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How to Fail Less Business Models andCustomer Development       Steve Blank    www.steveblank.com        @sgblank
Agenda – Day One• 9:00 - 11:00       Introduction to Customer Development• 11:00 - 11:30      break• 11:30 - 13:00      va...
Agenda – Day One• 9:00 - 11:00         Introduction to Customer Development• 11:00 - 11:30        break• 11:30 - 13:30    ...
Agenda – Day Two• 9:00 - 10:30         Student presentations on customer                       discovery action plan•   10...
The Lean LaunchPad      Lecture 4:Distribution Channels  How does your Product    Get to Customers?                       ...
ChannelsHow does your Product  Get to Customers?
© 2012 Steve Blank
Who Are OurCustomers and HowDo We Reach Them
Physical versus Virtual Channels
How Do You Want Your Product to    Get to Your Customer?     Yourself     Through someone else     Retail     Wholesal...
Web Channels               12
Physical Channels                    13
How Does Your Customer Want toBuy Your Product from your Channel?          • Same day          • Delivered and installed...
Types of ChannelsDirect           Indirect     Licensing            –   OEM            –   VAR            –   Reseller    ...
Distribution Complexity                                                                                           Global S...
How Do the Economics Work in  Different Sales Channel?
How Are Channels Compensated? – Commission – Percentage of sales price – Discounted pre-purchase                          ...
Channel Economics: “Direct” Sales                                                                           List          ...
Channel Economics: Resellers                                                                              List            ...
Channel Economics: Distributors/Resellers                                                                                 ...
The Channel as a Customer– Some products are embedded in others (OEM)– Some products are resold by others (VARs)– Some pro...
Channel Economics: OEM or IP Licensing                                                                                    ...
How Are Channels Motivated or Incented?– Money! – what makes them the most?– Training– Marketing to the channel– SPIF     ...
Book PublishingChannel Example
Example: Book Publishing             NationalPublisher                 Printer   Wholesaler   Retailer   Customer         ...
Book Publishing                             National               Publisher                 Distributor   Retailer   Cust...
Book Publishing Economics                    NationalPublisher                                   Wholesaler            Ret...
Book Publishing Delivery                   NationalPublisher                          Printer       Wholesaler          Re...
Medical DeviceChannel Example
Product flow/ChannelElectronic                                                Partners/  Health                   Fluid Sy...
HospitalsPain Clinics                          Channels (Direct)               • Direct to institutions                  •...
Farm Sensor Industry  Channel Example
Channel Model: Service Provider                                            Product                                        ...
Channel Model: Service Provider                                            Product                                        ...
Dental ProductChannel Example
COST / PROFIT ANALYSIS Licensing Revenue ModelPer unit cost and profit estimation            Our revenue 4-8% revenues    ...
Licensing of Technology Ecosystem             University           Insurance                                   Agencies 2-...
Medical DeviceChannel Example 2
••••••
Dental Product 2Channel Example
Channels   Direct Sales        Big DistributorsPrivate Practice   Institutional   Purchasing    Dentist           Dentist ...
Channels   Direct Sales        Big Distributors                                                80% Market Share           ...
Channels                                                Continuing                                                Educatio...
Online RentalChannel Example
PM Tools                                                                                               Rentpost.com       ...
Dental Product 3Channel Example
COST / PROFIT ANALYSIS  Direct Sales Revenue Model                                               Our revenue   $27     Lis...
Direct Sales Ecosystem   R&D &                 University           Insurance  Regulation                                 ...
Channel Example
• F-dopa iodonium intermediate              • F-dopamine iodonium intermediate       Precursor SynthesisReagents          ...
Channel Example
Travel IndustryChannel Example
Travel Services:Impact of Changing Technology
The Advent of GDS Systems (1980 -1995)
Turning the Screen Around Online Travel (1995-2010)
The Lean LaunchPad         Lecture 5   Customer RelationshipsHow Do You Get/Keep/Grow Customers?                          ...
Customer RelationshipsHow do you Get, Keep and Grow Customers?
© 2012 Steve Blank
Customer RelationshipsPhysical & Web Mobile Are Different                                      © 2012 Steve Blank
Customer RelationshipsPhysical Products – Get Customers                                    © 2012 Steve Blank
Customer Archetypes                   Drive Get/Keep/Grow                       Lab Manager: Brian• What’s their role?   –...
Paid Demand Creation Activities              “Paid” Media   Demand   Creation                  •   Public Relations       ...
Free Demand Creation Activities          “Earned” Media   Demand   Creation   •   Publications in journals              • ...
Customer RelationshipsPhysical Products – Get Customers                                    © 2012 Steve Blank
Customer RelationshipsPhysical Products – Get Customers                          CAC =                 Customer Acquisitio...
Customer Acquisition Cost versus           Sales Complexity                No Touch      Light Touch    High Touch        ...
Customer RelationshipsPhysical Products – Keep Customers                                     © 2012 Steve Blank
Customer RelationshipsPhysical Products – Keep Customers                Attrition/Churn                                   ...
Customer RelationshipsPhysical Products – Grow Customers                                     © 2012 Steve Blank
Customer RelationshipsPhysical Products – Get/Keep/Grow        LTV = Customer Lifetime Value                              ...
Customer RelationshipsWeb/Mobile Products– Get   Customers                                   © 2012 Steve Blank
Web/Mobile Products– Get    Customers             CPM = cost per thousand hits                                            ...
Web/Mobile Products– Get    Customers             CPA = Cost per Action                                     © 2012 Steve B...
SaaSProducts– Get Customers     OrganicTraffic, SEM, Oth er Paid Sources    Registered Visitors                           ...
Web/Mobile Products– Keep Customers
Our Example Marketing FunnelQuick Marketing Calculation     50%       amount of traffic that is organic versus paid    $1....
Our Example Marketing FunnelQuick Marketing Calculation     50%       amount of traffic that is organic versus paid    $1....
Our Example Marketing FunnelCost per Qualified Lead                    $125Leads to closed deal                      10Mar...
We Can Compute CAC and LTV                                                 Excludes people costsLead Gen costs per deal   ...
Balancing CAC/LTV in a SaaS model         LTV            >3x           CAC         Months to        recover CAC     <12 mo...
What Investors are Looking ForA well balanced business model                                     Monetization             ...
The Balancing Act            •   Viral effects            •   Inbound Marketing            •   Free or Freemium           ...
The Balancing Act              •   Viral effects              •   Inbound Marketing                                       ...
Customer RelationshipsWeb/Mobile Products– Keep Customers                                 © 2012 Steve Blank
How Churn affects LTV• Average customer lifetime in months =1 / Monthly Churn                                   Source: Da...
How Churn affects LifetimeMonths          Lifetime vs Churn Rate 120          100 100  80  60                       50  40...
How Churn affects LTVLifetime Value                                           Monthly                                     ...
Impact of lowering Churn                                                                      Cumulative Net Profit       ...
Churn• 1% to 2.5% churn per month is acceptable• Higher than that, you are filling a leaky bucket  – Need to understand wh...
Customer RelationshipsWeb/Mobile Products– Grow Customers                                 © 2012 Steve Blank
Customer RelationshipsWeb/Mobile Products Get/Keep/Grow                                    © 2012 Steve Blank
Ag RobotCustomer Relationships Example
Demand generation plan and budget• Word of mouth generation     – 2 systems for “Demo day events”     – 2 systems for cust...
Medical DeviceCustomer Relationships Example
Key OpinionLeaders (KOLs)
Key OpinionLeaders (KOLs)
Key OpinionLeaders (KOLs)
Key OpinionLeaders (KOLs)
Key OpinionLeaders (KOLs)
Key OpinionLeaders (KOLs)
Housing AppCustomer Relationship Example
• We ran a Facebook ad to test actual willingness2  to pay for this service                                               ...
• To test willingness to pay we used three        2  identical ads with three different landing pages                     ...
• To test willingness to pay we used three        2  identical ads with three different landing pages          Ad         ...
• Customer archetype: Sara                How she searches                 Wants to be efficient (will use a broker if do...
Online DatingCustomer Relationships Example
What We Did: Landing Page + Web App
What We Found: High referral traffic   4 day progress report                             Overall Signup progress          ...
