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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.

Delft climate kic 070212 part 2 Presentation Transcript

  • 1. How to Fail Less Business Models andCustomer Development Steve Blank www.steveblank.com @sgblank
  • 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. 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. 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. The Lean LaunchPad Lecture 4:Distribution Channels How does your Product Get to Customers? Version 6/22/12
  • 6. ChannelsHow does your Product Get to Customers?
  • 7. © 2012 Steve Blank
  • 8. Who Are OurCustomers and HowDo We Reach Them
  • 9. Physical versus Virtual Channels
  • 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. Web Channels 12
  • 12. Physical Channels 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. Types of ChannelsDirect Indirect Licensing – OEM – VAR – Reseller – Distributor 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. How Do the Economics Work in Different Sales Channel?
  • 17. How Are Channels Compensated? – Commission – Percentage of sales price – Discounted pre-purchase 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. 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. 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. 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. 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. How Are Channels Motivated or Incented?– Money! – what makes them the most?– Training– Marketing to the channel– SPIF 24
  • 24. Book PublishingChannel Example
  • 25. Example: Book Publishing NationalPublisher Printer Wholesaler Retailer Customer Distributor 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. 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. 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. Medical DeviceChannel Example
  • 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. 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. Farm Sensor Industry Channel Example
  • 33. Channel Model: Service Provider Product Money OEM Nutrient Data Large farmUs Small farm USDA/EPA Licensing/sales
  • 34. Channel Model: Service Provider Product Money OEM Nutrient Data Large farm ProductUs Small farm Service USDA/EPA Licensing/sales
  • 35. Dental ProductChannel Example
  • 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. 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. Medical DeviceChannel Example 2
  • 39. ••••••
  • 40. Dental Product 2Channel Example
  • 41. Channels Direct Sales Big DistributorsPrivate Practice Institutional Purchasing Dentist Dentist Department
  • 42. Channels Direct Sales Big Distributors 80% Market Share 30% MarginPrivate Practice Institutional Purchasing Dentist Dentist Department
  • 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. Online RentalChannel Example
  • 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. Dental Product 3Channel Example
  • 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. 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. Channel Example
  • 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. Channel Example
  • 52. Travel IndustryChannel Example
  • 53. Travel Services:Impact of Changing Technology
  • 54. The Advent of GDS Systems (1980 -1995)
  • 55. Turning the Screen Around Online Travel (1995-2010)
  • 56. The Lean LaunchPad Lecture 5 Customer RelationshipsHow Do You Get/Keep/Grow Customers? Version 6/13/12
  • 57. Customer RelationshipsHow do you Get, Keep and Grow Customers?
  • 58. © 2012 Steve Blank
  • 59. Customer RelationshipsPhysical & Web Mobile Are Different © 2012 Steve Blank
  • 60. Customer RelationshipsPhysical Products – Get Customers © 2012 Steve Blank
  • 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. Paid Demand Creation Activities “Paid” Media Demand Creation • Public Relations • Advertising • Trade Shows • Webinars • Email marketing • On-line SEM • Biz Dev
  • 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. Customer RelationshipsPhysical Products – Get Customers © 2012 Steve Blank
  • 65. Customer RelationshipsPhysical Products – Get Customers CAC = Customer Acquisition Cost © 2012 Steve Blank
  • 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. Customer RelationshipsPhysical Products – Keep Customers © 2012 Steve Blank
  • 68. Customer RelationshipsPhysical Products – Keep Customers Attrition/Churn © 2012 Steve Blank
  • 69. Customer RelationshipsPhysical Products – Grow Customers © 2012 Steve Blank
