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