What we did: Targeted women, all couples                   Demand generation testHypothesis: Women-in-relationships are li...
What we found: women click more...................................but not clear who will pay!              Couples will pa...
What we found: Clicks, no web app usage                         Demand generation testFunnel: “Couples” campaign          ...
Online SalesCustomer Relationships Example
Year 1           Web funnel                          Year 5  100 000 hits   Referenced to our web site       300 000 hits ...
Mobile AppCustomer Relationships Example
Success Depends on Virality> ChurnRatio of early stage viralityrate to churn rate = 2.00x
Success Depends on Virality>ChurnRatio of early stage viralityrate to churn rate = 1.50x
Success Depends on Virality>ChurnRatio of early stage viralityrate to churn rate = 1.0x
Demand creation via website        1                     2            3“Not a landing page”    Doesn’t show theNo Indonesi...
Demand creation via website -                results             Clicks                               CTR100              ...
Software Reference ToolCustomer Relationships Example
AdWords Testing
AB Testing Results0% conversion         42% conversion       75% conversion     32% conversion•   Original Peaya website h...
Google &Facebook campaigns• Keywords: free endnote, reference manager, pdf  manager, Itunes for digital content, I tunes, ...
We’re “a little” viral             12% of sign-ups from referrals             14 of 117 new registrations came from       ...
Collaboration doesn’t “pop”…. yet                  “Rate & Discuss” is least interesting                  tutorial screen ...
Customer Relationships Example
Search KeywordsLesson Learned:Very little search traffic -> a “missionary” sales effort
Highly Competitive KeywordsLesson Learned:AdWords (paid SEM) is not going to be an efficient channel with thesekeywords
Medical DeviceCustomer Relationships Example
ChannelIncentives                                                                                  VP                     ...
Demand Creation                                 Patients/Advocacy                                      Groups             ...
NSF I-Corps  The Lean LaunchPadLecture 6: Revenue Streams   How Do You Make Money?                             Version 6/2...
Revenue StreamsHow do you Make Money?
© 2012 Steve Blank
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 togenerate cash from each customer              segment
Revenue Streams1. How many will we sell?2. Where/who is the money coming from?3. How do we price the product?4. Does this ...
How Many Will You Sell?•   What’s the Market Size & estimate of Market Share?•   How many can your channel sell?•   How mu...
Where is the money coming from?                               Revenue Model Choices                                       ...
Key Revenue Model Questions• What are my customers paying for?• What capacity do my customers have to  pay?• How will you ...
Pricing Model =the tactics you use to set the price in      each customer segment
How to price the product?            Pricing Models - Physical•   Cost plus•   Competitive pricing          •      “Razor/...
Common approaches to pricing               Cost + markupCost based     Typically not a strategic way to price           ...
Additional components of pricing• Exclusive vs. non-exclusive• What do you price? What do you give away  for free?• How do...
Competition as an influence                • Pure competition Nature of  Market                • Oligopoly                ...
Payment Flow• Draw the diagram                               Tennant• Put in numbers                           send monthl...
Single versusMulti-sided Markets
Single/Multi-side Markets• Single-sided markets care about revenues• Multi-sided markets may care about users  first, reve...
“Users First” CompaniesIf you say your business is advertising based:• How do you get to 10M monthly users?• How do you be...
“Revenue First” Companies• Time to doublings for monthly revenues• Key questions:• When will I get to $100k/month in  reve...
Market Type and Revenue
Other Issues• Distribution channel affects  revenue streams• Market type affects revenue streams• Demand curve affects rev...
New Market       Revenue ForecastNew Market Sales Curve
Existing Market Revenue Forecast        Existing Market
Resegmented Market Revenue         Forecast
Common categoriesof Web/Mobile revenue models
“Direct” revenue models•   Sales: Product, app, or service sales•   Subscriptions: SAAS, games, monthly subscription•   Fr...
“Ancillary” revenue models• Referral revenue: pay for referring traffic/customers to other  web or mobile sites or product...
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 involv...
Advertising• Fee paid by brands and companies to get in  front of potential customers
Revenue Model Summary
Example AnalysisTarget market                         SalesUSA market – 1.5 M patients           Start in EU middle of yea...
Does it add up?1. Is revenue adequate to cover costs in the   short term?2. Are you confident revenue will grow   material...
Thought experiment• Time to doublings for monthly revenues• Key questions:  – When will I get to $100k/month in    revenue...
Optical EquipmentRevenue Model Example
Academia Payment Flow                                                                         activity                    ...
Bio-Pharma Payment Flow                                                                 activity                          ...
OEM Payment Flow                                                                               activity                   ...
Nitrate SensorRevenue Model Example
Product                        Money  OEM                   Water                        Data                        only ...
Product                                Money       OEM                      Nutrient                                 Data ...
Product                                Money       OEM                      Nutrient                                 Data ...
Product                                Money       OEM                      Nutrient                                 Data ...
Using $1000 per sensor (2x cost) puts us ~$350 more expensive than current commercialnitrate sensors. We’re including pH, ...
Using $1000 per sensor (2x cost) puts us ~$350 more expensive than current commercialnitrate sensors. We’re including pH, ...
Bio-Based Chemical Intermediates     Revenue Model Example
Revenue model: Hypothesis        Here’s what we hypothesized…           Biomass supplier                              Biom...
Revenue Model: Experiment 1                     Here’s what we did…                                      Production Econom...
Revenue model: Result 1                    Financial metrics                    Ethanol      DMF       Lactic    Bi-functi...
Revenue model: Result 1                    Financial metrics                    Ethanol      DMF       Lactic    Bi-functi...
Revenue model: Result 1                    Financial metrics                    Ethanol      DMF       Lactic    Bi-functi...
Revenue model: Result 1                    Financial metrics                    Ethanol          DMF            Lactic    ...
Revenue model: Result 2                               Payment Flow           Biomass supplier                             ...
Payment Flows Example
Payment Flows         Clinical Diagnostic Services                Pharmaceutical Products            Private              ...
Medical DevicePricing Example
GrapheneRevenue Model Example
Payment flow                     Researchers                Add value     More workCurrent TEM          Distributorsgrid p...
Payment flow   Electronic User     DistributorsE-reader manufacturer      Parts suppliers   Flexible display     Graphene ...
Direct Cost Estimates: Scale Matters• Cost per in2 – 1” Furnace = $.80• Cost per in2 – 2” Furnace = $.45• Cost per in2 – 4...
SensorPricing Tactics Example
Understand Economics of Plant + Sensors    Industrial PlantsUnderstand Economics of Technology Supplier      Plant #1     ...
205         Diaphragm                                             Membrane                                             $24...
Soft product launch projected for Q1-Q2 2012      General launch projected for Q4 2012Diaphragm                      Membr...
Medical DeviceRevenue Model Example
What we make           Device cost            (one time)              ~$2000Dental                              DentistOpt...
What the dentist normally makes                                            $250                                           ...
What we’d add for the dentist                                                                              Device creates ...
Farm Nitrate SensorRevenue Model Example
Economics of TSP OperationIncentives:   Best case scenario $45.89/acre     Worst case: $9.65/acre or state dependent 25% c...
Economics of TSP OperationIncentives:   Best case scenario $45.89/acre     Worst case: $9.65/acre or state dependent 25% c...
Biofactories for Therapeutics  Revenue Model Example
Revenue Model                         = money              = relationship                         = information        = A...
Optics Design CompanyRevenue Model Example
™                  Revenue Model & Payment Flows                                                                          ...
Complex Sensor Networks Revenue Model Example
Revenue Model and CustomerSET Sensor Node Product                        Acquisition                                      ...
Healthcare SoftwareRevenue Model Example
Revenue Model                                                                 Health           Healthcare                P...
The Lean LaunchPadLecture 6: Revenue Streams   How Do You Make Money?                             Version 6/22/12
Revenue StreamsHow do you Make Money?
© 2012 Steve Blank
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 togenerate cash from each customer              segment
Revenue Streams1. How many will we sell?2. Where/who is the money coming from?3. How do we price the product?4. Does this ...
How Many Will You Sell?•   What’s the Market Size & estimate of Market Share?•   How many can your channel sell?•   How mu...
Where is the money coming from?                               Revenue Model Choices                                       ...
Key Revenue Model Questions• What are my customers paying for?• What capacity do my customers have to  pay?• How will you ...
Pricing Model =the tactics you use to set the price in      each customer segment
How to price the product?            Pricing Models - Physical•   Cost plus•   Competitive pricing          •      “Razor/...
Common approaches to pricing               Cost + markupCost based     Typically not a strategic way to price           ...
Additional components of pricing• Exclusive vs. non-exclusive• What do you price? What do you give away  for free?• How do...
Competition as an influence                • Pure competition Nature of  Market                • Oligopoly                ...
Payment Flow• Draw the diagram                               Tennant• Put in numbers                           send monthl...
Single versusMulti-sided Markets
Single/Multi-side Markets• Single-sided markets care about revenues• Multi-sided markets may care about users  first, reve...
“Users First” CompaniesIf you say your business is advertising based:• How do you get to 10M monthly users?• How do you be...
“Revenue First” Companies• Time to doublings for monthly revenues• Key questions:• When will I get to $100k/month in  reve...
Market Type and Revenue
Other Issues• Distribution channel affects  revenue streams• Market type affects revenue streams• Demand curve affects rev...
New Market       Revenue ForecastNew Market Sales Curve
Existing Market Revenue Forecast        Existing Market
Resegmented Market Revenue         Forecast
Common categoriesof Web/Mobile revenue models
“Direct” revenue models•   Sales: Product, app, or service sales•   Subscriptions: SAAS, games, monthly subscription•   Fr...
“Ancillary” revenue models• Referral revenue: pay for referring traffic/customers to other  web or mobile sites or product...
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 involv...
Advertising• Fee paid by brands and companies to get in  front of potential customers
Revenue Model Summary
Example AnalysisTarget market                         SalesUSA market – 1.5 M patients           Start in EU middle of yea...
Does it add up?1. Is revenue adequate to cover costs in the   short term?2. Are you confident revenue will grow   material...
Thought experiment• Time to doublings for monthly revenues• Key questions:  – When will I get to $100k/month in    revenue...
Optical EquipmentRevenue Model Example
Academia Payment Flow                                                                         activity                    ...
Bio-Pharma Payment Flow                                                                 activity                          ...
OEM Payment Flow                                                                               activity                   ...
Nitrate SensorRevenue Model Example
Delft climate kic 070212 part 2
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Delft climate kic 070212 part 2
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Delft climate kic 070212 part 2
Delft climate kic 070212 part 2
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  • 320 SBIR Phase 2 companiesGot $500K50% from academiaMix of technologies20% of you will get phase 2b20% of those will succeed13 of you will succeedMost of you think you are in execution modeMost will be a few years old – thinking they are in execution~25 will be a lot olderNot all in the audience will be founders, some will be employeesGraphene Frontiers is the perfect exampleStart with their slidesEmphasize that this process not just works for software but anything with customer/market riskFix the serendipitous DOW meetingGroun flour pharma as a backup
  • ----- Meeting Notes (3/6/12 10:38) -----what the dentist makes for a perio procedure
  • Progression: larger and larger sensor networks deployed
  • ----- Meeting Notes (3/6/12 10:38) -----what the dentist makes for a perio procedure
  • Progression: larger and larger sensor networks deployed
  • (need to do this as a build…)
  • Are we sure its 5%-10% of revenue and not of profit? ---- Dr. Conti was quoted as saying 5-10% of revenue, but he may have meant profit.
  • Transcript of "Delft climate kic 070212 part 2"

    1. 1. How to Fail Less Business Models andCustomer Development Steve Blank www.steveblank.com @sgblank
    2. 2. Agenda – Day One• 9:00 - 11:00 Introduction to Customer Development• 11:00 - 11:30 break• 11:30 - 13:00 value proposition customer segments• 13:00 – 14:30 lunch working session Students prepare first version of business model canvas• 14:30 – 16:00 Student presentation of business model canvas• 16:00 – 16:15 break• 16:15 – 17:00 distribution channels
    3. 3. Agenda – Day One• 9:00 - 11:00 Introduction to Customer Development• 11:00 - 11:30 break• 11:30 - 13:30 value proposition customer segments• 12:30 – 13:30 lunch working session Students prepare first version of business model canvas• 13:30 – 15:00 Student presentation of business model canvas• 15:00 – 15:15 break• 15:30 – 16:30 distribution channelsHomework: 1) update your canvas2)develop a customer discovery action plan
    4. 4. Agenda – Day Two• 9:00 - 10:30 Student presentations on customer discovery action plan• 10:30 - 11:30 customer relationships (get/keep/grow)• 11:30 – 12:00 break• 12:00 - 13:00 revenue streams• 13:00 – 14:00 lunch working session Students present• 13:30 – 14:15 partners• 14:15 - 15:00 resources, activities, costs• 15:00 – 15:15 break• 15:30 – 16:30 Customer Development Manifesto
    5. 5. The Lean LaunchPad Lecture 4:Distribution Channels How does your Product Get to Customers? Version 6/22/12
    6. 6. ChannelsHow does your Product Get to Customers?
    7. 7. © 2012 Steve Blank
    8. 8. Who Are OurCustomers and HowDo We Reach Them
    9. 9. Physical versus Virtual Channels
    10. 10. How Do You Want Your Product to Get to Your Customer?  Yourself  Through someone else  Retail  Wholesale  Bundled with other goods or services 11
    11. 11. Web Channels 12
    12. 12. Physical Channels 13
    13. 13. How Does Your Customer Want toBuy Your Product from your Channel?  • Same day  • Delivered and installed  • Downloaded  • Bundled with other  products • As a service  • … 14
    14. 14. Types of ChannelsDirect Indirect Licensing – OEM – VAR – Reseller – Distributor 15
    15. 15. Distribution Complexity Global Systems Evangelists Systems Integrators WANs MainframesMarketing Complexity Direct Sales Minis LANs VARs PC Servers Desktop PCs Retail Printers Keyboards Web, Telesales Service Technicians Toner Solution Complexity 16
    16. 16. How Do the Economics Work in Different Sales Channel?
    17. 17. How Are Channels Compensated? – Commission – Percentage of sales price – Discounted pre-purchase 18
    18. 18. Channel Economics: “Direct” Sales List Your Revenue Price End Consumer Discounts Cost of Goods EU Profit + SG&A + R&D (Supply Chain)Source: Mark Leslie, Stanford GSB 19
    19. 19. Channel Economics: Resellers List Your Revenue Price End Consumer Discounts Cost of Goods EU Profit + SG&A + R&D Reseller (Supply Chain)Source: Mark Leslie, Stanford GSB 20
    20. 20. Channel Economics: Distributors/Resellers List Your Revenue Price End Consumer Distributor Discounts Cost of Goods Profit + SG&A + EU Reseller (Supply Chain) R&DSource: Mark Leslie, Stanford GSB 21
    21. 21. The Channel as a Customer– Some products are embedded in others (OEM)– Some products are resold by others (VARs)– Some products are distributed by others– Who’s the customer? 22
    22. 22. Channel Economics: OEM or IP Licensing ListYour Revenue Price End Consumer Cost of Distributor Distributor Discounts Master Goods Profit + SG&A + EU Reseller (Supply R&D Chain) Cost of Goods Profit + SG&A Reseller (Supply + R&D Chain)Your Product Becomes Your Customer’s Cost of Goods Source: Mark Leslie, Stanford GSB 23
    23. 23. How Are Channels Motivated or Incented?– Money! – what makes them the most?– Training– Marketing to the channel– SPIF 24
    24. 24. Book PublishingChannel Example
    25. 25. Example: Book Publishing NationalPublisher Printer Wholesaler Retailer Customer Distributor 26
    26. 26. Book Publishing National Publisher Distributor Retailer Customer Wholesaler•Percent of 35% 15% 10% 40% Retail $7.00 $3.00 $2.00 $8.00 $20.00 • You get -35% of retail - the distributor gets 10% - the wholesaler gets 15% - the retailer gets 40% -less any discount they offer the customer 27
    27. 27. Book Publishing Economics NationalPublisher Wholesaler Retailer Customer Distributor Allowances Wholesale costs Bills Markup Credit guarantees Payment guarantees Payment guarantees Return rights Credits Payments 28
    28. 28. Book Publishing Delivery NationalPublisher Printer Wholesaler Retailer Distributor Prepare film Receive (content)  Schedules  Print orders Determine Merchandise  Bundle allocations titles counts  Film Sell Deliver orders magazines Establish Prepare galleys Print and ship identity magazines Create demand Dispose of Acknowledge returns returns 29
    29. 29. Medical DeviceChannel Example
    30. 30. Product flow/ChannelElectronic Partners/ Health Fluid Synchrony OEMS Records Electronic Support Pump + Bundled Records Services Controller Kits Hospitals (AnesthesiologistsPatients Neurosurgeons) Pain Clinic (Anesthesiologists Neurosurgeons)
    31. 31. HospitalsPain Clinics Channels (Direct) • Direct to institutions • Some formularies involved in purchase decisions • Some doctors make purchase decision directly • Device company/Doctor relationship is key • Heavily influenced by : • Clinical study results • Regulatory approval • Reimbursement
    32. 32. Farm Sensor Industry Channel Example
    33. 33. Channel Model: Service Provider Product Money OEM Nutrient Data Large farmUs Small farm USDA/EPA Licensing/sales
    34. 34. Channel Model: Service Provider Product Money OEM Nutrient Data Large farm ProductUs Small farm Service USDA/EPA Licensing/sales
    35. 35. Dental ProductChannel Example
    36. 36. COST / PROFIT ANALYSIS Licensing Revenue ModelPer unit cost and profit estimation Our revenue 4-8% revenues List price End user Univ. Manufacturing Maintaining Raw LicenseR&D License & Distribution IP fee materials fee Packaging 37
    37. 37. Licensing of Technology Ecosystem University Insurance Agencies 2-4% license fee $$$ DMX R&D Products Procedures Health-Care IPs Providers: $$ End4-8% royalty Hospitals User ~$40 Practitioners Customer Clinics segment: Large corporations J&J, GSK, 3M 38
    38. 38. Medical DeviceChannel Example 2
    39. 39. ••••••
    40. 40. Dental Product 2Channel Example
    41. 41. Channels Direct Sales Big DistributorsPrivate Practice Institutional Purchasing Dentist Dentist Department
    42. 42. Channels Direct Sales Big Distributors 80% Market Share 30% MarginPrivate Practice Institutional Purchasing Dentist Dentist Department
    43. 43. Channels Continuing Education Magazines Trade Courses & Email Shows Direct Sales Big Distributors 80% Market Share 30% MarginPrivate Practice Institutional Purchasing Dentist Dentist Department
    44. 44. Online RentalChannel Example
    45. 45. PM Tools Rentpost.com Listings Rentjuice.com Provider Buildium.com Craigslist Rentingsmart.co Potential Padmapper.com Propertyware.com Landlords Rent.com Apartment.com propertymanagemnt360 Show, Advise, Valuate Forrent.com Rentjuice.com Realtors Propertyware.co Trulia.com Sell, Advise Credit Checks Landlords Safetenantcheck.c Erenter.com Buildium.com Property Listings, Managers Checks Payment Facilitator Maintenance Rent Payment Listings, Rentpayment.com Ratings Checks Clearnow.com Rent Payment Yelp.com Tenants Online Cheque Angie’s List Rentingsmart.coMaintenanceFurnishing Moving Find information Maintenance Finding Service Zoospi.com Providers Redbeacon.com Taskrabbit.com Servicemagic.com Schedule Tools Setster.com Web Info Zoospi.com 47
    46. 46. Dental Product 3Channel Example
    47. 47. COST / PROFIT ANALYSIS Direct Sales Revenue Model Our revenue $27 List price $40 * Per unit cost and profit estimation %32 cut End user Raw active Manufacturing & Profit + R&D + License Distributor ingredient Packaging fee $6 ? ($5) ~$11 ~$13* Competition• NuProprophy paste (Novamin$50)• NuPro desensitizer (Novamin$93)• MI varnish (Recaldent$100)• Gluma desensitizer (Glutaraldehyde$130)• Health-Dent desensitizer (Fluoride $49) 49
    48. 48. Direct Sales Ecosystem R&D & University Insurance Regulation Agencies $? $$?? Raw Materials Manufacturing $6/pk DMX R&D Products Customer $5/pk Procedures Segments; Formulations IPs Health-Care $$?? End &Packaging -32%($27) Providers: User - Hospitals Product - Practitioners Sales & $40/pk - Clinics Distribution 50
    49. 49. Channel Example
    50. 50. • F-dopa iodonium intermediate • F-dopamine iodonium intermediate Precursor SynthesisReagents • ABX • Siemens Explora GMP • Eckert & Ziegler Precursor in Cassette Cassette • GE MX module for TracerLabComponents • Eckert & Ziegler • Synthra GMP • Siemens Explora Cassette (device) Compliant • Neoprobe • TracerLab/ GESynthesizer • Siemens PETNet • GE Amersham PET Drug • Cardinal Health Finished productDistributor • AAA • Iason 52 I-Corps Final Presentation 12/14/11
    51. 51. Channel Example
    52. 52. Travel IndustryChannel Example
    53. 53. Travel Services:Impact of Changing Technology
    54. 54. The Advent of GDS Systems (1980 -1995)
    55. 55. Turning the Screen Around Online Travel (1995-2010)
    56. 56. The Lean LaunchPad Lecture 5 Customer RelationshipsHow Do You Get/Keep/Grow Customers? Version 6/13/12
    57. 57. Customer RelationshipsHow do you Get, Keep and Grow Customers?
    58. 58. © 2012 Steve Blank
    59. 59. Customer RelationshipsPhysical & Web Mobile Are Different © 2012 Steve Blank
    60. 60. Customer RelationshipsPhysical Products – Get Customers © 2012 Steve Blank
    61. 61. Customer Archetypes Drive Get/Keep/Grow Lab Manager: Brian• What’s their role? – How this person is evaluated / promoted / compensated?• Who are they? – Buyer’s name – Position / title / age / sex• How do they buy? – Discretionary budget (name of budget and amount)• What matters to them? – What motivates them?• Who influences them? – What do they read/who do they listen to?
    62. 62. Paid Demand Creation Activities “Paid” Media Demand Creation • Public Relations • Advertising • Trade Shows • Webinars • Email marketing • On-line SEM • Biz Dev
    63. 63. Free Demand Creation Activities “Earned” Media Demand Creation • Publications in journals • Conference speeches/papers • Educational seminars • Public relations • Blogging / Sharable content • Social Media • Communities
    64. 64. Customer RelationshipsPhysical Products – Get Customers © 2012 Steve Blank
    65. 65. Customer RelationshipsPhysical Products – Get Customers CAC = Customer Acquisition Cost © 2012 Steve Blank
    66. 66. Customer Acquisition Cost versus Sales Complexity No Touch Light Touch High Touch Field SalesFreemium Field Sales Self-Service Inside Sales Inside Sales with SE’s Rough Estimates of Cost of Customer Acquisition (CAC) $0- $50 – $1,000 - $3,000 - $25,000 – $75,000 – $10 $200 $2,000 $8,000 $75,000 $200,000 Source: David Skok Matrix Partners
    67. 67. Customer RelationshipsPhysical Products – Keep Customers © 2012 Steve Blank
    68. 68. Customer RelationshipsPhysical Products – Keep Customers Attrition/Churn © 2012 Steve Blank
    69. 69. Customer RelationshipsPhysical Products – Grow Customers © 2012 Steve Blank
    70. 70. Customer RelationshipsPhysical Products – Get/Keep/Grow LTV = Customer Lifetime Value © 2012 Steve Blank
    71. 71. Customer RelationshipsWeb/Mobile Products– Get Customers © 2012 Steve Blank
    72. 72. Web/Mobile Products– Get Customers CPM = cost per thousand hits © 2012 Steve Blank
    73. 73. Web/Mobile Products– Get Customers CPA = Cost per Action © 2012 Steve Blank
    74. 74. SaaSProducts– Get Customers OrganicTraffic, SEM, Oth er Paid Sources Registered Visitors Raw Leads Qualified Leads Inside Sales Closed Deal © 2012 Steve Blank
    75. 75. Web/Mobile Products– Keep Customers
    76. 76. Our Example Marketing FunnelQuick Marketing Calculation 50% amount of traffic that is organic versus paid $1.50 cost per paid visitor (Google AdWords, etc.)$ 0.75 Cost per visitor (both paid and unpaid) 3% visitors convert to raw leads 20% number of raw leads that turn into qualified leads 1 qualified lead 5 raw leads required 167 visitors required $125 Cost of visitors (also = Cost per qualified lead) Source: David Skok Matrix Partners
    77. 77. Our Example Marketing FunnelQuick Marketing Calculation 50% amount of traffic that is organic versus paid $1.50 cost per paid visitor (Google AdWords, etc.)$ 0.75 Cost per visitor (both paid and unpaid) 3% visitors convert to raw leads 20% number of raw leads that turn into qualified leads 1 qualified lead 5 raw leads required 167 Visitors required $125Cost per qualified lead Source: David Skok Matrix Partners
    78. 78. Our Example Marketing FunnelCost per Qualified Lead $125Leads to closed deal 10Marketing Costs per closed deal $1,250 Source: David Skok Matrix Partners
    79. 79. We Can Compute CAC and LTV Excludes people costsLead Gen costs per deal $ 1,250 (Cost per qualified lead x no of leads required per closed deal)Selling costs per deal $ 1,620 Excludes cost of sales management Excludes people costs in marketing, andTotal CAC $ 2,870 sales management. (CAC= Cost to Acquire a Customer) Calculated by dividing average monthlyTotal LTV $ 16,000 gross profit per customer (ARPU x Gross Margin ) by the churn rate This excludes people costs in marketing, and sales management costs Source: David Skok Matrix Partners
    80. 80. Balancing CAC/LTV in a SaaS model LTV >3x CAC Months to recover CAC <12 months Required for Capital Efficiency Source: David Skok Matrix Partners
    81. 81. What Investors are Looking ForA well balanced business model Monetization (LTV) Cost toAcquire aCustomer (CAC) Source: David Skok Matrix Partners
    82. 82. The Balancing Act • Viral effects • Inbound Marketing • Free or Freemium • Open Source • Free Trials • Touchless conversion • Inside Sales • Channels • Strategic partnershipsCost to Acquire a Customer Monetization (CAC) (LifeTime Value LTV) • Scalable Pricing • Cross Sell/Upsell • Product line expansion • Lead Gen for 3rd parties Source: David Skok Matrix Partners
    83. 83. The Balancing Act • Viral effects • Inbound Marketing • High Churn Rates • Free or Freemium • Open Source • Low customer • Free Trials satisfaction • Touchless conversion • Inside Sales • Channels • Strategic partnershipsCost to Acquire a Customer Monetization (CAC) (LifeTime Value LTV) • Field Sales • Scalable Pricing • Cross Sell/Upsell • Outbound • Product line expansion Marketing • Lead Gen for 3rd parties Source: David Skok Matrix Partners
    84. 84. Customer RelationshipsWeb/Mobile Products– Keep Customers © 2012 Steve Blank
    85. 85. How Churn affects LTV• Average customer lifetime in months =1 / Monthly Churn Source: David Skok Matrix Partners
    86. 86. How Churn affects LifetimeMonths Lifetime vs Churn Rate 120 100 100 80 60 50 40 20 20 0 Monthly Churn 1% 2% 5% Source: David Skok Matrix Partners
    87. 87. How Churn affects LTVLifetime Value Monthly Churn Source: David Skok Matrix Partners
    88. 88. Impact of lowering Churn Cumulative Net Profit Net Profit $7,000,000$1,200,000 $6,000,000$1,000,000 $5,000,000 $4,000,000 $800,000 $3,000,000 $600,000 $2,000,000 $400,000 $1,000,000 $200,000 $- Month 1 Month 3 Month 5 Month 7 Month 9 Month 11 Month 13 Month 15 Month 17 Month 19 Month 21 Month 23 Month 25 Month 27 Month 29 Month 31 Month 33 Month 35 $(1,000,000) $- $(2,000,000)$(200,000) $(3,000,000)$(400,000) $(4,000,000) Churn 1.25% Churn 2.5% Churn 1.25% Churn 2.5%• Impact of lowering the churn rate is felt more heavily in the later years, as expected• It has a significant impact on the long term profitability of the business Source: David Skok Matrix Partners
    89. 89. Churn• 1% to 2.5% churn per month is acceptable• Higher than that, you are filling a leaky bucket – Need to understand why you have low customer satisfaction and address the problem Source: David Skok Matrix Partners
    90. 90. Customer RelationshipsWeb/Mobile Products– Grow Customers © 2012 Steve Blank
    91. 91. Customer RelationshipsWeb/Mobile Products Get/Keep/Grow © 2012 Steve Blank
    92. 92. Ag RobotCustomer Relationships Example
    93. 93. Demand generation plan and budget• Word of mouth generation – 2 systems for “Demo day events” – 2 systems for customer demos – 4 x 30K each = $120,000• World Ag Expo Booth – 1 x 40x40 corner booth with demo – Hold press event breakfast – $ 15 K (booth, banners, hotels)• Magazine campaign – 3 ads in 2 magazines – Goal – get 2 articles on us – 2 x $ 10K + Ad agency = 30K• Total $165 K“You prove that it works and everything else is easy. Distribution is not that complicatedin farming.” – Wyatt Duncan, Integrated Crop Pest Control
    94. 94. Medical DeviceCustomer Relationships Example
    95. 95. Key OpinionLeaders (KOLs)
    96. 96. Key OpinionLeaders (KOLs)
    97. 97. Key OpinionLeaders (KOLs)
    98. 98. Key OpinionLeaders (KOLs)
    99. 99. Key OpinionLeaders (KOLs)
    100. 100. Key OpinionLeaders (KOLs)
    101. 101. Housing AppCustomer Relationship Example
    102. 102. • We ran a Facebook ad to test actual willingness2 to pay for this service 107
    103. 103. • To test willingness to pay we used three 2 identical ads with three different landing pages 108
    104. 104. • To test willingness to pay we used three 2 identical ads with three different landing pages Ad Sign-ups Clicks Ad spend Free 0 23 $25 $1/household 0 25 $25 $1/user 0 24 $25 • Unfortunately, test results only proved users did not trust our site for payments • Facebook traffic on this campaign was on our page for 4 seconds on average • Roommate campaign had a 1:37 site time average • Outstanding question: can we win trust in other ways and then engage users to pay rent through us? 109
    105. 105. • Customer archetype: Sara How she searches  Wants to be efficient (will use a broker if doing a search on her own is too painful)  Asks friends for recommendations What Matters to Sara  Wants to live in a fun place that is safe  Doesn’t want to overpay  Doesn’t have much time to hunt for a place  Live with someone she trusts (moving to DC) Influences  Where friends go out/live  Work location 110
    106. 106. Online DatingCustomer Relationships Example
    107. 107. What We Did: Landing Page + Web App
    108. 108. What We Found: High referral traffic 4 day progress report Overall Signup progress 1258 31 filled 5- 136 min survey 10.8%
    109. 109. What we did: Targeted women, all couples Demand generation testHypothesis: Women-in-relationships are likelier to clickthrough, irrespective of distance statusTested for $30 Facebook click through & conversion from FBimpressions Ad-1 Ad-3 Ad-2 Ad-4
