ENG491 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2011 – Fall 2012 Emre Oto Follow on

Channels  How does each customer segment want to be reached?  Through which interaction points? ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

Test Hypotheses: Channel ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

Two Critical Questions about Channels First one is obvious: How do you want to sell your product? 1 Second one is subtle, but more important than the first: How does your customer want to buy your product? 2 ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

How Do You Want to Sell Your Product? Yourself Through someone else Retail Wholesale Bundled with other goods or services ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

How Does Your Customer Want to Buy Your Product?  Same day  Delivered and installed  Downloaded  Bundled with other products  As a service  … ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

Nature of Product Impacts Channel: Atoms or Bits?  Access to customers changes dramatically  Logistics related to product complexity  People as products ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

The Sales “Channel” Web System Integrators Direct Sales Force Value-Added Resellers (VARs) Dealers Distributors Retail/Mass Merchants Your Company Your Customers ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

Types of Channels  OEM  VAR  Reseller  Distributor DirectIndirectLicensing ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

The Channel as a Customer  Some products are embedded in others (OEM)  Some products are resold by others (VARs)  Some products are distributed by others  Who’s the customer? ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

Distribution Complexity Evangelists Service Technicians Higher Value Added Higher Volume Direct Sales VARs Retail Web, Telesales Systems Integrators Mainframes Minis LANs PC Servers Desktop PCs Printers Keyboards Toner WANs Global Systems Solution Complexity Marketing Complexity ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

How Are Channels Compensated?  Commission  Percentage of sales price  Discounted pre-purchase ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

How Are Channels Motivated or Incented?  Money! – what makes them the most?  Training  Marketing to the channel  SPIF ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

Channel Economics: “Direct” Sales Cost of Goods (Supply Chain) Profit + SG&A + R&D End Consumer EU Discounts Revenue List Price Source:Mark Leslie, Stanford GSB ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

Channel Economics: Resellers Cost of Goods (Supply Chain) Profit + SG&A + R&D End Consumer EU Discounts Reseller Revenue List Price Source:Mark Leslie, Stanford GSB ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

Cost of Goods (Supply Chain) Profit + SG&A + R&D Channel Economics: Distributors/Resellers End Consumer EU Discounts Reseller Distributor Revenue List Price Source:Mark Leslie, Stanford GSB ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

Channel Economics: OEM or IP Licensing Your Product Becomes Your Customer’s COGs Source:Mark Leslie, Stanford GSB End Consumer Reseller Profit + SG&A + R&D Cost of Goods (Supply Chain) EU Discounts ResellerDistributor Master Distributor Profit + SG&A + R&D Cost of Goods (Supply Chain) Revenue List Price ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

Example: Book Publishing Publisher National Distributor PrinterWholesalerRetailerCustomer ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

Book Publishing  Percent of Retail For their efforts, distributors take an additional 10% of retail. That means you get 35% of retail, the distributor gets 10%, the wholesaler gets 15% and the retailer gets 40% less any discount they offer the end customer Publisher National Wholesaler DistributorRetailerCustomer 35%15%10%40% $7.00$3.00$2.00$8.00$20.00 ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

Book Publishing Economics 20 Publisher National Distributor WholesalerRetailerCustomer Wholesale costs Markup Allowances Payment guarantees Payments Bills Credit guarantees Payment guarantees Return rights Credits ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

Book Publishing Delivery Publisher National Distributor PrinterWholesalerRetailer Merchandise titles Sell magazines Acknowledge returns Determine allocations Dispose of returns Prepare film (content)  Establish identity  Create demand Prepare galleys Receive  Schedules  Print orders  Bundle counts  Film Print and ship magazines Deliver orders ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

Bits vs. Atoms Bits Physical Product WebPhysical Channel ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

Product and Channel Are Bits Bits Physical Product WebPhysical Channel  Rapid Agile and Customer development  Fastest to acquire early customers and scale ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

Web 2.0 – Product and Channel Are Bits Bits Physical Product WebPhysical Channel  Google  Twitter  Facebook  Zynga  Cloud Services ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

Product Is Bits, but Channel Is People Bits Physical Product WebPhysical Channel  Rapid Agile and Customer development  Fastest to acquire early customers and scale  Rapid Agile and Customer development  Traditional sales channel  May require installation ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

Traditional Enterprise Software Bits Physical Product WebPhysical Channel  Google  Twitter  Facebook  Zynga  Cloud Services  Microsoft  SAP  Oracle ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

Physical Products Sold Over the Web Bits Physical Product WebPhysical Channel  Rapid Customer development  Logistics, shipping and manufacturing critical  Customer service  Rapid Agile and Customer development  Fastest to acquire early customers and scale  Rapid Agile and Customer development  Traditional sales channel  May require installation ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

Killing Traditional Storefronts Bits Physical Product WebPhysical Channel  Zappos  Amazon  Cafepress  Netflix  Consumer electronics  Google  Twitter  Facebook  Zynga  Cloud Services  Microsoft  SAP  Oracle ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

The Factories May Be in China Bits Physical Product WebPhysical Channel  Rapid Customer development  Logistics, shipping and manufacturing critical  Customer service  Rapid Agile and Customer development  Fastest to acquire early customers and scale  Longer customer feedback cycle  May require large capital requirements for scale  Rapid Agile and Customer development  Traditional sales channel  May require installation ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

We Still Make Things that Need Salespeople Bits Physical Product WebPhysical Channel  Zappos  Amazon  Cafepress  Netflix  Consumer electronics  Google  Twitter  Facebook  Zynga  Cloud Services  Cars  Solar panels  Wind turbines  Bookstores  Consumer electronics  Microsoft  SAP  Oracle ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

Revenue Streams ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

Revenue Streams Two types of companies  Companies that care about revenues  Companies that don’t ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

Revenue Streams Companies that care about revenues  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? ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

Revenue Streams Companies that don’t care  If you say your business is advertising based, then revenues are related to number of users/viewers:  How do you get to 10M monthly users  How do you become one of the top 5 websites visited? ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

 This lecture is for those of us who need to care about revenues ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

Revenue Streams Key Questions  How many customers, value propositions and revenue models do I have? What are they?  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? ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

Revenue Streams Key Questions (cont.)  What constitutes cost for the company?  What are the key financials metrics for your business model?  What are the risks involved?  How will my competitors react? ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

Revenue Streams Common categories of revenue models  Asset sale:  Sale of ownership right to a physical product ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

Revenue Streams Common categories of revenue models  Usage fee:  Usage of service. Fee is proportional to the usage of the service. ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

Revenue Streams Common categories of revenue models  Subscription fee:  Fee for continuous access to a service ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

 Renting:  Fee for temporary access to a good or service Revenue Streams Common categories of revenue models ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

Revenue Streams Common categories of revenue models  Licensing:  Fee for use of some IP (including software) ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

Revenue Streams Common categories of revenue models  Intermediation fee:  Often found in marketplaces of various types, a fee for bringing together two or more parties involved in a transaction ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

 Advertising:  Fee paid by brands and companies to get in front of potential customers Revenue Streams Common categories of revenue models ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

Revenue Streams 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? ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

Revenue Streams Additional Components of Pricing  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.)  Understanding the customer’s willingness to pay is the key.. ..but this is one of the hardest problem in a startup (Customers don’t necessarily feel that they want to pay this way) Cost-based pricing Value-based pricing ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»

Revenue Streams Take competition into account  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.)  Understanding the customer’s willingness to pay is the key.. ..but this is one of the hardest problem in a startup (Customers don’t necessarily feel that they want to pay this way) Cost-based pricing Value-based pricing ENG491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams»