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How to Fail Less

 Business Models and
Customer Development


       Steve Blank
    www.steveblank.com
        @sgblank
Agenda – Day One
• 9:00 - 11:00       Introduction to Customer Development
• 11:00 - 11:30      break
• 11:30 - 13:00      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
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
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
The Lean LaunchPad

      Lecture 4:
Distribution Channels
  How does your Product
    Get to Customers?



                          Version 6/22/12
Channels

How does your Product
  Get to Customers?
© 2012 Steve Blank
Who Are Our
Customers and How
Do We Reach Them
Physical versus Virtual Channels
Delft climate kic 070212 part 2
How Do You Want Your Product to
    Get to Your Customer?

     Yourself

     Through someone else

     Retail

     Wholesale

     Bundled with other goods or services




                                             11
Web Channels




               12
Physical Channels




                    13
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
Types of Channels

Direct           Indirect     Licensing


            –   OEM
            –   VAR
            –   Reseller
            –   Distributor




                                          15
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
How Do the Economics Work in
  Different Sales Channel?
How Are Channels Compensated?

 – Commission
 – Percentage of sales price
 – Discounted pre-purchase




                                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
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
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
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
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
How Are Channels Motivated or Incented?


– Money! – what makes them the most?
– Training
– Marketing to the channel
– SPIF




                                       24
Book Publishing
Channel Example
Example: Book Publishing
             National
Publisher                 Printer   Wholesaler   Retailer   Customer
            Distributor




                                                                 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
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
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
Medical Device
Channel Example
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)
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
Farm Sensor Industry
  Channel Example
Channel Model: Service Provider

                                            Product
                                             Money

            OEM                             Nutrient
                                             Data
                         Large farm




Us




                         Small farm




          USDA/EPA                     Licensing/sales
Channel Model: Service Provider

                                            Product
                                             Money

            OEM                             Nutrient
                                             Data
                         Large farm
                                       Product



Us




                         Small farm    Service



          USDA/EPA                     Licensing/sales
Dental Product
Channel Example
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
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
Medical Device
Channel Example 2
•
•
•




•
•
•
Delft climate kic 070212 part 2
Dental Product 2
Channel Example
Channels



   Direct Sales        Big Distributors




Private Practice   Institutional   Purchasing
    Dentist           Dentist      Department
Channels



   Direct Sales        Big Distributors

                                                80% Market Share
                                                30% Margin




Private Practice   Institutional   Purchasing
    Dentist           Dentist      Department
Channels
                                                Continuing
                                                Education    Magazines   Trade
                                                 Courses      & Email    Shows




   Direct Sales        Big Distributors

                                                 80% Market Share
                                                 30% Margin




Private Practice   Institutional   Purchasing
    Dentist           Dentist      Department
Online Rental
Channel Example
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.co
Maintenance
Furnishing       Moving               Find information           Maintenance Finding
        Service                                                        Zoospi.com
       Providers                                                             Redbeacon.com
                                                                     Taskrabbit.com
                                                                            Servicemagic.com             Schedule Tools
                                                                                                          Setster.com
                        Web Info                                                                                  Zoospi.com
                                                                                                                         47
Dental Product 3
Channel Example
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
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
Channel Example
• F-dopa iodonium intermediate
              • F-dopamine iodonium intermediate       Precursor Synthesis
Reagents


              • ABX          • Siemens Explora
   GMP        • Eckert & Ziegler                       Precursor in Cassette
 Cassette     • GE MX module for TracerLab
Components


              • Eckert & Ziegler      • Synthra
   GMP        • Siemens Explora                        Cassette (device)
 Compliant    • Neoprobe      • TracerLab/ GE
Synthesizer

            •   Siemens PETNet
            •   GE Amersham
 PET Drug •     Cardinal Health                        Finished product
Distributor •   AAA • Iason


                                                  52
  I-Corps Final Presentation 12/14/11
Channel Example
Travel Industry
Channel Example
Travel Services:
Impact of Changing Technology
The Advent of GDS Systems (1980 -1995)
Turning the Screen Around
 Online Travel (1995-2010)
The Lean LaunchPad

         Lecture 5
   Customer Relationships
How Do You Get/Keep/Grow Customers?




                                      Version 6/13/12
Customer Relationships

How do you Get, Keep and Grow Customers?
© 2012 Steve Blank
Customer Relationships
Physical & Web Mobile Are Different




                                      © 2012 Steve Blank
Customer Relationships
Physical Products – Get Customers




                                    © 2012 Steve Blank
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?
Paid Demand Creation Activities
              “Paid” Media

   Demand
   Creation
                  •   Public Relations
                  •   Advertising
                  •   Trade Shows
                  •   Webinars
                  •   Email marketing
                  •   On-line SEM
                  •   Biz Dev
Free Demand Creation Activities
          “Earned” Media

   Demand
   Creation   •   Publications in journals
              •   Conference speeches/papers
              •   Educational seminars
              •   Public relations
              •   Blogging / Sharable content
              •   Social Media
              •   Communities
Customer Relationships
Physical Products – Get Customers




                                    © 2012 Steve Blank
Customer Relationships
Physical Products – Get Customers



                          CAC =
                 Customer Acquisition Cost




                                     © 2012 Steve Blank
Customer Acquisition Cost versus
           Sales Complexity


                No Touch      Light Touch    High Touch                          Field Sales
Freemium                                                    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
Customer Relationships
Physical Products – Keep Customers




