Step-by-Step Instructions

Click to download your spreadsheet.

This chapter will introduce you to the Currency Calculator.

Problems it Solves

The Currency Calculator takes the Path to Victory spreadsheet in the Offer Testing workbook, to the next level helping you:

1. See if your market is big enough for your Victory

Now that you have data on your Offer Conversion Rate, you need to estimate your Currency Conversion Rate.

2. Estimate the size of your market

You are going to get a better, more accurate measure of the size of your market to see if this customer segment is large enough to meet your needs.

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You are going to use two different components to build out your Currency Calculator.

The first is the Currency Ladder that you just finished: the list of the different steps to your Victory Currency, as well as the different types of currency that you will need to ask for to get there.

The second is the Path to Victory spreadsheet. You'll use the data from this spreadsheet to create your Currency Test.

Adoption Life Cycle - A Review

The Adoption Lifecycle, just to recap, has four different sections. Your success will come when you achieve your Early Majority. In order to get your Early Majority, you first need to get some Early Adopters.

You also know that previous research can help to estimate the relationship between the size of the Early Adopters and the Early Majority.

The Currency Calculator

Open the Currency Calculator Spreadsheet. The first thing you will notice is that on this spreadsheet there are two tabs: Offer Testing and Currency Calculator. You will also notice that the two spreadsheets look very similar.

Step 1

Copy your Victory Declaration from the previous sheet. If there is anything you would like to change here, now is the time to do it.

Step 2

Copy your Product Revenue from the previous sheet. If there are any changes you would like to make here, again now is the time.

Step 3

In this step, you'll notice a few significant changes.

Before, you had only one currency conversion number. Now, you will have space for all the different types of currency that you will need and their conversion rates. These will be combined to give you an estimated total conversion rate.

Under the Currency Requests column, write in each of the difference Steps from your Currency Ladder.

Next, estimate the conversion rates you believe apply to each rung on the ladder.

In my case, I have my Lean Founders and I'm showing them a Blog Ad. At this point, I have proven my Offer Conversion Rate because I have seen that 4% of Founders that are shown this ad click on it.

Next, I wrote down the next type of currency I'm asking for: that they'll read my Landing Page. This is the next thing that my customers have to do in order for me to get my Victory Currency from them.

I also have real data on this because I have kept track during my Offer Testing that 78% of people who click on my ad read at least enough of my Landing Page to make it to my Call to Action (e.g. my "Buy" button).

Now, for every item I don't have real data for, I will estimate. I am predicting that 50% of people who read the landing page will get to and click on the BUY button.

I predict 50% of people who click the BUY button will choose a product. 50% of those people will likely take the time to enter their personal information. 50% of those people will take the next step to give me their credit card information. Finally, I estimate that just 50% of those people will actually take the final step to make the purchase.

Now the spreadsheet will calculate the total by multiplying each of these numbers together.

From here I can see my estimated Currency Conversion Rate is 2.44%.

I can also see that my Annual Early Adopters from this channel: 219 (Annual Channel Reach x Offer Conversion Rate x Currency Conversion Rate).

Now it's your turn. Estimate your Currency Conversion Rates for each of the steps in your Currency Ladder.

As you run your Currency Tests, you'll be able to see whether you're converting on each of the steps at a high enough level to achieve your Victory. If any of the Steps are not getting their expected conversion rates, you can start to investigate to see why not.

Once you finished your first Early Adopter Channel, fill out the same steps for the other two channels. In my examples, my second Channel has similar numbers, but my third Channel does not.

Step 4

Now here's the second thing that's different on this spreadsheet. In the previous exercise, we used the Diffusion of Innovations Curve ratios to determine the size of various groups on the curve. That number will be useful here, but I am also going to introduce another metric you can use.

This new metric is called the Viral Coefficient.

The Viral Coefficient estimates how many new customers will your next customer bring you?

How can one customer bring you additional customers? This is the classic "word of mouth" growth strategy.

