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  • SMART Revenue Model Design - No Slide Title

    1. 1. SMART Revenue Model Design Teck Ho UC, Berkeley Copyright © 2009 Teck-Hua Ho
    2. 2. Fundamental Functions of Business Value Creation Value Appropriation Copyright © 2009 Teck-Hua Ho
    3. 3. Revenue Model Design <ul><li>Examples of Revenue Model </li></ul><ul><ul><li>eBay </li></ul></ul><ul><ul><li>Autodesk </li></ul></ul><ul><ul><li>Bay Alarm </li></ul></ul><ul><li>SMART Revenue Model Design </li></ul>Copyright © 2009 Teck-Hua Ho
    4. 4. eBay’s Original Revenue Model (up to 2005) <ul><li>M = Total number of items listed per year </li></ul><ul><li>Fee i = Insertion fee of item i </li></ul><ul><li>Com i = Final value fee of item i </li></ul><ul><li>I i = 1 if item i is sold; 0 otherwise </li></ul><ul><li>M depends on number of people in the community </li></ul><ul><li>Com i x I i increases with price or seller surplus </li></ul>Copyright © 2009 Teck-Hua Ho Revenue Levers
    5. 5. S calability Principle Copyright © 2009 Teck-Hua Ho A key feature of the revenue model: Revenues increase linearly with M but costs do not increase with M .
    6. 6. M atching Appropriated Value to Value Creation <ul><li>Who are eBay’s customers? (Bidders? Buyers? Sellers?) </li></ul><ul><li>What does it mean for eBay to do a better job? </li></ul><ul><li>Does eBay get paid more for doing a better job? </li></ul>Copyright © 2009 Teck-Hua Ho
    7. 7. SMART Principles <ul><li>S calability, so that revenues grow at least as fast as costs. </li></ul><ul><li>M atching value appropriation with value creation. </li></ul><ul><li>A ccelerate diffusion, adoption, and upgrade purchases. </li></ul><ul><li>R elationship based ( i.e., facilitate and build on repeated interaction with customers where possible). </li></ul><ul><li>T otal appropriated value ( i.e., focus on total customer value, including lifetime customer value and influencer value). </li></ul>Copyright © 2009 Teck-Hua Ho
    8. 8. eBay’s Original Revenue Model (up to 2005) <ul><li>M = Total number of items listed per year </li></ul><ul><li>Fee i = Insertion fee of item i </li></ul><ul><li>Com i = Final value fee of item i </li></ul><ul><li>I i = 1 if item i is sold; 0 otherwise </li></ul><ul><li>M depends on number of people in the community </li></ul><ul><li>Com i x I i increases with price or seller surplus </li></ul>Copyright © 2009 Teck-Hua Ho Revenue Levers
    9. 9. Ways to Enhance eBay’s Revenue <ul><li>Increase M </li></ul><ul><ul><li>Increase size of community, </li></ul></ul><ul><ul><li>Enter new markets and product categories </li></ul></ul><ul><ul><li>Increase turnover (e.g., reduce bidding duration, encourage setting of buyout prices) </li></ul></ul><ul><li>Increase Fee i </li></ul><ul><ul><li>Encourage more pictures and promotion of items </li></ul></ul><ul><li>Increase Com i </li></ul><ul><ul><li>Increase average number of bidders / auction (so as to increase seller surplus) </li></ul></ul><ul><ul><li>Encourage high-priced items (e.g., electronics, cars) </li></ul></ul><ul><li>Increase I i </li></ul><ul><ul><li>Increase average number of bidders / auction so as to increase the probability that the highest bid > reserve price </li></ul></ul><ul><ul><li>Encourage a lower reserve price (e.g., the recent increase in insertion fee for reserve price auction) </li></ul></ul>Copyright © 2009 Teck-Hua Ho