  • 70. Customer RelationshipsPhysical Products – Get/Keep/Grow LTV = Customer Lifetime Value © 2012 Steve Blank
  • 71. Customer RelationshipsWeb/Mobile Products– Get Customers © 2012 Steve Blank
  • 72. Web/Mobile Products– Get Customers CPM = cost per thousand hits © 2012 Steve Blank
  • 73. Web/Mobile Products– Get Customers CPA = Cost per Action © 2012 Steve Blank
  • 74. SaaSProducts– Get Customers OrganicTraffic, SEM, Oth er Paid Sources Registered Visitors Raw Leads Qualified Leads Inside Sales Closed Deal © 2012 Steve Blank
  • 75. Web/Mobile Products– Keep Customers
  • 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. 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. Our Example Marketing FunnelCost per Qualified Lead $125Leads to closed deal 10Marketing Costs per closed deal $1,250 Source: David Skok Matrix Partners
  • 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. 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. What Investors are Looking ForA well balanced business model Monetization (LTV) Cost toAcquire aCustomer (CAC) Source: David Skok Matrix Partners
  • 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. 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. Customer RelationshipsWeb/Mobile Products– Keep Customers © 2012 Steve Blank
  • 85. How Churn affects LTV• Average customer lifetime in months =1 / Monthly Churn Source: David Skok Matrix Partners
  • 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. How Churn affects LTVLifetime Value Monthly Churn Source: David Skok Matrix Partners
  • 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. 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. Customer RelationshipsWeb/Mobile Products– Grow Customers © 2012 Steve Blank
  • 91. Customer RelationshipsWeb/Mobile Products Get/Keep/Grow © 2012 Steve Blank
  • 92. Ag RobotCustomer Relationships Example
  • 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. Medical DeviceCustomer Relationships Example
  • 95. Key OpinionLeaders (KOLs)
  • 96. Key OpinionLeaders (KOLs)
  • 97. Key OpinionLeaders (KOLs)
  • 98. Key OpinionLeaders (KOLs)
  • 99. Key OpinionLeaders (KOLs)
  • 100. Key OpinionLeaders (KOLs)
  • 101. Housing AppCustomer Relationship Example
  • 102. • We ran a Facebook ad to test actual willingness2 to pay for this service 107
  • 103. • To test willingness to pay we used three 2 identical ads with three different landing pages 108
  • 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. • 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. Online DatingCustomer Relationships Example
  • 107. What We Did: Landing Page + Web App
  • 108. What We Found: High referral traffic 4 day progress report Overall Signup progress 1258 31 filled 5- 136 min survey 10.8%
  • 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. 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. 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. Online SalesCustomer Relationships Example
  • 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. Mobile AppCustomer Relationships Example
  • 115. Success Depends on Virality> ChurnRatio of early stage viralityrate to churn rate = 2.00x
  • 116. Success Depends on Virality>ChurnRatio of early stage viralityrate to churn rate = 1.50x
  • 117. Success Depends on Virality>ChurnRatio of early stage viralityrate to churn rate = 1.0x
  • 118. Demand creation via website 1 2 3“Not a landing page” Doesn’t show theNo Indonesian version product
  • 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. Software Reference ToolCustomer Relationships Example
  • 121. AdWords Testing
  • 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. 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. 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. 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. Customer Relationships Example
  • 127. Search KeywordsLesson Learned:Very little search traffic -> a “missionary” sales effort
  • 128. Highly Competitive KeywordsLesson Learned:AdWords (paid SEM) is not going to be an efficient channel with thesekeywords
  • 129. Medical DeviceCustomer Relationships Example
  • 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. 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. NSF I-Corps The Lean LaunchPadLecture 6: Revenue Streams How Do You Make Money? Version 6/22/12
  • 133. Revenue StreamsHow do you Make Money?
  • 134. © 2012 Steve Blank
  • 135. The Two Key Questions• What’s my revenue model?• Within the revenue model – how do I price the product?
