fit, where the product or service doesn't meet the needs of the target audience, can result in low sales and wasted resources.
Additionally, a lack of scalability, where the business can't easily grow to meet increasing demand, can limit long-term profitability.
Lastly, economic downturns or unforeseen events like the COVID-19 pandemic can disrupt operations and strain finances, making it crucial for startups to have contingency plans in place.
These threats are often included in the SWOT analysis for a startup.
What are the margins of a startup?
Gross margins and net margins are key financial metrics used to gauge the profitability of a startup.
The gross margin is the difference between the revenue earned from the startup's products or services and the direct costs associated with creating those products or services.
Essentially, it's the profit remaining after subtracting the costs directly related to developing the product or service, such as raw materials, direct labor, and manufacturing expenses.
Net margin, conversely, accounts for all expenses the startup faces, including indirect costs like administrative expenses, marketing, office space, and taxes.
Net margin delivers a comprehensive view of the startup's profitability, encompassing both direct and indirect costs.
Gross margins
Startups might experience a wide average gross margin, often ranging from 30% to 70%, depending on the industry and business model.
For instance, if your startup generates $20,000 per month, your gross profit at a 50% margin would be 50% x $20,000 = $10,000.
Let's illustrate with an example.
Consider a startup with a software product, selling 100 units per month at $200 each, thus earning $20,000 in revenue.
However, the startup faces costs like server expenses, third-party services, and direct labor.
Assuming these costs total $9,000, the startup's gross profit would be $20,000 - $9,000 = $11,000.
Here, the gross margin for the startup would be $11,000 / $20,000 = 55%.
Net margins
Startups might have a diverse range of average net margins, often spanning from -20% (yes, negative, especially in the initial phase) to 20%.
In practical terms, if your startup earns $20,000 per month, your net profit could be around $2,000, representing 10% of the total revenue.
Let's continue with the previous example for consistency.
Our startup, selling software products, makes $20,000 from selling 100 units at $200 each.
Direct costs have already been calculated at $9,000.
On top of this, the startup incurs additional indirect costs, including marketing expenses, insurance, R&D, accounting fees, and perhaps rent or coworking space fees. Assuming these total $8,000.
After considering both direct and indirect expenses, the startup's net profit equates to $20,000 - $9,000 - $8,000 = $3,000.
Thus, the net margin for the startup is $3,000 divided by $20,000, resulting in 15%.
As a founder, recognizing that the net margin (in contrast to the gross margin) offers a more accurate representation of your startup's true profitability is crucial, as it reflects all operational costs and expenses.
Ultimately, what profits can you expect as a startup founder?
Understanding that the net margin is a critical factor in determining your startup's profitability is essential. It reflects what remains after all expenses have been covered.
Your potential earnings are inherently tied to your execution capabilities and business strategies.
Struggling startup founder
Earns $2,000 per month
If you initiate a startup without adequate preparation, such as a vague business model, minimal understanding of your market, or lack of a clear value proposition, your total revenue might stagnate around $10,000.
Furthermore, if you're unable to control your operational costs or invest inefficiently in marketing and product development, you might struggle to achieve a net margin above 20%.
This scenario would restrict your monthly earnings to around $2,000 (20% of $10,000).
For startup founders, this represents a challenging phase with minimal income.
Average startup founder
Earns $15,000 per month
Imagine you've launched a startup with a clear business model, understanding of market needs, and a decent product-market fit. You're making informed decisions, and your total revenue grows to about $50,000.
By managing your expenses, such as operational costs, marketing strategies, and product development, your net margin could comfortably sit around 30%.
In this intermediate scenario, your monthly take-home could be around $15,000 (30% of $50,000).
Successful startup founder
Earns $80,000 per month
As a founder, you've cultivated a thriving startup ecosystem. You've identified a significant market need, your product or service has strong market fit, and you're driving innovative solutions.
You've strategically invested in skilled talent, effective marketing, and sustainable business practices. Your revenue skyrockets, potentially exceeding $200,000.
Through shrewd financial management and scaling strategies, you've streamlined expenses, perhaps achieving a net margin of about 40%.
In this optimal scenario, your monthly earnings could be a remarkable $80,000 (40% of $200,000).
May this be your future! Achieving the status of a successful startup founder begins with a meticulously planned business strategy, complemented by resilience and adaptability in the dynamic startup landscape.