Lecture 6 revenue model
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Transcript of Lecture 6 revenue model
Steve Blank
Jon Feiber
John Burke
Ann Miura-Ko
Jerry Engel
Jim Hornthal
Oren Jacob
The Lean LaunchPad
Lecture 6: Revenue Streams
2images by JAM
customer segments
key partners
cost structure
revenue streams
channels
customer relationships
key activities
key resources
value proposition
REVENUE STREAMS
what are customers really willing to pay for? how? are you generating transactional or recurring
revenues?
REVENUE MODEL =
the strategy the company uses to generate cash from each customer segment
How Many Will You Sell?
• What was the Market size and estimate of market share?,– Translate into the anticipated number of customers (as in 10% of a million-
person market=100,000 customers)
• How many can your channel sell?• How much will the channel cost?• How many customer activations?
– Revenue? Churn/Attrition rate? customers/?
• How much will it cost to acquire a customer?– How many units will they buy from each of these efforts?
Where is the money coming from?
Revenue Model Choices
Bits
Physical
Product
Web Physical
Channel
Direct Sales Products Subscription Upsell/Next Sell
Ancillary Sales:• Referral revenue • Affiliate revenue• E-mail list rentals• Back-end offers
Direct Sales Products Service Upsell/Next Sell
Referrals Leasing
Direct Sales Products Subscription Add-on services Upsell/Next Sell
Referrals
Web/Mobile Revenue Models
“Direct” revenue models
• 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
• Virtual goods: selling virtual goods
• Advertising sales: unique and/or large audience
“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
• E-mail list rentals: rent your customer email lists to advertiser partners
• 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
Physical Revenue Models
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
Advertising
• Fee paid by brands and companies to get in front of potential customers
PRICING MODEL =
the tactics you use to set the price in each customer segment
How do we price the product?
Pricing Model Choices
How do we price the product?
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• Product-based pricing• Competitive pricing• Volume pricing• Value pricing• Portfolio pricing• The “razor/razor blade” model• Subscription• Time/Hourly Billing• Leasing
Pricing Models - Physical
How do we price the product?
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• Product-based pricing• Subscriptions• Freemium• Pay-per-use• Virtual goods• Advertising sales
Pricing Models – Web/Mobile/Cloud
Payment Flows
• Draw the diagram• Put in Numbers
ACOG
ACS
Doctor specialty
committee
Hospital Administrati
on
Patient
Technician
Insurance
Radiologist
Mammography
PCPOB/GYN
MammOptics
Sales representatives
Demand Creation
CUSTOM
ER
Teste
dTe
sting
Need to
test
In progress
Teste
d
Need to
test
Need to
test
In progress
In progress
Less mammography
New claims Mammography is a loss
Breast cancer specialists lose
Job loss
Improve healthcare
Attract patients
New costs
Revenue
Better care
More patientsRevenue
Pricing
Other words we use in the place of price
• Fee• Commission• Subscription• Toll• Interest• Rent• Tax• Shipping
Common approaches to pricing
Cost + markup Typically not a strategic way to
price Driven by internal economics and
not customer insight
Cost based
Value based
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
Pricing Choices (1)
• Cost-based pricing: based on a multiple of actual product cost. Typically priced for maximum revenue/profit versus volume
• Value pricing: based on the value delivered by the product rather than the cost itself
• Competitive pricing: positions the product vs. others in its competitive set, typically in existing markets
• Volume pricing: designed to encourage multiple purchases or users
Pricing Choices (2)
• Portfolio pricing. Mix of high markups and some with low, depending on competition, lock-in, value delivered, and loyal customers
• “Razor/razor blade” model: part of the product is free or inexpensive; yet it pulls through repeat, highly profitable purchases on an ongoing basis
• Subscription: while now thought of a software strategy, the “Book of the Month Club” pioneered this for physical products
• Leasing: lowers the entry cost for customers. Provides constant earnings over a period of years
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
• Pure competition• Oligopoloy• Monopoloy
Nature of Market
How they will react?
What is their product? What are their costs and prices? “What pricing will make them
feel the worst?”
Multi-side Markets and Revenue
• Single-sided markets that care about revenues
• Web-based Multi-sided markets may care about users first, revenues second
“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?
“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?
New Market Revenue Forecast
New Market Sales Curve
Existing Market Revenue Forecast
Existing Market
Resegmented Market Revenue Forecast
Other Revenue Issues
• Channel issues– Return rights? – Channel discounts? SPIFs?
• Market Type affects Revenue Streams • Demand curve affects Revenue • Consider Lifetime Value
Other 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?• What constitutes cost for the company?• What are the key financials metrics for your
business model?• What are the risks involved?
Start with Key Assumptions
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• Target market– USA market – 1.5 M patients– Europe – 2 M patients
• Package– Reusable wrist watch– Disposable sensors / patch– Access to patients data
• Product development– 4 people in the beginning– $2 million– 1.5 years to develop (for BP)
Sales Start in EU middle of year 3 Start in USA end of year 4
Personnel Average salary $120 K Load factor 1.5 Headcount from 4 to 174 in
year 8 Financing
Series A – $3 M Series B – $10 M
Price per package: $150COGS Profit
$60 per unit $90 per unit
Operating Expenses
Does it add up?
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• Is the revenue adequate to cover costs in the short term;• Are you confident the revenue will grow materially if not
dramatically over time; and• Does the profitability get better as the revenues get
bigger?
Team Deliverable for Next Week
• What’s your revenue model? • How will you price your products? • Draw the diagram of payment flows • What are your key financial metrics? • Test pricing 100 web customers 10/15 non web? • How do competitors price? • Assemble a rough income statement • Summarized in a 5 Minute PowerPoint Presentation