    110. 110. What we found: women click more...................................but not clear who will pay! Couples will pay subscription if they find more sharing Subscription model test 1 during free trial valuable LDRs 1 6 Takeaway: “More sharing” without convenience will Paid have to be free. SLRs 4 Good if free Women likelier to click through irrespective of distance Demand generation test II status Click LOCATION Impressions Through Men Women Women-in-rel rates 87140
    111. 111. What we found: Clicks, no web app usage Demand generation testFunnel: “Couples” campaign $ 29.7 this week 304,286 0.01 c impressions 122 uniques 0.35 c/new 85 new 24.6% conversion 30 sign-up 0.99 c clicks but one used web app
    112. 112. Online SalesCustomer Relationships Example
    113. 113. Year 1 Web funnel Year 5 100 000 hits Referenced to our web site 300 000 hits 50% 70% Fill out savings calculator 20% 30% Send request to sales 30% 30% Reconnection with viable customer 80% 80% Visit to site 10% 20% Close saleTotal Revenue Total Revenue1.44 million 18.14 million
    114. 114. Mobile AppCustomer Relationships Example
    115. 115. Success Depends on Virality> ChurnRatio of early stage viralityrate to churn rate = 2.00x
    116. 116. Success Depends on Virality>ChurnRatio of early stage viralityrate to churn rate = 1.50x
    117. 117. Success Depends on Virality>ChurnRatio of early stage viralityrate to churn rate = 1.0x
    118. 118. Demand creation via website 1 2 3“Not a landing page” Doesn’t show theNo Indonesian version product
    119. 119. Demand creation via website - results Clicks CTR100 74 2.00% 1.56% 68 1.25% 50 22 1.00% 0.59% 0 0.00% 1 2 3 1 2 3 People need to use the product CPC for us to maximize Conversions per click learning1.5 1.34 6.00% 4.05% 1 0.62 4.00% 2.94% 0.540.5 2.00% 0.00% 0 0.00% 1 2 3 1 2 3
    120. 120. Software Reference ToolCustomer Relationships Example
    121. 121. AdWords Testing
    122. 122. AB Testing Results0% conversion 42% conversion 75% conversion 32% conversion• Original Peaya website has 66% conversion rate• Conversion defined as people clicking the download button on the landing page• Experiment still underway; too few data points for drawing conclusions
    123. 123. Google &Facebook campaigns• Keywords: free endnote, reference manager, pdf manager, Itunes for digital content, I tunes, manage pdf, organize paper, paper manager, citation manager, paper citation, cite pdfs• 24 impressions, 2 clicks on googleadwords• Clicks on free endnote and organize paper• No Facebook response• 1 Post on ResearchGate drew 7 visitors
    124. 124. We’re “a little” viral 12% of sign-ups from referrals 14 of 117 new registrations came from referrals by 3 people from Jan 1 to Feb 1. Referral bonus promoted in tutorial
    125. 125. Collaboration doesn’t “pop”…. yet “Rate & Discuss” is least interesting tutorial screen so far However: 1) we can test different messages (ie “collaborate”) 2) experiment is slightly biased in ordering, we need further testing
    126. 126. Customer Relationships Example
    127. 127. Search KeywordsLesson Learned:Very little search traffic -> a “missionary” sales effort
    128. 128. Highly Competitive KeywordsLesson Learned:AdWords (paid SEM) is not going to be an efficient channel with thesekeywords
    129. 129. Medical DeviceCustomer Relationships Example
    130. 130. ChannelIncentives VP All Institutions Out-patient care/ Per Service High Value home setting Revenue Model TherapiesHospitals Private Dosing flexibility Hospitals, specialty clinics Efficient patientPain Clinics management In-patient care/ Per Diem hospitalization Pharmacoeconomics Revenue Model HMO, ACO, Non- profit, University Hospitals
    131. 131. Demand Creation Patients/Advocacy Groups Conferences / Trade magazines / PR Societies conferences $20k/event * 6 events $20k/event * 4 events Research JournalOne on one Meetings $150k/year travel Adoption Publications (Free) Budget ~ $300 k/year
    132. 132. NSF I-Corps The Lean LaunchPadLecture 6: Revenue Streams How Do You Make Money? Version 6/22/12
    133. 133. Revenue StreamsHow do you Make Money?
    134. 134. © 2012 Steve Blank
    135. 135. The Two Key Questions• What’s my revenue model?• Within the revenue model – how do I price the product?
    136. 136. Revenue Model = the strategy the company uses togenerate cash from each customer segment
    137. 137. Revenue Streams1. 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?
    138. 138. 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? • 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? Top down: 10% of a million-person market=100,000 customers Bottom up: 1,000 customers/month 1st year => 3,000/month 3rd year
    139. 139. Where is the money coming from? Revenue Model Choices Channel Web Physical  Direct Sales  Direct Sales  Products  Products  Subscription Bits  License  Add-on services  Subscription  Upsell/Next Sell  Upsell/Next Sell  ReferralsProduct  Direct Sales  Ancillary Sales:  Products •Referral revenue •Affiliate revenue  Service Physical •E-mail list rentals  Upsell/Next Sell •Back-end offers  Referrals  Leasing
    140. 140. 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?
    141. 141. Pricing Model =the tactics you use to set the price in each customer segment
    142. 142. How to price the product? Pricing Models - Physical• Cost plus• Competitive pricing • “Razor/razor blade” model• Volume pricing • Subscription• Value pricing • Time/Hourly Billing• Portfolio pricing • Leasing
    143. 143. Common approaches to pricing  Cost + markupCost based  Typically not a strategic way to price  Driven by internal economics and not customer insight  Based on buyer’s perception ofValue based value (e.g. time saved, new efficiency created,etc.)  Customers don’t necessarily feel that they want to pay this way
    144. 144. 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?
    145. 145. Competition as an influence • Pure competition Nature of Market • Oligopoly • Monopoly  What is their product?How they will react?  What are their costs and prices?  “What pricing will make them feel the worst?”
    146. 146. Payment Flow• Draw the diagram Tennant• Put in numbers send monthly water bill water bill plus $2/month $2/month Property Owners install meter $9/month (2yrs) activities $200 one time Leasing company payments
    147. 147. Single versusMulti-sided Markets
    148. 148. Single/Multi-side Markets• Single-sided markets care about revenues• Multi-sided markets may care about users first, revenues second – Often Web-based
    149. 149. “Users First” CompaniesIf 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?
    150. 150. “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?
    151. 151. Market Type and Revenue
    152. 152. Other Issues• Distribution channel affects revenue streams• Market type affects revenue streams• Demand curve affects revenue streams• Consider lifetime value
    153. 153. New Market Revenue ForecastNew Market Sales Curve
    154. 154. Existing Market Revenue Forecast Existing Market
    155. 155. Resegmented Market Revenue Forecast
    156. 156. Common categoriesof Web/Mobile revenue models
    157. 157. “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
    158. 158. “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
    159. 159. Asset Sale• Sale of ownership right to a physical product
    160. 160. Usage Fee• Usage of service. Fee is proportional to the usage of the service.
    161. 161. Subscription Fee• Fee for continuous access to a service
    162. 162. Renting• Fee for temporary access to a good or service
    163. 163. Licensing• Fee for use of some IP (including software)
    164. 164. Intermediation Fee• Often found in marketplaces of various types, a fee for bringing together two or more parties involved in a transaction
    165. 165. Advertising• Fee paid by brands and companies to get in front of potential customers
    166. 166. Revenue Model Summary
    167. 167. Example AnalysisTarget market SalesUSA market – 1.5 M patients Start in EU middle of year 3Europe – 2 M patients Start in USA end of year 4Package PersonnelReusable wrist watch Average salary $120 KDisposable sensors / patch Load factor 1.5Access to patients data Headcount from 4 to 174 in year 8Product development Financing4 people in the beginning Series A – $3 M$2 million Series B – $10 M1.5 years to develop Price per package: $150 COGS Operating ExpensesProfit $60 per unit $90 per unit
    168. 168. Does it add up?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?
    169. 169. Thought experiment• Time to doublings for monthly revenues• Key questions: – When will I get to $100k/month in revenues? – When will I get to $1M/month in revenues? – What assumptions about my business am I making when I reach these milestones?