  • 136. Revenue Model = the strategy the company uses togenerate cash from each customer segment
  • 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. 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. 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. 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. Pricing Model =the tactics you use to set the price in each customer segment
  • 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. 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. 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. 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. 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. Single versusMulti-sided Markets
  • 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. “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. “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. Market Type and Revenue
  • 152. Other Issues• Distribution channel affects revenue streams• Market type affects revenue streams• Demand curve affects revenue streams• Consider lifetime value
  • 153. New Market Revenue ForecastNew Market Sales Curve
  • 154. Existing Market Revenue Forecast Existing Market
  • 155. Resegmented Market Revenue Forecast
  • 156. Common categoriesof Web/Mobile revenue models
  • 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. “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. Asset Sale• Sale of ownership right to a physical product
  • 160. Usage Fee• Usage of service. Fee is proportional to the usage of the service.
  • 161. Subscription Fee• Fee for continuous access to a service
  • 162. Renting• Fee for temporary access to a good or service
  • 163. Licensing• Fee for use of some IP (including software)
  • 164. Intermediation Fee• Often found in marketplaces of various types, a fee for bringing together two or more parties involved in a transaction
  • 165. Advertising• Fee paid by brands and companies to get in front of potential customers
  • 166. Revenue Model Summary
  • 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. 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. Thought experiment• Time to doublings for monthly revenues• Key questions: – When will I get to $100k/month in revenues? – When will I get to $1M/month in revenues? – What assumptions about my business am I making when I reach these milestones?
  • 170. Optical EquipmentRevenue Model Example
  • 171. Academia Payment Flow activity payment Component Phi Optics vendorsQPI info & price Buys QPI device funds grant/contract request for equipment University Grant Agencies Researcher Business Industry Contracts Services applies for grants/contracts
  • 172. Bio-Pharma Payment Flow activity payment Component Phi Optics vendors QPI specs + price Includes equipment in the budget Buys QPI device Purchasing CTO Researcher Dept. VP for R&D Justifies need for equipment
  • 173. OEM Payment Flow activity payment Equipment Phi Optics suppliersQPI specs + price+ SOW Allocates funds in the Funds SOW budget Pays royalties/sub- licensing/other recurring fees Product Dev Accounting CTO Engineers + VP for R&D Dept. Business Dev ($) + Legal Dept (royalties) Justifies QPI integration in OEM system Suggests co-development deal
  • 174. Nitrate SensorRevenue Model Example
  • 175. Product Money OEM Water Data only Large farm Small farmUSDA/EPA
  • 176. Product Money OEM Nutrient Data Large farmUs Small farm USDA/EPA Product sales
  • 177. Product Money OEM Nutrient Data Large farmUs Small farm USDA/EPA Licensing/sales
  • 178. Product Money OEM Nutrient Data Large farmUs Small farm USDA/EPA Independent of licensing decision
  • 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. 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. Bio-Based Chemical Intermediates Revenue Model Example
  • 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. 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. 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. 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. 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. 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. 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. Payment Flows Example
  • 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. Medical DevicePricing Example
  • 192. GrapheneRevenue Model Example
  • 193. Payment flow Researchers Add value More workCurrent TEM Distributorsgrid provider Graphene Frontiers Material supplier
  • 194. Payment flow Electronic User DistributorsE-reader manufacturer Parts suppliers Flexible display Graphene Frontiers manufacturer Parts suppliers Material Research, cost supplier
  • 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. SensorPricing Tactics Example
  • 197. Understand Economics of Plant + Sensors Industrial PlantsUnderstand Economics of Technology Supplier Plant #1 Plant #2 Plant #3 Technology SupplierWho does this?
  • 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. 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. Medical DeviceRevenue Model Example
  • 201. What we make Device cost (one time) ~$2000Dental DentistOptics Disposables ~$2.50 per patient
  • 202. What the dentist normally makes $250 Insurance Membership $250 Co-pay Dentist Patient Equipment / Variable CostsNote: Assumes 50/50 copay-insurance split
  • 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. Farm Nitrate SensorRevenue Model Example
  • 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. 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. Biofactories for Therapeutics Revenue Model Example
  • 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. Optics Design CompanyRevenue Model Example
  • 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. Complex Sensor Networks Revenue Model Example
  • 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. Healthcare SoftwareRevenue Model Example
  • 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. The Lean LaunchPadLecture 6: Revenue Streams How Do You Make Money? Version 6/22/12
  • 216. Revenue StreamsHow do you Make Money?
  • 217. © 2012 Steve Blank
  • 218. The Two Key Questions• What’s my revenue model?• Within the revenue model – how do I price the product?
  • 219. Revenue Model = the strategy the company uses togenerate cash from each customer segment
  • 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. 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. 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. 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. Pricing Model =the tactics you use to set the price in each customer segment
  • 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. 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. 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. 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. 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. Single versusMulti-sided Markets
  • 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. “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. “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. Market Type and Revenue
  • 235. Other Issues• Distribution channel affects revenue streams• Market type affects revenue streams• Demand curve affects revenue streams• Consider lifetime value
  • 236. New Market Revenue ForecastNew Market Sales Curve
  • 237. Existing Market Revenue Forecast Existing Market
  • 238. Resegmented Market Revenue Forecast
  • 239. Common categoriesof Web/Mobile revenue models
  • 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. “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. Asset Sale• Sale of ownership right to a physical product
  • 243. Usage Fee• Usage of service. Fee is proportional to the usage of the service.
  • 244. Subscription Fee• Fee for continuous access to a service
  • 245. Renting• Fee for temporary access to a good or service
  • 246. Licensing• Fee for use of some IP (including software)
  • 247. Intermediation Fee• Often found in marketplaces of various types, a fee for bringing together two or more parties involved in a transaction
  • 248. Advertising• Fee paid by brands and companies to get in front of potential customers
  • 249. Revenue Model Summary
  • 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. 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. 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. Optical EquipmentRevenue Model Example
  • 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. 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. 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. Nitrate SensorRevenue Model Example
  • 258. Product Money OEM Water Data only Large farm Small farmUSDA/EPA
  • 259. Product Money OEM Nutrient Data Large farmUs Small farm USDA/EPA Product sales
  • 260. Product Money OEM Nutrient Data Large farmUs Small farm USDA/EPA Licensing/sales
  • 261. Product Money OEM Nutrient Data Large farmUs Small farm USDA/EPA Independent of licensing decision
  • 262. 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
  • 263. 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
  • 264. Bio-Based Chemical Intermediates Revenue Model Example
  • 265. 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)
  • 266. 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
  • 267. 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
  • 268. 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
  • 269. 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
  • 270. 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
  • 271. 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
  • 272. Payment Flows Example
  • 273. 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
  • 274. Medical DevicePricing Example
  • 275. GrapheneRevenue Model Example
  • 276. Payment flow Researchers Add value More workCurrent TEM Distributorsgrid provider Graphene Frontiers Material supplier
  • 277. Payment flow Electronic User DistributorsE-reader manufacturer Parts suppliers Flexible display Graphene Frontiers manufacturer Parts suppliers Material Research, cost supplier
  • 278. 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
  • 279. SensorPricing Tactics Example
  • 280. Understand Economics of Plant + Sensors Industrial PlantsUnderstand Economics of Technology Supplier Plant #1 Plant #2 Plant #3 Technology SupplierWho does this?
  • 281. 290 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
  • 282. 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 $94,000,000 291
  • 283. Medical DeviceRevenue Model Example
  • 284. What we make Device cost (one time) ~$2000Dental DentistOptics Disposables ~$2.50 per patient
  • 285. What the dentist normally makes $250 Insurance Membership $250 Co-pay Dentist Patient Equipment / Variable CostsNote: Assumes 50/50 copay-insurance split
  • 286. 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
  • 287. Farm Nitrate SensorRevenue Model Example
  • 288. 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
  • 289. 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
  • 290. Biofactories for Therapeutics Revenue Model Example
  • 291. Revenue Model = money = relationship = information = AAT Patient Large Pharma Private Payor Employer Government PayorWholesalers Hospital/Clinic Government Physicians Taxpayer Pulmonary Function Lab INFLUENCER
  • 292. Optics Design CompanyRevenue Model Example
  • 293. ™ 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 302
  • 294. Complex Sensor Networks Revenue Model Example
  • 295. 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
  • 296. Healthcare SoftwareRevenue Model Example
  • 297. 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
  • 298. The Lean LaunchPad Lecture 7: PartnersWho are your Partners and Suppliers? Version 6/13/12
  • 299. Key PartnersWho are your Partners and Suppliers?
  • 300. © 2012 Steve Blank
  • 301. What defines a “Partner?”• Shared economics• Mutual success / failure• Co-development/invention• Common customerBut remember - you’re a startup
  • 302. Why Have Partners?● Faster time to market● Broader product offering● More efficient use of capital● Unique customer knowledge or expertise● Access to new markets 311
  • 303. Types of Partners 312
  • 304. Partners – Strategic Alliances• Reduce the list of things your startup needs to build or provide to offer a complete product or service.• Use partners to build the “whole product” • using 3rd parties to provide a customer with a complete solution • complement your core product with other products or services • Training, installation, service, etc Example: In 1996, Starbucks partnered with Pepsico to bottle, distribute and sell the popular coffee-based drink, Frappacino 313
  • 305. Partners – Joint Business Development • Joint promotion of complementary products • Share advertising, marketing, and sales programs • One may be the dominant player Example: Intel offered advertising fees to PC Vendors
  • 306. Startup mistakeStrategic alliances and joint partnerships Not needed for Earlyvangelists Are needed for Mainstream customers Usually fail 315
  • 307. Partners – Coopetition • Joint promotion of competitive products • Competitors might join together in programs to grow awareness of their industry • Tradeshows • Industry AssociationsExample:Automotive Suppliers form the Automotive Industry Action Group (AIAG) - 900 members 316
  • 308. Partners – Key Suppliers • Outsource suppliers • Backoffice, supply chain, manufacturing • Direct suppliers • Components, raw materials, etc.Example:Apple builds the iPhone from multiple suppliers 317
  • 309. Traffic Partners – Virtual Channels• Long-term agreements with other companies • deliver long-term, predictable levels of customers • “Cross referral” or swapping basis • Paid on a per-referral basis • Partners drive traffic using text-links, with onsite promotions, and with ads on the referring site • Partners sometimes exchange email lists http://medical-tools.com/dental/
  • 310. Partner Risks 319
  • 311. Partnership Disaster: Boeing Collaborative Looked great on paper. Worst business decision of the 21st century 320
  • 312. Managing partners - Risks• Impendence mismatch• Longest of partners schedule becomes your longest item• No clear ownership of customer• Products lack vision – shared product design• Different underlying objectives in relationship• Churn in partners strategy or personnel• IP issues• Difficult to unwind or end