    10. 10. Ways to Increase Auction-off Rate <ul><li>Fees to list an item </li></ul><ul><ul><li>for regular auctions, fees is a function of starting price </li></ul></ul><ul><ul><li>for vehicles, a function of type of vehicles </li></ul></ul><ul><ul><li>for real estate, a function of types of properties and listing type </li></ul></ul><ul><li>Picture Service Fees—first picture free, additional picture or bigger picture incurs fees </li></ul><ul><li>Listing upgrade fees: various options to promote items </li></ul><ul><li>Final value fees </li></ul><ul><ul><li>for regular auction, charged when reserve met, at a function of the closing bid </li></ul></ul><ul><ul><li>For vehicles, charged when the first bid over the reserve price is placed (regardless of whether sale is finally made) </li></ul></ul><ul><ul><li>For real estate, a fixed fee for land/time share where there is successful high bid on the item and no fees for other type of real estates </li></ul></ul><ul><li>Reservation Price Fees—charged only if item not sold, a function of reserve price </li></ul>Copyright © 2009 Teck-Hua Ho
    11. 11. eBay’s Original Revenue Model (up to 2005) <ul><li>M = Total number of items listed per year </li></ul><ul><li>Fee i = Insertion fee of item i </li></ul><ul><li>Com i = Final value fee of item i </li></ul><ul><li>I i = 1 if item i is sold; 0 otherwise </li></ul><ul><li>M depends on number of people in the community </li></ul><ul><li>Com i x I i increases with price or seller surplus </li></ul>Copyright © 2009 Teck-Hua Ho Revenue Levers
    12. 12. Acquisitions and Investments <ul><li>In July, 1998, eBay acquired Cincinnati, OH based online auction site Up4Sale.com . </li></ul><ul><li>In May, 1999 , eBay acquired the online payment service Billpoint , which it shut down after acquiring PayPal . </li></ul><ul><li>In 1999, eBay acquired the auction house Butterfield & Butterfield, which it sold in 2002 to Bonhams . </li></ul><ul><li>In 1999, eBay acquired the auction house Alando for $43 million, which changed then to eBay Germany. </li></ul><ul><li>ebay aqcuired kruse auctions </li></ul><ul><li>In June, 2000 , eBay acquired Half.com for $318 million, which was later integrated with the eBay Marketplace. </li></ul><ul><li>In August, 2001 , eBay acquired Mercado Libre , Lokau and iBazar, Latin American auction sites. </li></ul><ul><li>In July, 2002 , eBay acquired PayPal , for $1.5 billion in stock. </li></ul><ul><li>On January 31 , 2003 , eBay acquired CARad.com, an auction management service for car dealers. </li></ul><ul><li>On July 11 , 2003 eBay Inc. acquired EachNet , a leading ecommerce company in China, paying approximately $150 million in cash. </li></ul>Copyright © 2009 Teck-Hua Ho
    13. 13. Acquisitions and Investments <ul><li>On June 22 , 2004 , eBay acquired all outstanding shares of Baazee.com , an Indian auction site for approximately US $50 million in cash, plus acquisition costs. </li></ul><ul><li>On August 13 , 2004 , eBay took a 25% stake in Craigslist by buying out an existing shareholder who was once a Craigslist employee. </li></ul><ul><li>In September 2004 , eBay moved forward on its acquisition of Korean rival Internet Auction Co. (IAC), buying nearly 3 million shares of the Korean online trading company for 125,000 Korean won (about US$109) per share. </li></ul><ul><li>In November 2004 , eBay acquired Marktplaats.nl for €225 million. This was a Dutch competitor which had an 80% market share in the Netherlands , by concentrating more on small ads than actual auctions. </li></ul><ul><li>On December 16 , 2004 , eBay acquired Rent.com for $415 million in cash (original deal was for $385 million of the amount in eBay stock plus $30 million in cash). </li></ul><ul><li>In May 2005 , eBay acquired Gumtree , a network of UK local city classifieds sites. </li></ul><ul><li>On May 18 , 2005 , eBay acquired the Spanish classifieds site Loquo . </li></ul><ul><li>In June 2005 , eBay acquired Shopping.com , an online comparison site for $635 million. </li></ul><ul><li>At the end of June 2005 , eBay acquired the German language classifieds site Opus Forum. </li></ul><ul><li>In September 2005 , eBay bought Skype , a VoIP company, for $2.6 billion in stock and cash. </li></ul>http://news.bbc.co.uk/2/hi/technology/4238258.stm Copyright © 2009 Teck-Hua Ho
