NSF I-Corps The Lean LaunchPad Lecture 6: Revenue Streams Core question: For what value are customers willing to pay? How Do You Make Money?

Revenue Streams How do you Make Money? This is first time teams really will start to think about this stuff and it ties back to the initial “Marketing Sizing” exercise (TAM/SAM/TM) so ask them to do it - this is a good place to revisit that concept How do you Make Money?

Revenue Model = the strategy the company uses to generate cash from each customer segment

Revenue Streams Payment Flow: From Who and at What Times? How many will we sell? Where/who is the money coming from? How do we price the product? Does this add up to a business worth pursuing? We must address these four questions to understand our revenue streams Revenue Model - Payment flow (from whom and at what times) - Pay for what? - How much? - How to pay

Asset Sale Licensing Usage Fee Intermediation Subscription Fee Advertising Renting

the tactics you use to set the price in each customer segment Pricing Model = the tactics you use to set the price in each customer segment Pricing tactics - Maintaining pricing power - Cost based to company - Value based to customer

How to price the product? Pricing Models - Physical “Razor/razor blade” model Subscription Time/Hourly Billing Leasing Cost plus Competitive pricing Volume pricing Value pricing Portfolio pricing Cost-plus: rarely smart, but allows you to maximize revenues (not profit) Competitive: if many other competitors in the space (match?, cost leader?, premium?) Value: consider the value delivered, not the cost. Portfolio: if selling multiple products, find the best balance. Maybe a cost leader and profit from the more differentiated products Razor: get lock-in with a low cost razor, make high margin on proprietary blades (ink jet) Subscription: cheese of the month club Leasing: lowers initial cost, lets them pay for it out of operating budget, not capital

Common approaches to pricing Cost + markup Typically not a strategic way to price Driven by internal economics and not customer insight Cost 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 Value based

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? 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? Investors will always ask: what does it cost to acquire a customer? and what is the lifetime alue of each customer?

Payment Flow Oh, don’t forget payment TIMING Draw the diagram Put in numbers Tennant send monthly water bill water bill plus $2/month $2/month Property Owners install meter $9/month (2yrs) activities $200 one time Leasing company payments Oh, don’t forget payment TIMING

Does it add up? Is revenue adequate to cover costs in the short term? Are you confident revenue will grow materially if not dramatically over time? Does profitability improve as the revenues get bigger? Will business be attractive to owner, investors - is this a lifestyle business or possibly a true explosive growth opportunity?

Simple experiment How fast will monthly revenue double? 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?

More Complex Experiment LTV is directly related to your revenue streams, channel and relationships CAC is about how you generate demand LTV >> CAC

Revenue Model Examples

“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