  • 313. Should I take an investment from a Large Company?• They are interested in their bottom line, not yours• Their objectives are not to make you a large company• Who’s the sponsor? What’s the motivation? • Needs to come from the business side • Not the venture side•Try to get sales deals not investment• Or try to offer warrants based on sales success
  • 314. Startup Partner Strategies• Don’t confuse partners for Earlyvangelists vs. mainstream• Don’t confuse big company partnering with startup strategy• Find the one that gives you an unfair advantage• Recognize you don’t matter to a large partner 323
  • 315. CatalystsPartner Examples 324
  • 316. Thru-Pore Partners:Technologies Hypothesis and Experiments Catalyst Companies Research Catalysts, Inc. Contract Manufacturers Distributors T3
  • 317. Materials CoatingPartner Examples 326
  • 318. Molecular Diagnostics Partner Examples 331
  • 319. Partners Back End Front End Sample Prep Dx Test Company(not for RUO) Hospitals ChipManufacturers LiquiLume Clinical Labs Packaging Reagents Doctors (IDT, Fisher) OEMs Distributors Research Labs (Fisher)Shippers (UPS, FedEx)
  • 320. Back-End Partners Type Examples Benefit Risk / NeedChip HTE Labs Make optofluidic chips (key High / Criticalmanufacturer element of technology)Packaging ? Keep device costs low Low / EssentialOEMs Laser or detector Parts needed to build Low, Med / manufacturers complete instrument EssentialReagents IDT, Fisher Provide custom probes and Med / EssentialSupplier control targets.Sample Prep. Qiagen Partner for validation of Low / NiceInstrument input target samples
  • 321. Front-End Partners Type Examples Benefit Risk / NeedDistributor Fisher Sell chips, reagents Low / Not critical for RUOResearch labs UCSF oncologists, Will validate technology; Low / Critical Stanford MDx Lab, publish; develop assays during phase I UCSF Micro. LabDx test Genentech; Possibly unique test on Low / Synergisticcompany Companion Dx w unique platform, partner pharma and biotechs; develops assay Specialty Dx test cos. Strategic allianceClinical labs Quest, LabCorp Help develop CLIA-waived Med / Crucial application; 510(k); clinical during phase II trials
  • 322. Complex Sensor Networks Partner Examples 335
  • 323. Universe of PartnersSensor device/network co’s Embedded platform makers SET Application specialists
  • 324. Potential PartnershipsSensor device/network co’s Embedded platform makers SET Application specialists
  • 325. Medical DevicePartner Examples
  • 326. The Lean LaunchPad Lecture 8:Resources, Activities & Costs Version 6/22/12
  • 327. Key ActivitiesWhat’s Most Important for the Business?
  • 328. © 2012 Steve Blank
  • 329. Key ResourcesWhat’s Are Your Most Important Assets?
  • 330. Cost StructureWhat are the Costs and Expenses
  • 331. © 2012 Steve Blank
  • 332. How You Make Money <
  • 333. Key Resources
  • 334. Four Critical Resources• Physical• Financial• Human• Intellectual
  • 335. Physical Resources• company facilities – office space, company location• product/services – supply of silicon wafers or iron ore, or thousands of feet of warehouse space?• Many physical goods are capital intensive
  • 336. Financial Resources• Friends and Family• Crowdfunding• Angels• Venture Capital• Corporate partners• Others: SBA or SBIR grants• Lease-lines• Factoring• Vendor-financing
  • 337. Human Resources• qualified employees• mentors, teachers, coaches, advisors
  • 338. Mentors, Teachers, Coaches• Mentors, teachers, coaches advance your personal career – If you want to learn a specific subject find a teacher – If you want to hone specific skills or reach an exact goal hire a coach – If you want to get smarter and better over your career find someone who cares about you enough to be a mentor
  • 339. Advisors• Advisors are people you need to help advance your company’s success – Founders fail when they believe their visions are facts – Listening to experienced advice can help you sort through whether your vision is a hallucination – Getting an advisory board (by expanding your circle of accumulated wisdom past their investors) is so important that it’s an explicit step in the Customer Development process