Imagine a new sandwich shop opens down the street and at first no one shows up. Eventually you walk in, grab a caprese sandwich and it turns out to be the best you've had! The next time you and your co-founder meet up, you take her to the sandwich shop and boom...you've just increased this shop's "viral coefficient."

In this case, you brought in one new customer so we would say you, as a customer, have a Viral Coefficient of 1 (for each new customer, you, how many customers did you bring in...one).

Of course, not every one of the sandwich shop's customers is going to bring in their co-founders, to calculate the sandwich shop's overall viral coefficient, we'd take the average across all of their customers.

Of course today "word of mouth" has been augmented with social sharing, reviews, recommendations, referrals, etc. but the principles are the same. Your Viral Coefficient represents, on average how many additional customers you'll get from each additional customer you get.

Another way to think of the viral coefficient, is how "viral" is the product. More on that shortly.

First, you are going to write in the percentage of paying customers who will actively use your service. Now of course you hope this number will be 100%, but often it isn't.

For example, with something like a book (my product) there are many people who will buy the book but not actually use it (present company excepted). Or perhaps you've had the experience of downloading an app from the App Store and never using it. This is the behavior you want to capture here because someone who doesn't use your product isn't likely to tell others about it.

Next, write in the percentage of people who you believe will love your solution. How many of your users are likely to get really, really excited about what you've put out there? Again, it's natural to think this number will be 100%, but it's often not...in fact, it's often not even close.

Now, thinking of the people who will love your product, estimate the number of people they'll tell about their awesome experience with it. Is your product something everyone will want to brag about on Facebook, or will it only apply to one or two of their friends.

Finally, write in your estimate of the Word of Mouth Conversion Rate.  This is the percentage of people who, after hearing about your product from a friend, are likely to turn around and pay for it.

By multiplying each of these number together, you can estimate your Viral Coefficient. Mine is 0.13125. That means that for every customer I get by my own efforts, I get a little over a tenth of a customer. In other words, for every 8 customers I get on my own, I'll get a "free" customer from referrals.

It's worth recognizing that very few products outside of social networks have significant viral growth. As founders we're often left wondering if our product could be viral - that as soon as we launch, maybe it'll catch on like wildfire.

For that to happen, for your product to be truly viral, your viral coefficient will need to be greater than 1. While it's possible, that rarely happens for apps that aren't social networks and aren't free.

In fact, the viral coefficient increases most when the customer's experience is literally improved, by recommending it to their friends (e.g. Facebook, WhatsApp, Instagram, etc.).

Other ways to increase your Viral Coefficient is through incentives, such as seen with Uber, Lyft, or Dropbox, where for every friend you invite on to the service, you get something in return.

You'll explore how to use incentives, and how to actually measure your viral coefficient, in future exercises. For now, an estimate will do.

What you have now are two ways to estimate the size of your Early Majority, based on the size of your Early Adopters. One is based on the Diffusion of Innovations ratios, and another is based on your estimated Viral Coefficient.

You won't know which one is more accurate until you run some more experiments, but these two approaches can give you a range to operate with.

Step 5

The next tables represent the results of all your estimates.

Here you have the number of Early Adopters you are going to get through your channels, as well as the total number of Early Majority that are going to come on during a given year.

In turn, you can see how much revenue you are going to generate. Obviously this is a ballpark number, but it will give you a sense of how long it is going to take to achieve your Victory.

If you viral coefficient is very high you will see exponential growth year after year. If your viral coefficient is low, like most businesses, you will see that growth via "word of mouth" takes a long time.

You will also notice that these charts assume your first year is an "Early Adopter year." After that first year, you can expect your Early Majority to come along.

In the right-hand side of this chart, you will see that your Early Majority + Early Adopter Revenue has been calculated using both the Viral Coefficient Method and the Ratio Method, as well as an average of the two.