    14. 14. eBay’s Revenue Model after 2005 <ul><li>M = Total number of items listed per year </li></ul><ul><li>Fee i = Insertion fee of item i </li></ul><ul><li>Com i = Final value fee of item i </li></ul><ul><li>I i = 1 if item i is sold; 0 otherwise </li></ul><ul><li>R i = Reserve price fee for item i </li></ul><ul><li>S j = Monthly subscription fee of storefront j </li></ul><ul><li>N = Total number of storefronts </li></ul>Copyright © 2009 Teck-Hua Ho Revenue Levers
    15. 15. Move from Transaction to R elationship-based Revenue <ul><li>Encourage frequent sellers to open a storefront </li></ul><ul><ul><li>increases customer loyalty </li></ul></ul><ul><ul><li>Increases number of items listed (especially more expensive items) on eBay </li></ul></ul><ul><li>Encourage sellers to switch from another auction platform (amazon.com) to eBay </li></ul><ul><li>Encourage existing storefronts to migrate to a more expensive storefront </li></ul>Copyright © 2009 Teck-Hua Ho
    16. 16. SMART Principles <ul><li>S calability, so that revenues grow at least as fast as costs. </li></ul><ul><li>M atching value appropriation with value creation. </li></ul><ul><li>A ccelerate diffusion, adoption, and upgrade purchases. </li></ul><ul><li>R elationship based ( i.e., facilitate and build on repeated interaction with customers where possible). </li></ul><ul><li>T otal appropriated value ( i.e., focus on total customer value, including lifetime customer value and influencer value). </li></ul>Copyright © 2009 Teck-Hua Ho
    17. 17. Autodesk’s Revenue Model (up to 2003) <ul><li>N = Total number of customers </li></ul><ul><li>P = Total number of products </li></ul><ul><li>n ij = Number of users in Customer i for Product j </li></ul><ul><li>P j,new = Purchase price of Product j </li></ul><ul><li>P j,Upgrade = Upgrade price of Product j </li></ul><ul><li>I ij, Upgrade = 1 if Customer i adopts the upgrade of Product j </li></ul>Copyright © 2009 Teck-Hua Ho Revenue Levers New Customers Existing Customers
    18. 18. Challenges <ul><li>Transaction-based rather than relationship-based </li></ul><ul><li>Probability of upgrade less than 1/3 and the investment in software upgrade is huge </li></ul><ul><li>High variability in revenue flow </li></ul>Copyright © 2009 Teck-Hua Ho
    19. 19. Autodesk’s Revenue Model (after 2003) Copyright © 2009 Teck-Hua Ho New Customers Existing Customers Existing Customers
    20. 20. New Revenue Levers <ul><li>I ij, Sub = 1 if Customer i subscribes to Product j </li></ul><ul><li>I ij, Renewal = 1 if Customer i renews the subscription for Product j </li></ul><ul><li>P j,Sub = Subscription fee of Product j </li></ul><ul><li>P j,Renewal = Renewal fee of Product j </li></ul>Copyright © 2009 Teck-Hua Ho
    21. 21. SMART Principles <ul><li>S calability, so that revenues grow at least as fast as costs. </li></ul><ul><li>M atching value appropriation with value creation. </li></ul><ul><li>A ccelerate diffusion, adoption, and upgrade purchases. </li></ul><ul><li>R elationship based ( i.e., facilitate and build on repeated interaction with customers where possible). </li></ul><ul><li>T otal appropriated value ( i.e., focus on total customer value, including lifetime customer value and influencer value). </li></ul>Copyright © 2009 Teck-Hua Ho
    22. 22. Bay Alarm Revenue Model <ul><li>N = Total number of customers </li></ul><ul><li>IC i = Installation charge for customer i </li></ul><ul><li>C i = Cost of installation for customer i </li></ul><ul><li>RMR i = Recurring monthly revenue for customer i </li></ul><ul><li>T i = Life time of customer i </li></ul>Copyright © 2009 Teck-Hua Ho Revenue Levers Customer Life-time Value
    23. 23. Optimizing Life-time Value <ul><li>Analyze how customer i ’s life-time varies with demographics, chosen products, and payment methods </li></ul><ul><li>Tradeoff between IC and RMR </li></ul><ul><li>Focus on customer pyramid and migration </li></ul><ul><li>Buy and sell customers based on expected life-time value </li></ul>Copyright © 2009 Teck-Hua Ho