    170. 170. Optical EquipmentRevenue Model Example
    171. 171. Academia Payment Flow activity payment Component Phi Optics vendorsQPI info & price Buys QPI device funds grant/contract request for equipment University Grant Agencies Researcher Business Industry Contracts Services applies for grants/contracts
    172. 172. Bio-Pharma Payment Flow activity payment Component Phi Optics vendors QPI specs + price Includes equipment in the budget Buys QPI device Purchasing CTO Researcher Dept. VP for R&D Justifies need for equipment
    173. 173. OEM Payment Flow activity payment Equipment Phi Optics suppliersQPI specs + price+ SOW Allocates funds in the Funds SOW budget Pays royalties/sub- licensing/other recurring fees Product Dev Accounting CTO Engineers + VP for R&D Dept. Business Dev ($) + Legal Dept (royalties) Justifies QPI integration in OEM system Suggests co-development deal
    174. 174. Nitrate SensorRevenue Model Example
    175. 175. Product Money OEM Water Data only Large farm Small farmUSDA/EPA
    176. 176. Product Money OEM Nutrient Data Large farmUs Small farm USDA/EPA Product sales
    177. 177. Product Money OEM Nutrient Data Large farmUs Small farm USDA/EPA Licensing/sales
    178. 178. Product Money OEM Nutrient Data Large farmUs Small farm USDA/EPA Independent of licensing decision
    179. 179. Using $1000 per sensor (2x cost) puts us ~$350 more expensive than current commercialnitrate sensors. We’re including pH, moisture, and conductivity, though.Incentives: Best case scenario $45.89/acre Worst case: $9.65/acre or state dependent 25% cost coverage Install sensors 400 acres, 4 soil Us Small farm types: 8 sensors $1K/sensor less incentive = $4140 $3860 for 400 acre nutrient management USDA/EPA
    180. 180. Using $1000 per sensor (2x cost) puts us ~$350 more expensive than current commercialnitrate sensors. We’re including pH, moisture, and conductivity, though.Incentives: Best case scenario $45.89/acre Worst case: $9.65/acre or state dependent 25% cost coverage Install sensors 400 acres, 4 soil Us Small farm types: 8 sensors $1K/sensor less incentive = $4140 Average $10.40 in N- $3860 for 400 acre fertilizer lost to groundwater nutrient management per acre: Repaid in 1 year USDA/EPA
    181. 181. Bio-Based Chemical Intermediates Revenue Model Example
    182. 182. Revenue model: Hypothesis Here’s what we hypothesized… Biomass supplier Biomass 15 c/lb Biomass Range 5-20c/lb Monomer manufacturer Monomer ? Detergent alcohols 80c/lbDistributor Surfactant Formulation ? formulator Formulated Surfactant 90c/lb Surfactant Surfactant 100 c/lbDecision user Formulated Detergent 100c/lbMakers Consumer facing Detergent 200 c/lb company 10% Surfactant in Detergent Consumer Market Pull Product (Sustainability agenda)
    183. 183. Revenue Model: Experiment 1 Here’s what we did… Production Economics Experts Economic analysis expert Director Director Techno-commercial analysis expert Life Cycle Assessment Expert Economic analysis expert Business Manager
    184. 184. Revenue model: Result 1 Financial metrics Ethanol DMF Lactic Bi-functional fatty acid Scale (T/day) 500,0001b/da 600,000 300,000 y lb/day lb/dayFeedstock 15 c/lb 19 c/lb 16 c/lbProcessing 2 c/lb 26 c/lb 25 c/lbCapital 1 c/lb 2 c/lb 41 c/lbOther 3 c/lb 15 c/lb 39 c/lbMSP (c/lb) 21 c/lb 62 c/lb 120 c/lb
    185. 185. Revenue model: Result 1 Financial metrics Ethanol DMF Lactic Bi-functional fatty acid Scale (T/day) 500,0001b/da 600,000 300,000 y lb/day lb/dayFeedstock 15 c/lb 19 c/lb 16 c/lbProcessing 2 c/lb 26 c/lb 25 c/lbCapital 1 c/lb 2 c/lb 41 c/lbOther 3 c/lb 15 c/lb 39 c/lbMSP (c/lb) 21 c/lb 62 c/lb 120 c/lb
    186. 186. Revenue model: Result 1 Financial metrics Ethanol DMF Lactic Bi-functional fatty acid Scale (T/day) 500,0001b/da 600,000 300,000 y lb/day lb/dayFeedstock 15 c/lb 19 c/lb 16 c/lbProcessing 2 c/lb 26 c/lb 25 c/lbCapital 1 c/lb 2 c/lb 41 c/lbOther 3 c/lb 15 c/lb 39 c/lbMSP (c/lb) 21 c/lb 62 c/lb 120 c/lb
    187. 187. Revenue model: Result 1 Financial metrics Ethanol DMF Lactic Bi-functional fatty acid Scale (T/day) 500,0001b/da 600,000 300,000 ? y lb/day lb/dayFeedstock 15 c/lb 19 c/lb 16 c/lb 15 c/lbProcessing 2 c/lb 26 c/lb 25 c/lb ?Capital 1 c/lb 2 c/lb 41 c/lb ?Other 3 c/lb 15 c/lb 39 c/lb ?MSP (c/lb) 21 c/lb 62 c/lb 120 c/lb < 100 c/lb Less than 100 c/lbis achievable when: 1. Large reactor with 500,000 lb/day capacity 2. Optimized fermentation and processing costs
    188. 188. Revenue model: Result 2 Payment Flow Biomass supplier Biomass 15 c/lb Biomass Range 5-20c/lb Monomer manufacturer Monomer 80 c/lb Detergent alcohols 80c/lbDistributor Surfactant Formulation 90 c/lb formulator Formulated Surfactant 90c/lb Surfactant Surfactant 100 c/lbDecision user Formulated Detergent 100c/lbMakers Consumer facing Detergent 200 c/lb company 10% Surfactant in Detergent Consumer Market Pull Product (Sustainability agenda) Disposal Regulations Waste
    189. 189. Payment Flows Example
    190. 190. Payment Flows Clinical Diagnostic Services Pharmaceutical Products Private Sales/order Sales/order payer/MAC Payment Payment Service Service$$ Hospital / Clinic Pharmaceutical Company Pathologist/ Researchers Oncologist billing $$ Instr. / Kits $$ CanScan CanScan Services rendered Class 6 - Update 3.5.2012
    191. 191. Medical DevicePricing Example
    192. 192. GrapheneRevenue Model Example
    193. 193. Payment flow Researchers Add value More workCurrent TEM Distributorsgrid provider Graphene Frontiers Material supplier
    194. 194. Payment flow Electronic User DistributorsE-reader manufacturer Parts suppliers Flexible display Graphene Frontiers manufacturer Parts suppliers Material Research, cost supplier
    195. 195. Direct Cost Estimates: Scale Matters• Cost per in2 – 1” Furnace = $.80• Cost per in2 – 2” Furnace = $.45• Cost per in2 – 4” Furnace = $.20If 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/NitrogenCost per in2 – 4” Furnace, Batch/Continuous = … $.05
    196. 196. SensorPricing Tactics Example
    197. 197. Understand Economics of Plant + Sensors Industrial PlantsUnderstand Economics of Technology Supplier Plant #1 Plant #2 Plant #3 Technology SupplierWho does this?
