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

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? Key Revenue Model Questions

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

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? Revenue Streams

Where is the money coming from? Revenue Model Choices Bits Physical Product WebPhysical Channel  Direct Sales  Products  License  Subscription  Upsell/Next Sell  Ancillary Sales : Referral revenue Affiliate revenue 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

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

The Two Key Questions What’s my revenue model? Within the revenue model – how do I price the product?

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?

Cost plus Competitive pricing Volume pricing Value pricing Portfolio pricing How to price the product? “Razor/razor blade” model Subscription Time/Hourly Billing Leasing Pricing Models - Physical

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

Exclusive vs. non-exclusive What do you price? What do you give away for free? How does cost vary at different production levels? Additional components of pricing

Pure competition Oligopoly Monopoly Competition as an influence 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?”

Single versus Multi-sided Markets Who are you?

Single-sided markets care about revenues Multi-sided markets may care about users first, revenues second –Often Web-based Single/Multi-side Markets

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? “Users 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? “Revenue First” Companies

Distribution channel affects revenue streams Market type affects revenue streams Demand curve affects revenue streams Consider lifetime value Other Issues

Common categories of 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 “Direct” 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 “Ancillary” revenue models

Sale of ownership right to a physical product Asset Sale

Usage of service. Fee is proportional to the usage of the service. Usage Fee

Fee for continuous access to a service Subscription Fee

Fee for temporary access to a good or service Renting

Fee for use of some IP (including software) Licensing

Often found in marketplaces of various types, a fee for bringing together two or more parties involved in a transaction Intermediation Fee

Graphene Revenue Model Example

Distributors Researchers Graphene Frontiers Current TEM grid provider More workAdd value Material supplier Payment flow

Distributors Graphene Frontiers Material supplier Flexible display manufacturer Electronic User Research, cost E-reader manufacturer Parts suppliers Payment flow

Cost per in 2 – 1” Furnace = $.80 Cost per in 2 – 2” Furnace = $.45 Cost per in 2 – 4” Furnace = $.20 If we can move to N (replacing Ar, key direct cost driver) Cost per in 2 – 1” Furnace = $.50 Cost per in 2 – 2” Furnace = $.25 Cost per in 2 – 4” Furnace = $.10 “Holy Grail”: 4” or larger continuous production w/Nitrogen Cost per in 2 – 4” Furnace, Batch/Continuous = … $.05 Direct Cost Estimates: Scale Matters

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? Does it add up?

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? Thought experiment

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