It is important to note that on the Offer Testing Path to Victory worksheet, you used the Early Majority numbers, giving Optimistic, Pessimistic and Average numbers using the Diffusion of Innovation ratios. Here, the Viral Coefficient replaces the Pessimistic number and the Ratio Method as the Optimistic number, again also taking the Average of the two.

In very few cases, you may have a Viral Coefficient that is very high, and it is important to represent that here as your Optimistic number.

Regardless, you are estimating a range so you know your ballpark numbers. From here, you can take an average of the two extremes to have an idea of where you are along your path.

In the current example, you take the Viral Coefficient, plus any Early Majority (in this case, there are zero for the first year), and multiply that by the Total Lifetime Value of a customer. Here you can see the first revenue on average for the first year is $202,703K.

In the next column you can see the Victory Revenue, and then the difference between the two. You can see the "Average" column is red for my first year because it is less than my Victory Revenue requires.

The second year, you start to add on your Early Majority. This is done by integrating the Viral Coefficient.

Here, you take the total number of Early Adopters you had in the previous year and then multiply that by the Viral Coefficient. You can see that over time the Average Revenue will increase over time. In my example, the yearly revenue increases quickly from $182 K to $426K.

Your Early Majority to Early Adopter ratio will stay constant over the years as this is a straight ratio and not variable year to year. See "Assumptions and Limitations" for more details.

The graph at the bottom of the spreadsheet represents where your income will fall.

The orange bar is your Victory Revenue. Your goal is to be higher than that bar. The other three lines represent the EA to EM ratio (yellow), the Viral Coefficient revenue (gray), and the Average (blue). Ideally, all three of your projected revenue lines are above your Victory Revenue, but, at the very least, make sure your Average line (blue) is above your Victory Revenue. This will give you a good chance to achieve your goal.

Of course, by all means consider this spreadsheet a starting point. Please edit it and tinker with the formulas to more accurately represent your business reality.

Step 6

As before, it is important to call out the assumptions represented in this worksheet.

First, everything in this worksheet is an assumption until proven otherwise. Your job, is to identify the assumptions, test them, and replace the predicted numbers with actual data.

Second, this spreadsheet assumes the entire lifetime value of the customer is realized in the first year. If you have a situation where a customer's value is spread out over multiple years, your data will be off. You may want to represent your particular customer value differently in this field.

Third, this spreadsheet assumes that the Early Majority will kick in a year after the Early Adopters. They could come earlier or later. The timeline will differ for everyone.

Fourth, there is no accounting on this worksheet for Late Majority or Laggards. As mentioned in Path to Victory, I do not advise waiting to declare Victory until you have won over your Late Majority and Laggards. In this exercise, I am encouraging you to set yourself up to reach Victory with just your Early Adopters and Early Majority so you can declare Victory as you are hitting your stride. After that, you can count any additional customers and revenue as bonus.

Fifth, this worksheet does not account for channel saturation. For some businesses, customers may change their response to your advertising or offers over time. Please make sure you are changing the algorithms as you see fit to model your business and how it will interact with the real world.

Sixth, this spreadsheet has simplified your customer acquisition strategy into only three channels. You are welcome to add on more channels if that feels right, though I caution you to question whether it is actually possible to execute in more than three channels at once.

Seventh, again, to simplify the algorithm, we are assuming the same price for every customer or channel. Feel free to add in a line to represent the different prices you would like to charge.

Finally, the Diffusion of Innovation ratios are based on highly sited research; however, it is from research created 50 years ago. It is important to use this as a starting point, but stay responsive to the data you are getting back from your actual customers.

What's Next

There you have it! You have now designed your Path to Victory for achieving your currency goals.

You now have a better sense of whether you will be able to achieve your Victory by delineating each of the currencies you will have to achieve.

You also have a more accurate estimation of the size of your market based on your Early Adopter to Early Majority ratio and your Viral Coefficient.

Finally, you now know how much actual currency you will need in order to achieve your Victory, and which experiments you will need to run to verify your hypotheses.

Next up, you will be using the estimates in this spreadsheet to put together your first Currency Experiment!