    24. 24. Security Alarm Company (Commercial) Copyright © 2009 Teck-Hua Ho The Rest of the World Suspects Prospects Inactive Customers “ Top” > $500 “ Big” $150 - $500 “ Medium” $50 - $150 “ Small” < $50 Recurring Monthly Revenue
    25. 25. Security Alarm Company Copyright © 2009 Teck-Hua Ho 2005 Sample Size 2006 Sample Size RMR – Average ($) RMR – Maximum ($) 2122 2238 125 2065
    26. 26. Customer Migration Matrix Copyright © 2009 Teck-Hua Ho Customers in 2005 Top Big Medium Small Inactive Top 74 64 2 1 0 7 Big 251 16 197 4 0 34 Medium 517 0 32 401 3 81 Small 1280 0 2 65 1073 140 New Customers in 2006 478 7 14 170 287 0 Total Customers in 2006 87 247 641 1363 262
    27. 27. Customer Migration Matrix Copyright © 2009 Teck-Hua Ho Customers in 2005 Top Big Medium Small Inactive Top 74 86.5% 2.7% 1.4% 0 9.5% Big 251 6.4% 78.5% 1.6% 0 13.5% Medium 517 0 6.2% 77.6% 0.6% 15.7% Small 1280 0 0.2% 5.1% 83.8% 10.9% New Customers in 2006 478 1.5% 2.9% 35.6% 60.0% Total Customers in 2006 87 247 641 1363 262
    28. 28. Average RMR by Segment Copyright © 2009 Teck-Hua Ho Top ( >$500) Big ( $200-$500) Medium ( $80-$199) Small ( <$80) $801 $304 $126 $48
    29. 29. Loss in Revenue due to Retention Copyright © 2009 Teck-Hua Ho Total Loss in Customer Life-time Value = 50 months (average life-time) x $35,484 =$1.78m Transition Number of Transitions Loss in RMR / Transition ($) Total Loss in RMR ($) Top to Big 2 497 994 Top to Medium 1 675 675 Top to Small 0 753 0 Top to Inactive 7 801 5607 Big to Medium 4 178 712 Big to Small 0 256 0 Big to Inactive 34 304 10336 Medium to Small 3 78 234 Medium to Inactive 81 126 10206 Small to Inactive 140 48 6720 TOTAL 272 35484
    30. 30. Customer Value Management Copyright © 2009 Teck-Hua Ho https://www.snacvm.com
    31. 31. SMART Principles <ul><li>S calability, so that revenues grow at least as fast as costs. </li></ul><ul><li>M atching value appropriation with value creation. </li></ul><ul><li>A ccelerate diffusion, adoption, and upgrade purchases. </li></ul><ul><li>R elationship based ( i.e., facilitate and build on repeated interaction with customers where possible). </li></ul><ul><li>T otal appropriated value ( i.e., focus on total customer value, including lifetime customer value and influencer value). </li></ul>Copyright © 2009 Teck-Hua Ho
    32. 32. Customer Life-time Value Equation Copyright © 2009 Teck-Hua Ho Customer Life-time Value = Customer Purchase Value + Customer Influence Value
    33. 33. Customer Purchase Value t time Self-motivated: Consider Bob: = Influenced by others: Bob’s purchase value = credit back is credited back to the person influenced him Bob’s purchase value Copyright © 2009 Teck-Hua Ho V V V
    34. 34. Customer Influence Value t time Consider Bob: credit back s 1 s 2 s 3 each credit back credit back Bob’s influential value = I 1 + I 2 + I 3 Copyright © 2009 Teck-Hua Ho V V V
    35. 35. Purchase Acceleration Copyright © 2009 Teck-Hua Ho No Purchase Acceleration Purchase Acceleration Increase% Size of “Targeted Sample” 0 4.2% - Total Life-time Customer Value 100 115.5 15.5%
    36. 36. SMART Principles <ul><li>S calability, so that revenues grow at least as fast as costs. </li></ul><ul><li>M atching value appropriation with value creation. </li></ul><ul><li>A ccelerate diffusion, adoption, and upgrade purchases. </li></ul><ul><li>R elationship based ( i.e., facilitate and build on repeated interaction with customers where possible). </li></ul><ul><li>T otal appropriated value ( i.e., focus on total customer value, including lifetime customer value and influencer value). </li></ul>Copyright © 2009 Teck-Hua Ho

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