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 customersBottom 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

Web Physical

Channel

Direct Sales Products License 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

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

• 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

GrapheneRevenue 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

Parts suppliers

Payment flow

• Cost per in2 – 1” Furnace = $.80

• Cost per in2 – 2” Furnace = $.45

• Cost per in2 – 4” Furnace = $.20

If we can move to N (replacing Ar, key direct cost driver)

• Cost per in2 – 1” Furnace = $.50

• Cost per in2 – 2” Furnace = $.25

• Cost per in2 – 4” Furnace = $.10

“Holy Grail”: 4” or larger continuous production w/Nitrogen

Cost per in2 – 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