The document outlines an agenda for a workshop on customer development and business models, including sessions on developing a value proposition, identifying customer segments, creating a business model canvas, developing a customer discovery action plan, and discussing customer relationships, revenue streams, and the customer development manifesto. Homework assignments involve updating the business model canvas and developing a customer discovery action plan.
1. How to Fail Less
Business Models and
Customer 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 channels
Homework: 1) update your canvas
2)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
11. How Do You Want Your Product to
Get to Your Customer?
Yourself
Through someone else
Retail
Wholesale
Bundled with other goods or services
11
14. How Does Your Customer Want to
Buy Your Product from your Channel?
• Same day
• Delivered and installed
• Downloaded
• Bundled with other
products
• As a service
• …
14
16. Distribution Complexity
Global Systems
Evangelists Systems Integrators
WANs
Mainframes
Marketing Complexity
Direct Sales
Minis
LANs
VARs
PC Servers
Desktop PCs
Retail
Printers
Keyboards
Web, Telesales Service
Technicians
Toner
Solution Complexity
16
17. How Do the Economics Work in
Different Sales Channel?
18. How Are Channels Compensated?
– Commission
– Percentage of sales price
– Discounted pre-purchase
18
19. 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
20. 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
21. Channel Economics: Distributors/Resellers
List
Your Revenue Price
End Consumer
Distributor
Discounts
Cost of Goods Profit + SG&A +
EU
Reseller
(Supply Chain) R&D
Source: Mark Leslie, Stanford GSB
21
22. 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
23. Channel Economics: OEM or IP Licensing
List
Your 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
24. How Are Channels Motivated or Incented?
– Money! – what makes them the most?
– Training
– Marketing to the channel
– SPIF
24
27. 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
28. Book Publishing Economics
National
Publisher Wholesaler Retailer Customer
Distributor
Allowances
Wholesale costs
Bills
Markup
Credit
guarantees
Payment
guarantees
Payment
guarantees
Return rights
Credits
Payments
28
29. Book Publishing Delivery
National
Publisher 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
31. Product flow/Channel
Electronic Partners/
Health Fluid Synchrony
OEMS
Records
Electronic Support Pump + Bundled
Records Services Controller Kits
Hospitals
(Anesthesiologists
Patients Neurosurgeons)
Pain Clinic
(Anesthesiologists
Neurosurgeons)
32. Hospitals
Pain 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
37. COST / PROFIT ANALYSIS
Licensing Revenue Model
Per unit cost and profit estimation
Our revenue 4-8% revenues List price
End user
Univ. Manufacturing
Maintaining Raw License
R&D License & Distribution
IP fee materials fee
Packaging
37
38. Licensing of Technology Ecosystem
University Insurance
Agencies
2-4% license fee
$$$
DMX
R&D
Products
Procedures
Health-Care
IPs
Providers: $$ End
4-8% royalty Hospitals User
~$40 Practitioners
Customer Clinics
segment: Large
corporations
J&J, GSK, 3M
38
63. 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?
64. Paid Demand Creation Activities
“Paid” Media
Demand
Creation
• Public Relations
• Advertising
• Trade Shows
• Webinars
• Email marketing
• On-line SEM
• Biz Dev
65. Free Demand Creation Activities
“Earned” Media
Demand
Creation • Publications in journals
• Conference speeches/papers
• Educational seminars
• Public relations
• Blogging / Sharable content
• Social Media
• Communities
78. Our Example Marketing Funnel
Quick 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
79. Our Example Marketing Funnel
Quick 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
80. Our Example Marketing Funnel
Cost per Qualified Lead $125
Leads to closed deal 10
Marketing Costs per closed deal $1,250
Source: David Skok Matrix Partners
81. We Can Compute CAC and LTV
Excludes people costs
Lead 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, and
Total CAC $ 2,870 sales management.
