Transcript Bootcamp_2_Revenue_Modelsx

Revenue Streams
How Do You Make Money?
© 2012 Steve Blank
Key Revenue Model Questions
• What are my customers paying for?
• What capacity do my customers have to pay?
• How will you package your product?
• How will you price the offerings?
Issues as you Pivot
• Distribution channel affects
revenue streams
• Market type affects revenue streams
• Demand curve affects revenue streams
• Consider lifetime value
The Two Key Questions
What’s my revenue model?
Within the revenue model – how do I
price the product?
Revenue Model =
the strategy the company uses to
generate cash from each customer
segment
Key Revenue Model Questions
• What are my customers paying for?
• What capacity do my customers have to
pay?
• How will you package your product ?
• How will you price the offerings?
How Many Will You Sell?
• What’s the Market Size & estimate of Market
Share?
• How many can your channel sell?
• How much will the channel cost?
• How many customer activations?
– Conversion? Churn/Attrition rate? CAC?
• How much will it cost to acquire a customer?
– How many units will they buy from each of these
efforts? LTV?
Top down: 10% of a million-person market=100,000 customers
Bottom up: 1,000 customers/month 1st year => 3,000/month 3rd year
Revenue Streams
1. How many will we sell?
2. Where/who is the money coming from?
3. How do we price the product?
4. Does this add up to a
business worth doing?
Where is the money coming from?
Revenue Model Choices
Channel
Web
 Direct Sales
 Products
 License
Bits
 Subscription
 Upsell/Next Sell
Product
 Ancillary Sales:
Physical
•Referral revenue
•Affiliate revenue
•E-mail list rentals
•Back-end offers
Physical
 Direct Sales
 Products
 Subscription
 Add-on services
 Upsell/Next Sell
 Referrals
 Direct Sales
 Products
 Service
 Upsell/Next Sell
 Referrals
 Leasing
Pricing Model =
the tactics you use to set the price in
each customer segment
Two Types of Pricing
Fixed pricing
• Cost plus
• (Stepped) volume
pricing
• Value pricing
Dynamic pricing
• Negotiation
• Yield-management
• Real-time markets
• Auctions
How to price the product?
Pricing Models - Physical
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Cost plus
Competitive pricing
Volume pricing
Value pricing
Portfolio pricing
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“Razor/razor blade” model
Subscription
Time/Hourly Billing
Leasing
Common approaches to pricing
Cost based
Value based
 Cost + markup
 Typically not a strategic way to price
 Driven by internal economics and not
customer insight
 Based on buyer’s perception of
value (e.g. time saved, new
efficiency created, etc.)
 Customers don’t necessarily feel
that they want to pay this way
Additional components of pricing
• Exclusive vs. non-exclusive
• What do you price? What do you give away for
free?
• How does cost vary at different production
levels?
Competition as an influence
Nature of
Market
How they will
react?
• Pure competition
• Oligopoly
• Monopoly
 What is their product?
 What are their costs and prices?
 “What pricing will make them feel
the worst?”
Single versus
Multi-sided Markets
Who are you?
Single/Multi-side Markets
• Single-sided markets care about revenues
• Multi-sided markets may care about users
first, revenues second
– Often Web-based
“Users First” Companies
If you say your business is advertising based:
• How do you get to 10M monthly users?
• How do you become one of the top 5 websites
visited?
• How much do the “payers” actually pay?
“Revenue First” Companies
• Time to doublings for monthly revenues
• Key questions:
• When will I get to $100k/month in
revenues?
• When will I get to $1M/month in revenues?
• What assumptions about my business am
I making when I reach these milestones?
Other Issues
• Distribution channel affects
revenue streams
• Market type affects revenue streams
• Demand curve affects revenue streams
• Consider lifetime value
Common categories
of revenue models
“Direct” revenue models
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Sales: Product, app, or service sales
Subscriptions: SAAS, games, monthly subscription
Freemium: use the product for free: upsell/conversion
Pay-per-use: revenue on a “per use” basis
“Ancillary” revenue models
• Referral revenue: pay for referring traffic/customers to
other web or mobile sites or products.
• Affiliate revenue: finder’s fees/commissions from
other sites for directing customers to make purchases at
the affiliated site
• Back-end offers: add-on sales items from other
companies as part of their registration or purchase
confirmation processes, or “sell” their existing traffic to a
company that strives to monetize it and share the
resulting revenu3
Asset Sale
• Sale of ownership right to a physical
product
Usage Fee
• Usage of service. Fee is proportional to
the usage of the service.
Subscription Fee
• Fee for continuous access to a service
Renting
• Fee for temporary access to a good or service
Licensing
• Fee for use of some IP (including software)
Intermediation Fee
• Often found in marketplaces of various types, a
fee for bringing together two or more parties
involved in a transaction
Graphene
Revenue Model Example
Payment flow
Researchers
Add value
Current TEM
grid provider
More work
Distributors
Graphene Frontiers
Material supplier
Payment flow
Electronic User
Distributors
E-reader manufacturer
Parts suppliers
Flexible display
manufacturer
Graphene Frontiers
Parts suppliers
Material
supplier
Research, cost
Direct Cost Estimates: Scale Matters
• Cost per in2 – 1” Furnace = $.80
• Cost per in2 – 2” Furnace = $.45
• Cost per in2 – 4” Furnace = $.20
If we can move to N (replacing Ar, key direct cost driver)
• Cost per in2 – 1” Furnace = $.50
• Cost per in2 – 2” Furnace = $.25
• Cost per in2 – 4” Furnace = $.10
“Holy Grail”: 4” or larger continuous production w/Nitrogen
Cost per in2 – 4” Furnace, Batch/Continuous = … $.05
Does it add up?
1. Is revenue adequate to cover costs in the
short term?
2. Are you confident revenue will grow materially
if not dramatically over time?
3. Does profitability improve as the revenues
get bigger?
Thought experiment
• Time to doublings for monthly revenues
• Key questions:
– When will I get to $100k/month in revenues?
– When will I get to $1M/month in revenues?
– What assumptions about my business am I
making when I reach these milestones?
To-Do’s
– Test price in front of 100 customers on the web or 10
– 15 customers for non-web
– What’s the revenue model strategy? vs.
– What are the pricing tactics?
– Draw a diagram of payment flows
– Is it a single- or multi-sided market?
– What are the metrics that matter for your business
model?
– Did anything change about your value proposition,
customers/users, channel, customer relations?
– Update your business model canvas with changes