  • 340. Qualified Employees/Culture• Are the difference between a good idea that never went anywhere and a billion dollar firm
  • 341. MBA295FCustomer Development 36
  • 342. Executive Traits by Stage Entrepreneurial- Mission-Oriented Process-Managed Driven Learning and Management Execution and Growth DiscoveryPersonal Superstar Leader Manager of plans,Contribution goals, process, and personnelTime Commitment 24/7 As needed Long term 9 to 5Planning Opportunistic and Mission- and goal- Process-, and goal- agile driven drivenProcess Hates and eliminates As needed, driven Implements and uses by missionManagement Style Autocratic, star Distributed to May be bureaucratic system departmentsSpan of Control Hands-on Mission-driven, Distributed down the synchronized organizationFocus High and passionate Mission Execution visionUncertainty/Chaos Brings order out of Focuses on fast Focuses on chaos response repeatability
  • 343. Executive Traits by Stage
  • 344. Executive Traits by Stage
  • 345. Executive Traits by Stage
  • 346. Intellectual Property
  • 347. Trademark protects branding & marks• Trademark gives you the right to prevent others from using “confusingly similar” marks and logos• Trademark protection lasts as long as you use the mark• The more you use the mark, the stronger your protection• Trademark registration is optional, but has significant advantages if approved• Country by country
  • 348. Copyright protects creative works of authorship• Copyright gives right to prevent others from copying, distributing or making derivatives of your work – Protects “expressions” of ideas but does not protect the underlying ideas• (Way) more than just technology: – songs, books, movies, photos, etc.• Copyright protection lasts practically forever• Copyright does not prevent independent development• Registration is optional, but is required to sue for infringement
  • 349. Trade Secrets• Information that is kept secret and has economic value to the business• Coke recipe, customer lists, product road maps.• No registration required• Can last for as long as you take reasonable steps to keep confidential
  • 350. Contract• Protection agreed to by contract• No registration process• You have whatever protection is defined in the contract (e.g., NDA gives you certain rights to protection of your confidential information)• The protection lasts for the time period defined in the contract
  • 351. Patents• A government granted monopoly – prevents others from making, using or selling your invention – Even if the other’s infringement was innocent or accidental• Invention must be non-obvious• Protection lasts typically for 15-20 years• Application and examination is required – Typical cost for application and exam is $10-30k – Typical time for application and exam is 1-4 years• Must file in U.S. within one year of sale, offer for sale, public disclosure or public use• Provisional application alternative
  • 352. What Can be Patented?• Just about anything . . . – Circuits, hardware – Software, applied algorithms – Formulas, designs – User interfaces – Applications, systems – Business processes (sometimes)• But not these . . . – Scientific principles – Pure mathematical algorithms• And, pending Supreme Court Case raises concerns regarding patentability of “methods” inventions
  • 353. CostsMetrics that Matter
  • 354. Search vs. Execution Metrics• Existing companies execute plans• Startups search for them• Income Statement, Balance Sheet, etc are execution documents• You first need to derive the metrics that matter
  • 355. Metrics That Matter• Value proposition: product cost, mkt size/share, competition?• Customer Relationships: customer acquisition costs, conversion rates, lifetime value?• Market Type: revenue curves• Operating Costs: basic operating costs of the business?• Channel: Channel margin, promotion, shelf-space charges?• Revenue Streams: average selling price, # of customers/year, achievable revenue?• Burn Rate: per month? When will the company run out of cash?