(CAC= Cost to Acquire a Customer)
Calculated by dividing average monthly
Total 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
82. 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
83. What Investors are Looking For
A well balanced business model
Monetization
(LTV)
Cost to
Acquire a
Customer
(CAC)
Source: David Skok Matrix Partners
84. The Balancing Act
• Viral effects
• Inbound Marketing
• Free or Freemium
• Open Source
• Free Trials
• Touchless conversion
• Inside Sales
• Channels
• Strategic partnerships
Cost 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
85. 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 partnerships
Cost 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
87. How Churn affects LTV
• Average customer lifetime in months =
1 / Monthly Churn
Source: David Skok Matrix Partners
88. How Churn affects Lifetime
Months Lifetime vs Churn Rate
120
100
100
80
60 50
40
20
20
0 Monthly
Churn
1% 2% 5%
Source: David Skok Matrix Partners
89. How Churn affects LTV
Lifetime Value
Monthly
Churn
Source: David Skok Matrix Partners
90. 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
91. 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
95. 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 complicated
in farming.” – Wyatt Duncan, Integrated Crop Pest Control
106. • We ran a Facebook ad to test actual willingness2
to pay for this service
107
107. • To test willingness to pay we used three 2
identical ads with three different landing pages
108
108. • 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
109. • 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
112. What We Found: High referral traffic
4 day progress report
Overall Signup progress
1258
31 filled 5-
136 min survey
10.8%
113. What we did: Targeted women, all couples Demand generation test
Hypothesis: Women-in-relationships are likelier to click
through, irrespective of distance status
Tested for $30 Facebook click through & conversion from FB
impressions
Ad-1 Ad-3
Ad-2 Ad-4
114. 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
115. What we found: Clicks, no web app usage Demand generation test
Funnel: “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
117. 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 sale
Total Revenue Total Revenue
1.44 million 18.14 million
126. AB Testing Results
0% 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
127. 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
128. 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
129. 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
134. ChannelIncentives
VP
All Institutions
Out-patient care/ Per Service High Value
home setting Revenue Model Therapies
Hospitals Private Dosing flexibility
Hospitals, specialty
clinics Efficient patient
Pain Clinics management
In-patient care/ Per Diem
hospitalization Pharmacoeconomics
Revenue Model
HMO, ACO, Non-
profit, University
Hospitals
135. Demand Creation
Patients/Advocacy
Groups
Conferences / Trade magazines / PR
Societies conferences
$20k/event * 6 events $20k/event * 4 events
Research Journal
One on one Meetings
$150k/year travel
Adoption Publications
(Free)
Budget ~ $300 k/year
136. NSF I-Corps
The Lean LaunchPad
Lecture 6: Revenue Streams
How Do You Make Money?
Version 6/22/12
139. The Two Key Questions
• What’s my revenue model?
• Within the revenue model – how do I
price the product?
140. Revenue Model =
the strategy the company uses to
generate cash from each customer
segment
141. Revenue Streams
1. How many will we sell?
2. Where/who is the money coming from?
3. How do we price the product?
4. Does this add up to a
business worth doing?
142. 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
143. 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 Referrals
Product
Direct Sales
Ancillary Sales:
Products
•Referral revenue
•Affiliate revenue Service
Physical
•E-mail list rentals Upsell/Next Sell
•Back-end offers Referrals
Leasing
144. 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?
145. Pricing Model =
the tactics you use to set the price in
each customer segment
146. 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
147. Common approaches to pricing
Cost + markup
Cost based Typically not a strategic way to price
Driven by internal economics and not
customer insight
Based on buyer’s perception of
Value based value (e.g. time saved, new
efficiency created,etc.)
Customers don’t necessarily feel
that they want to pay this way
148. 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?
149. 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?”
150. 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
153. “Users First” Companies
If you say your business is advertising based:
• How do you get to 10M monthly users?
• How do you become one of the top 5 websites
visited?
• How much do the “payers” actually pay?
154. “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?
161. “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
162. “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
171. Example Analysis
Target market Sales
USA market – 1.5 M patients Start in EU middle of year 3
Europe – 2 M patients Start in USA end of year 4
Package Personnel
Reusable wrist watch Average salary $120 K
Disposable sensors / patch Load factor 1.5
Access to patients data Headcount from 4 to 174 in year 8
Product development Financing
4 people in the beginning Series A – $3 M
$2 million Series B – $10 M
1.5 years to develop
Price per package: $150
COGS Operating ExpensesProfit
$60 per unit $90 per unit
172. 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?
173. Thought experiment
• Time to doublings for monthly revenues
• Key questions:
– When will I get to $100k/month in
revenues?
– When will I get to $1M/month in revenues?
– What assumptions about my business am I
making when I reach these milestones?
175. Academia Payment Flow
activity
payment
Component
Phi Optics
vendors
QPI info & price
Buys QPI
device funds grant/contract
request for equipment
University
Grant Agencies
Researcher Business
Industry Contracts
Services
applies for grants/contracts
176. Bio-Pharma Payment Flow
activity
payment
Component
Phi Optics
vendors
QPI specs
+ price Includes equipment in the
budget
Buys QPI
device
Purchasing CTO
Researcher
Dept. VP for R&D
Justifies need for equipment
177. OEM Payment Flow
activity
payment
Equipment
Phi Optics
suppliers
QPI specs + price
+ SOW
Allocates funds in the
Funds SOW budget
Pays royalties/sub-
licensing/other recurring
fees
Product Dev
Accounting CTO
Engineers + VP for R&D
Dept.