    198. 198. 205 Diaphragm Membrane $240/MT Cl2 Operational conditions Capital cost per incident Downtime per incident # of cells protected Cost of damages + downtime per incident per year Time between incidents Number of cells, US and worldwide Value per unit per year Diaphragm Membrane Membrane Header $2,500 $270 $10,600
    199. 199. Soft product launch projected for Q1-Q2 2012 General launch projected for Q4 2012Diaphragm Membrane Membrane Header $2,500 $270 $10,600 Year Type % Revenue [/year] 1 Innovators (US) 2.5 $271,500 Operating costs for 1st year projected to be $350,000 2 Early Adopters 16 $15,040,000 3 Early Majority 50 $47,000,000 4 Late Majority 84 $78,960,000 Full Penetration 100 $94,000,000 206
    200. 200. Medical DeviceRevenue Model Example
    201. 201. What we make Device cost (one time) ~$2000Dental DentistOptics Disposables ~$2.50 per patient
    202. 202. What the dentist normally makes $250 Insurance Membership $250 Co-pay Dentist Patient Equipment / Variable CostsNote: Assumes 50/50 copay-insurance split
    203. 203. What we’d add for the dentist Device creates $250 additional Insurance periodontal procedures Device cost (one time) Membership ~$2000 $250 Co-pay Dental Dentist Patient Optics Disposables ~$2.50 per patient Equipment / Variable CostsNote: Assumes 50/50 copay-insurance split
    204. 204. Farm Nitrate SensorRevenue Model Example
    205. 205. Economics of TSP OperationIncentives: Best case scenario $45.89/acre Worst case: $9.65/acre or state dependent 25% cost coverage Install sensors, provide service 400 acres, 4 soil Us Pay for 2-3 year contract service monthly types: 8 sensors Small farm $3860 for 400 acre Average $10.40 in N- nutrient management fertilizer lost to groundwater per acre $1K/sensor less incentive = $4140 to USDA/EPA recover in contract
    206. 206. Economics of TSP OperationIncentives: Best case scenario $45.89/acre Worst case: $9.65/acre or state dependent 25% cost coverage Install sensors, provide service 400 acres, 4 soil Us Pay for 2-3 year contract service monthly types: 8 sensors Small farm Onion Case Study (44K acres): $3860 for 400 acre Cost: DAP - $700/ton + $25/a nutrient management Rate: 280lb/a for 400a farm $1K/sensor less = $39K incentive = $4140 to USDA/EPA recover in contract 30% Improvement: $13K saved Charge: $6K/season = $660K/yr contract revenue
    207. 207. Biofactories for Therapeutics Revenue Model Example
    208. 208. Revenue Model = money = relationship = information = AAT Patient Large Pharma Private Payor Employer Government PayorWholesalers Hospital/Clinic Government Physicians Taxpayer Pulmonary Function Lab INFLUENCER
    209. 209. Optics Design CompanyRevenue Model Example
    210. 210. ™ Revenue Model & Payment Flows Customer: LED company LighTip™ Engineering contract ($150-300/hour) Light source Advanced Quantity purchase of Illumination components for prototype & Engineering Reflector mass production . Desired target Key Partner: Our Optical Manufacturer deliverable Prototype & High Volume Production (0.25%-8% Customer’s final product commission)5/23/2012 217
    211. 211. Complex Sensor Networks Revenue Model Example
    212. 212. Revenue Model and CustomerSET Sensor Node Product Acquisition Middleware and Reusable Software OEM HW components Subsystems ($100 COGS)SET’s price $400 Year 1: Year 2: Year 3: Year 4: Year 5: (3 Customers) (10 Customers) (30 Customers) (100 Customers) (200 Customers) 1K nodes 5K nodes 30K nodes 200K nodes 400K nodes $400K $2M $12M $80M $160M First target customers Leverage our partners’ existing customers
    213. 213. Healthcare SoftwareRevenue Model Example
    214. 214. Revenue Model Health Healthcare Patient Data Information Providers ExchangesTailored Messaging Portal $$$for + Patient Outcomes Patient Data Patient Analytics $$$ Resources/To Health ols Patient Profile Insights Patient
    215. 215. The Lean LaunchPadLecture 6: Revenue Streams How Do You Make Money? Version 6/22/12
    216. 216. Revenue StreamsHow do you Make Money?
    217. 217. © 2012 Steve Blank
    218. 218. The Two Key Questions• What’s my revenue model?• Within the revenue model – how do I price the product?
    219. 219. Revenue Model = the strategy the company uses togenerate cash from each customer segment
    220. 220. Revenue Streams1. 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?
    221. 221. 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? • 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? Top down: 10% of a million-person market=100,000 customers Bottom up: 1,000 customers/month 1st year => 3,000/month 3rd year
    222. 222. Where is the money coming from? Revenue Model Choices Channel Web Physical  Direct Sales  Direct Sales  Products  Products  Subscription Bits  License  Add-on services  Subscription  Upsell/Next Sell  Upsell/Next Sell  ReferralsProduct  Direct Sales  Ancillary Sales:  Products •Referral revenue •Affiliate revenue  Service Physical •E-mail list rentals  Upsell/Next Sell •Back-end offers  Referrals  Leasing
    223. 223. 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?
    224. 224. Pricing Model =the tactics you use to set the price in each customer segment
    225. 225. How to price the product? Pricing Models - Physical• Cost plus• Competitive pricing • “Razor/razor blade” model• Volume pricing • Subscription• Value pricing • Time/Hourly Billing• Portfolio pricing • Leasing
    226. 226. Common approaches to pricing  Cost + markupCost based  Typically not a strategic way to price  Driven by internal economics and not customer insight  Based on buyer’s perception ofValue based value (e.g. time saved, new efficiency created,etc.)  Customers don’t necessarily feel that they want to pay this way
    227. 227. 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?
    228. 228. Competition as an influence • Pure competition Nature of Market • Oligopoly • Monopoly  What is their product?How they will react?  What are their costs and prices?  “What pricing will make them feel the worst?”
    229. 229. Payment Flow• Draw the diagram Tennant• Put in numbers send monthly water bill water bill plus $2/month $2/month Property Owners install meter $9/month (2yrs) activities $200 one time Leasing company payments
    230. 230. Single versusMulti-sided Markets
    231. 231. Single/Multi-side Markets• Single-sided markets care about revenues• Multi-sided markets may care about users first, revenues second – Often Web-based
    232. 232. “Users First” CompaniesIf 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?
    233. 233. “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?
    234. 234. Market Type and Revenue
    235. 235. Other Issues• Distribution channel affects revenue streams• Market type affects revenue streams• Demand curve affects revenue streams• Consider lifetime value
    236. 236. New Market Revenue ForecastNew Market Sales Curve
    237. 237. Existing Market Revenue Forecast Existing Market
    238. 238. Resegmented Market Revenue Forecast
    239. 239. Common categoriesof Web/Mobile revenue models
    240. 240. “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
    241. 241. “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
    242. 242. Asset Sale• Sale of ownership right to a physical product
    243. 243. Usage Fee• Usage of service. Fee is proportional to the usage of the service.
    244. 244. Subscription Fee• Fee for continuous access to a service
    245. 245. Renting• Fee for temporary access to a good or service
    246. 246. Licensing• Fee for use of some IP (including software)
    247. 247. Intermediation Fee• Often found in marketplaces of various types, a fee for bringing together two or more parties involved in a transaction
    248. 248. Advertising• Fee paid by brands and companies to get in front of potential customers
    249. 249. Revenue Model Summary
    250. 250. Example AnalysisTarget market SalesUSA market – 1.5 M patients Start in EU middle of year 3Europe – 2 M patients Start in USA end of year 4Package PersonnelReusable wrist watch Average salary $120 KDisposable sensors / patch Load factor 1.5Access to patients data Headcount from 4 to 174 in year 8Product development Financing4 people in the beginning Series A – $3 M$2 million Series B – $10 M1.5 years to develop Price per package: $150 COGS Operating ExpensesProfit $60 per unit $90 per unit
    251. 251. Does it add up?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?
    252. 252. Thought experiment• Time to doublings for monthly revenues• Key questions: – When will I get to $100k/month in revenues? – When will I get to $1M/month in revenues? – What assumptions about my business am I making when I reach these milestones?
    253. 253. Optical EquipmentRevenue Model Example
    254. 254. Academia Payment Flow activity payment Component Phi Optics vendorsQPI info & price Buys QPI device funds grant/contract request for equipment University Grant Agencies Researcher Business Industry Contracts Services applies for grants/contracts
    255. 255. Bio-Pharma Payment Flow activity payment Component Phi Optics vendors QPI specs + price Includes equipment in the budget Buys QPI device Purchasing CTO Researcher Dept. VP for R&D Justifies need for equipment
    256. 256. OEM Payment Flow activity payment Equipment Phi Optics suppliersQPI specs + price+ SOW Allocates funds in the Funds SOW budget Pays royalties/sub- licensing/other recurring fees Product Dev Accounting CTO Engineers + VP for R&D Dept. Business Dev ($) + Legal Dept (royalties) Justifies QPI integration in OEM system Suggests co-development deal
    257. 257. Nitrate SensorRevenue Model Example
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