  • 356. Life ScienceIntellectual Property Example
  • 357. Intellectual Property Does Y Does Y Will they Y Harvard Harvard license it own it? want it? to us? N N N Proceed with Extreme Pivot patent filing  and pre- clinical trials N Does Does Will they Berkeley Y Berkeley Y license it Y own it? want it? to us? N NMeeting with Berkeley Technology Transfer at LBNL (This Week)Meeting with Harvard Technology Office (Next Week) Class 7 - Update 3.12.2012
  • 358. Robotic AgricultureResource, Activities Example
  • 359. We’ve hit our first milestones Mar 2013Jun 2011 Dec 2011 Jun 2012 First unitTechnology Track Post-processed Real-time First unit Prototype Image recognition image recognitionCustomer Discovery Track Select 1st Testing agreement Customer trial and target crop with top producer customer orderFinance Track Friends and Seed Round Series A Applied family round for grants $125 K $800 K $3-5 M F&F Seed Series A Confidential
  • 360. Medical DeviceResource, Activities & Cost Example
  • 361. AppleResource, Activities & Cost Example
  • 362. Product User Digital Hub Digital Lifestyle Digital Platform PARTNER KEY VALUE CUSTOMER CUSTOMER NETWORK ACTIVITIES PROPOSITON RELATIONSHIPS SEGMENTS build whole differentiated component High-end devices both solutions for marketsmakers, shipping & mass market logistic suppliers h/w & s/w differentiated customers - professional & consumer KEY DISTRIBUTION brand - Apple, RESOURCES CHANNELS PowerMac, online store iMac COST STRUCTURE REVENUE STREAMS Computers, Invest in software & R&D services
  • 363. Product User Digital Hub Digital Lifestyle Digital Platform PARTNER KEY VALUE CUSTOMER CUSTOMER NETWORK ACTIVITIES PROPOSITON RELATIONSHIPS SEGMENTS build whole differentiated component High-end devices both solutions for marketsmakers, shipping & mass market logistic suppliers h/w & s/w differentiated customers - professional & consumer KEY DISTRIBUTION brand - Apple, RESOURCES CHANNELS PowerMac, online store iMac COST STRUCTURE REVENUE STREAMS Computers, Invest in software & R&D services
  • 364. Product User PARTNER KEY VALUE CUSTOMER CUSTOMER NETWORK ACTIVITIES PROPOSITON RELATIONSHIPS SEGMENTS component build whole High-end makers solutions for differentiated devices both differentiated markets mass market h/w & s/w customers - Shipping & professional & logistic consumer suppliers KEY DISTRIBUTION brand - Apple, RESOURCES CHANNELS PowerMac, Wholesalers, iMac retailers, re- sellers innovative online store designers IP & patents & agreements COST STRUCTURE REVENUE STREAMS Computers, Invest in software & R&D services
  • 365. Product User Digital Hub PARTNER KEY VALUE CUSTOMER CUSTOMER NETWORK ACTIVITIES PROPOSITON RELATIONSHIPS SEGMENTS KEY DISTRIBUTION RESOURCES CHANNELS COST STRUCTURE REVENUE STREAMS
  • 366. Product User Digital Hub Digital Lifestyle PARTNER KEY VALUE CUSTOMER CUSTOMER NETWORK ACTIVITIES PROPOSITON RELATIONSHIPS SEGMENTS KEY DISTRIBUTION RESOURCES CHANNELS COST STRUCTURE REVENUE STREAMS
  • 367. Product User Digital Hub Digital Lifestyle Digital Platform PARTNER KEY VALUE CUSTOMER CUSTOMER NETWORK ACTIVITIES PROPOSITON RELATIONSHIPS SEGMENTS KEY DISTRIBUTION RESOURCES CHANNELS COST STRUCTURE REVENUE STREAMS
  • 368. The Customer Development Manifesto 15 Rules to Live By
  • 369. A Startup is: A temporary organization designed to searchfor a repeatable and scalable business model
  • 370. 1. There are No Facts Inside Your Building
  • 371. 2. Pair Customer Development with Agile Development
  • 372. 3.Failure is an Integral Part of Search
  • 373. 4. Continuous Iteration and Pivots
  • 374. 5. No Business Plan Survives First Contact with Customers
  • 375. 6. Validate Hypotheses with Experiments
  • 376. 7. Market Type Changes Everything
  • 377. 8. Startup Metrics are Different
  • 378. 9. Fast and Fearless Decision-Making
  • 379. 9. Cycle Time, Speed and Tempo
  • 380. 10. Startup Job Titles Are VeryDifferent from a Large Company’s
  • 381. 11. Preserve Cash While Searching
  • 382. 12. Spend When It’s a Repeatable Model
  • 383. 13. Communicate and Share Learning
  • 384. 14. Startups demand Comfort withChaos, Uncertainty and Change
  • 385. 15. It’s Not A Job, It’s All About Passion