Business Dev ($) +
Legal Dept
(royalties)
Justifies QPI integration in OEM system
Suggests co-development deal
179. Product
Money
OEM Water
Data
only
Large farm
Small farm
USDA/EPA
180. Product
Money
OEM Nutrient
Data
Large farm
Us
Small farm
USDA/EPA
Product sales
181. Product
Money
OEM Nutrient
Data
Large farm
Us
Small farm
USDA/EPA
Licensing/sales
182. Product
Money
OEM Nutrient
Data
Large farm
Us
Small farm
USDA/EPA
Independent of
licensing decision
183. Using $1000 per sensor (2x cost) puts us ~$350 more expensive than current commercial
nitrate 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
184. Using $1000 per sensor (2x cost) puts us ~$350 more expensive than current commercial
nitrate 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
186. 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/lb
Distributor
Surfactant Formulation ?
formulator Formulated Surfactant 90c/lb
Surfactant Surfactant 100 c/lb
Decision user Formulated Detergent 100c/lb
Makers
Consumer facing Detergent 200 c/lb
company 10% Surfactant in Detergent
Consumer Market Pull Product
(Sustainability agenda)
187. 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
203. Understand Economics of Plant + Sensors Industrial Plants
Understand Economics of Technology Supplier Plant #1
Plant #2
Plant #3
Technology Supplier
Who does this?
204. 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
205. Soft product launch projected for Q1-Q2 2012
General launch projected for Q4 2012
Diaphragm 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
211. Economics of TSP Operation
Incentives: 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
212. Economics of TSP Operation
Incentives: 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
214. Revenue Model
= money = relationship
= information = AAT
Patient
Large Pharma Private Payor
Employer
Government Payor
Wholesalers
Hospital/Clinic
Government
Physicians
Taxpayer
Pulmonary Function Lab INFLUENCER
216. ™
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
220. Revenue Model
Health
Healthcare Patient Data
Information
Providers Exchanges
Tailored Messaging
Portal $$$
for + Patient Outcomes
Patient Data
Patient Analytics
$$$
Resources/To Health
ols Patient Profile Insights
Patient
224. The Two Key Questions
• What’s my revenue model?
• Within the revenue model – how do I
price the product?
225. Revenue Model =
the strategy the company uses to
generate cash from each customer
segment
226. Revenue Streams
1. How many will we sell?
2. Where/who is the money coming from?
3. How do we price the product?
4. Does this add up to a
business worth doing?
227. 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
228. 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 Referrals
Product
Direct Sales
Ancillary Sales:
Products
•Referral revenue
•Affiliate revenue Service
Physical
•E-mail list rentals Upsell/Next Sell
•Back-end offers Referrals
Leasing
229. 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?
230. Pricing Model =
the tactics you use to set the price in
each customer segment
231. 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
232. Common approaches to pricing
Cost + markup
Cost based Typically not a strategic way to price
Driven by internal economics and not
customer insight
Based on buyer’s perception of
Value based value (e.g. time saved, new
efficiency created,etc.)
Customers don’t necessarily feel
that they want to pay this way
233. 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?
234. 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?”
235. 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
238. “Users First” Companies
If you say your business is advertising based:
• How do you get to 10M monthly users?
• How do you become one of the top 5 websites
visited?
• How much do the “payers” actually pay?
239. “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?
246. “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
247. “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
256. Example Analysis
Target market Sales
USA market – 1.5 M patients Start in EU middle of year 3
Europe – 2 M patients Start in USA end of year 4
Package Personnel
Reusable wrist watch Average salary $120 K
Disposable sensors / patch Load factor 1.5
Access to patients data Headcount from 4 to 174 in year 8
Product development Financing
4 people in the beginning Series A – $3 M
$2 million Series B – $10 M
1.5 years to develop
Price per package: $150
COGS Operating ExpensesProfit
$60 per unit $90 per unit
257. 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?
258. Thought experiment
• Time to doublings for monthly revenues
• Key questions:
– When will I get to $100k/month in
revenues?
– When will I get to $1M/month in revenues?
– What assumptions about my business am I
making when I reach these milestones?
260. Academia Payment Flow
activity
payment
Component
Phi Optics
vendors
QPI info & price
Buys QPI
device funds grant/contract
request for equipment
University
Grant Agencies
Researcher Business
Industry Contracts
Services
applies for grants/contracts
261. Bio-Pharma Payment Flow
activity
payment
Component
Phi Optics
vendors
QPI specs
+ price Includes equipment in the
budget
Buys QPI
device
Purchasing CTO
Researcher
Dept. VP for R&D
Justifies need for equipment
262. OEM Payment Flow
activity
payment
Equipment
Phi Optics
suppliers
QPI specs + price
+ SOW
Allocates funds in the
Funds SOW budget
Pays royalties/sub-
licensing/other recurring
fees
Product Dev
Accounting CTO
Engineers + VP for R&D
Dept.
Business Dev ($) +
Legal Dept
(royalties)
Justifies QPI integration in OEM system
Suggests co-development deal
264. Product
Money
OEM Water
Data
only
Large farm
Small farm
USDA/EPA
265. Product
Money
OEM Nutrient
Data
Large farm
Us
Small farm
USDA/EPA
Product sales
266. Product
Money
OEM Nutrient
Data
Large farm
Us
Small farm
USDA/EPA
Licensing/sales
267. Product
Money
OEM Nutrient
Data
Large farm
Us
Small farm
USDA/EPA
Independent of
licensing decision
268. Using $1000 per sensor (2x cost) puts us ~$350 more expensive than current commercial
nitrate 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
Editor's Notes
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.