choosing a startup's revenue model

Choose Your Startup’s Revenue Model

www.kenontek.com

By Ken LeaverFebruary 2014

@Kenontek

Chapter 1: What is a Revenue Model

Chapter 2: Overview of revenue models

Chapter 3: How to choose the right one (to start with)?

Chapter 4: Experiment & Iterate

Chapter 5: Defending your revenue model

Revenue streams connect to your value proposition & customer segments

• You should match your revenue streams to the specific value you add to each customer segment you’re targeting

Selling goods

Selling physical goods Selling digital goods

• Do you have access to unique products?

• Better price than others?

• Do you have unique content people are willing to pay for?

• Mobile apps typically sell virtual goods that help speed the game up or make it more fun

Media / Community Access

• Build a community and then charge for access• Often need to create or attract quality content

Subscription

Plain subscription Subscription based on Usage

• Most SAAS companies use this• How determine price? • Competition pricing?• Free trial?

• Will usage naturally go up with time?• Value goes up with increased data?

Colibri.io MixPanel.com

Advertising

• Need high traffic • If B2C then don’t bother if you don’t have 50k+

visits/day• Higher purchase intent = higher price of ads

Commission for service

xxx

• Enabling transactions for other merchants• Typically need to sign up lots of partners/merchants (eg. Square,

AirBnB, Booking.com, etc.)

Marketplace

Kabanchik.com.ua

• Chicken & Egg Problem: need buyers and sellers• Ratings often very important• Lots of user generated content• One player typically wins

Affiliates

• Do you have a lot of traffic?• What products is your content related to?• You choose the ads that will work best for your audience• If CPA, you need to advertise products/sites with good

conversion

Freemium

• Similar to usage-based but with a large amount of free usage

• User gets to feel the value before paying

Advice 1: Focus first on solving a pain point

Retention is the best indication of this. Don’t worry about making money until you have users staying.

Advice 2: Make sure your pain point is something people will pay for

Are you a vitamin or a pain killer?

Vitamins require very high traffic

Not sure you’re a pain killer? The best way to test is to get someone to pay.Do this test as early as possible

Advice 3: Make sure what they are willing to pay can one day be less than your customer acquisition cost

No matter which model you start with remember that is just a….

You may and likely will change your business model.Probably several times.And you will optimize it many more times.

How do you test?

1. Make a hypothesis: “I think customers will be willing to pay a service charge”

2. Test it by building this into the product and throwing 1000 visitors at it (eg. at $0.10/visitor).

3. Look at the conversion (eg. 1%) and revenue per customer (eg. $5).

4. Compare cost of acquisition ($100) vs. Revenue earned ($50)

5. Optimize or try a different model. Or do both.

6. Repeat until the equation is positive.

You don’t have to lock yourself into one model

But…. Try to get one model working well first before having multiple ones.

Manufacturer revenue from sales of phone

Retailer margin from sales inApple Stores

30% margin on all app sales and in-app purchases

Selling ads through iAds

% commission on contracts from telecom providers

Measure and track each experiment

Subscription pric

e of $10

Subscription pric

e of $20

Freemium then pay $1/user

Freemium then pay $10/m

o

Freemium + pay $1/user +

pay for e

xtra data

Now its time for you to defend your business model

1. We will split into 2 groups (1 mentor each / 3 teams per group)

2. Team presents: • Idea & Pain Point (1min) • Business model & why you chose that one (2min)• Your estimate of Cost of User Acquisition & Revenue from Customer

(2min) – Be sure to explain your assumptions and give numbers!!!• eg. cost of visitor = $0.10 x 1% (conversion) = $10. Revenue/user =

$15/subscription. I think people would be willing to pay $15 because XXX…

3. Mentor & other teams challenge the business model with questions (5 min)

4. Next team is up

5. After all 3 teams presented we will switch the mentors in the groups and repeat.