The Lean LaunchPad Session 5:
Revenue Model and Pricing Professors Steve Blank,Jon Feiber, Jim Hornthal, Oren Jacob https://sites.google.com/site/xmba296t / XMBA296T

images 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?

<ul><li>Test Hypotheses: </li></ul><ul><li>Problem </li></ul><ul><li>Customer </li></ul><ul><li>User
</li></ul><ul><li>Payer </li></ul><ul><li>Test Hypotheses: </li></ul><ul><li>Demand Creation </li></ul><ul><li>Test Hypotheses: </li></ul><ul><li>Channel </li></ul><ul><li>Test Hypotheses: </li></ul><ul><li>Product </li></ul><ul><li>Market Type </li></ul><ul><li>Competitive </li></ul><ul><li>Test Hypotheses: </li></ul><ul><li>Pricing Model / Pricing </li></ul><ul><li>Test Hypotheses: </li></ul><ul><li>Size of Opportunity/Market </li></ul><ul><li>Validate Business Model </li></ul><ul><li>Test Hypotheses: </li></ul><ul><li>Channel </li></ul><ul><li>(Customer) </li></ul><ul><li>(Problem) </li></ul>Customer Development Team Agile Development

Two types of companies <ul><li>Single-sided
markets that care about revenues </li></ul><ul><li>Multi-sided markets that care about users first, revenues second </li></ul>

“ Revenue First” Companies <ul><li>Time
to doublings for monthly revenues </li></ul><ul><li>Key questions: </li></ul><ul><ul><li>When will I get to $100k/month in revenues? </li></ul></ul><ul><ul><li>When will I get to $1M/month in revenues? </li></ul></ul><ul><ul><li>What assumptions about my business am I making when I reach these milestones? </li></ul></ul>

“ Users First” Companies <ul><li>If
you say your business is advertising based: </li></ul><ul><li>How do you get to 10M monthly users? </li></ul><ul><li>How do you become one of the top 5 websites visited? </li></ul>

The Two Key Questions <ul><li>What’s
my revenue model ? </li></ul><ul><li>Within the revenue model – how do I price the product? </li></ul>

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

Pricing Model = the tactics
you use to set the price in each customer segment

buzz group

Web/Mobile Revenue Models

“Direct” revenue models <ul><li>Sales: Product,
app, or service sales </li></ul><ul><li>Subscriptions : SAAS, games, monthly subscription </li></ul><ul><li>Freemium: use the product for free: upsell/conversion </li></ul><ul><li>Pay-per-use : revenue on a “per use” basis </li></ul><ul><li>Virtual goods : selling virtual goods </li></ul><ul><li>Advertising sales : unique and/or large audience </li></ul>

“Ancillary” revenue models <ul><li>Referral revenue
: pay for referring traffic/customers to other web or mobile sites or products. </li></ul><ul><li>Affiliate revenue : finder’s fees/commissions from other sites for directing customers to make purchases at the affiliated site </li></ul><ul><li>E-mail list rentals : rent your customer email lists to advertiser partners </li></ul><ul><li>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 </li></ul>

Physical Revenue Models

Asset Sale <ul><li>Sale of ownership
right to a physical product </li></ul>

Usage Fee <ul><li>Usage of service.
Fee is proportional to the usage of the service. </li></ul>

Subscription Fee <ul><li>Fee for continuous
access to a service </li></ul>

Renting <ul><li>Fee for temporary access
to a good or service </li></ul>

Licensing <ul><li>Fee for use of
some IP (including software) </li></ul>

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

Advertising <ul><li>Fee paid by brands
and companies to get in front of potential customers </li></ul>

Pricing

Other words we use in
the place of price <ul><li>Fee </li></ul><ul><li>Commission </li></ul><ul><li>Subscription </li></ul><ul><li>Toll </li></ul><ul><li>Interest </li></ul><ul><li>Rent </li></ul><ul><li>Tax </li></ul><ul><li>Shipping </li></ul>

Common approaches to pricing <ul><li>Cost
+ markup </li></ul><ul><li>Typically not a strategic way to price </li></ul><ul><li>Driven by internal economics and not customer insight </li></ul>Cost based Value based <ul><li>Based on buyer’s perception of value (e.g. time saved, new efficiency created, etc.) </li></ul><ul><li>Customers don’t necessarily feel that they want to pay this way </li></ul>

Pricing Choices (1) <ul><li>Cost-based pricing
: based on a multiple of actual product cost. Typically priced for maximum revenue/profit versus volume </li></ul><ul><li>Value pricing : based on the value delivered by the product rather than the cost itself </li></ul><ul><li>Competitive pricing : positions the product vs. others in its competitive set, typically in existing markets </li></ul><ul><li>Volume pricing : designed to encourage multiple purchases or users </li></ul>

Pricing Choices (2) <ul><li>Portfolio pricing
. Mix of high markups and some with low, depending on competition, lock-in, value delivered, and loyal customers </li></ul><ul><li>“ Razor/razor blade” model : part of the product is free or inexpensive; yet it pulls through repeat, highly profitable purchases on an ongoing basis </li></ul><ul><li>Subscription : while now thought of a software strategy, the “Book of the Month Club” pioneered this for physical products </li></ul><ul><li>Leasing: lowers the entry cost for customers. Provides constant earnings over a period of years </li></ul>

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

Competition as an influence <ul><li>Pure
competition </li></ul><ul><li>Oligopoloy </li></ul><ul><li>Monopoloy </li></ul>Nature of Market How they will react? <ul><li>What is their product? </li></ul><ul><li>What are their costs and prices? </li></ul><ul><li>“ What pricing will make them feel the worst?” </li></ul>

Other Revenue Issues <ul><li>Channel issues
</li></ul><ul><ul><li>Return rights? </li></ul></ul><ul><ul><li>Channel discounts? SPIFs? </li></ul></ul><ul><li>Market Type? </li></ul>

New Market Revenue Forecast New
Market Sales Curve

Existing Market Revenue Forecast Existing
Market

Resegmented Market Revenue Forecast

Other Questions <ul><li>What are my
customers paying for? </li></ul><ul><li>What capacity do my customers have to pay? </li></ul><ul><li>How will you package your product ? </li></ul><ul><li>How will you price the offerings? </li></ul><ul><li>What constitutes cost for the company? </li></ul><ul><li>What are the key financials metrics for your business model? </li></ul><ul><li>What are the risks involved? </li></ul>

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