                                     © 2012 Steve Blank
Customer Relationships
Physical Products – Keep Customers




                Attrition/Churn
                                     © 2012 Steve Blank
Customer Relationships
Physical Products – Grow Customers




                                     © 2012 Steve Blank
Customer Relationships
Physical Products – Get/Keep/Grow




        LTV = Customer Lifetime Value
                                        © 2012 Steve Blank
Customer Relationships
Web/Mobile Products– Get   Customers




                                   © 2012 Steve Blank
Web/Mobile Products– Get    Customers


             CPM = cost per thousand hits




                                            © 2012 Steve Blank
Web/Mobile Products– Get    Customers


             CPA = Cost per Action




                                     © 2012 Steve Blank
SaaSProducts– Get Customers


     Organic
Traffic, SEM, Oth
 er Paid Sources    Registered Visitors

                                                            Raw Leads
                             Qualified Leads

                                          Inside Sales
                                                         Closed Deal




                                                                        © 2012 Steve Blank
Web/Mobile Products– Keep Customers
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
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
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
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
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
What Investors are Looking For


A well balanced business model




                                     Monetization
                                            (LTV)



 Cost to
Acquire a
Customer
  (CAC)

                                 Source: David Skok Matrix Partners
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
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
Customer Relationships
Web/Mobile Products– Keep Customers




                                 © 2012 Steve Blank
How Churn affects LTV




• Average customer lifetime in months =


1 / Monthly Churn


                                   Source: David Skok Matrix Partners
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
How Churn affects LTV

Lifetime Value




                                           Monthly
                                            Churn
                            Source: David Skok Matrix Partners
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
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
Customer Relationships
Web/Mobile Products– Grow Customers




                                 © 2012 Steve Blank
Customer Relationships
Web/Mobile Products Get/Keep/Grow




                                    © 2012 Steve Blank
Ag Robot
Customer Relationships Example
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
Medical Device
Customer Relationships Example
Delft climate kic 070212 part 2
Key Opinion
Leaders (KOLs)
Key Opinion
Leaders (KOLs)
Key Opinion
Leaders (KOLs)
Key Opinion
Leaders (KOLs)
Key Opinion
Leaders (KOLs)
Key Opinion
Leaders (KOLs)
Delft climate kic 070212 part 2
Housing App
Customer Relationship Example
• We ran a Facebook ad to test actual willingness2
  to pay for this service




                                                 107
• To test willingness to pay we used three        2
  identical ads with three different landing pages




                                                  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
• 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
Online Dating
Customer Relationships Example
What We Did: Landing Page + Web App
What We Found: High referral traffic

   4 day progress report




                             Overall Signup progress


                                            1258
                                                       31 filled 5-
                                            136        min survey


                                            10.8%
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
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
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
Online Sales
Customer Relationships Example
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
Mobile App
Customer Relationships Example
Success Depends on Virality> Churn
Ratio of early stage viralityrate to churn rate = 2.00x
Success Depends on Virality>Churn
Ratio of early stage viralityrate to churn rate = 1.50x
Success Depends on Virality>Churn
Ratio of early stage viralityrate to churn rate = 1.0x
Demand creation via website

        1                     2            3




“Not a landing page”    Doesn’t show the
No Indonesian version       product
Demand creation via website -
                results
             Clicks                               CTR
100                    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
                                     learning
1.5   1.34                        6.00%
                                                            4.05%
  1                    0.62       4.00%             2.94%
                0.54
0.5                               2.00%
                                          0.00%
  0                               0.00%
       1         2      3                  1            2    3
Software Reference Tool
Customer Relationships Example
AdWords Testing
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
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
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
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
Customer Relationships Example
Search Keywords




Lesson Learned:
Very little search traffic -> a “missionary” sales effort
Highly Competitive Keywords




Lesson Learned:
AdWords (paid SEM) is not going to be an efficient channel with these
keywords
Medical Device
Customer Relationships Example
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
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
NSF I-Corps
  The Lean LaunchPad

Lecture 6: Revenue Streams
   How Do You Make Money?




                             Version 6/22/12
Revenue Streams
How do you Make Money?
© 2012 Steve Blank
The Two Key Questions
• What’s my revenue model?
• Within the revenue model – how do I
  price the product?
Revenue Model =

 the strategy the company uses to
generate cash from each customer
              segment
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?
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
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
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?
Pricing Model =

the tactics you use to set the price in
      each customer segment
How to price the product?
            Pricing Models - Physical


•   Cost plus
•   Competitive pricing          •      “Razor/razor blade” model
•   Volume pricing               •      Subscription
•   Value pricing                •      Time/Hourly Billing
•   Portfolio pricing            •      Leasing
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
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?
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?”
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
Single versus
Multi-sided Markets
Single/Multi-side Markets

• Single-sided markets care about revenues

• Multi-sided markets may care about users
  first, revenues second
  – Often Web-based
“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?
“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?
Market Type and Revenue
Other Issues
• Distribution channel affects
  revenue streams
• Market type affects revenue streams
• Demand curve affects revenue streams
• Consider lifetime value
New Market
       Revenue Forecast




New Market Sales Curve
Existing Market Revenue Forecast




        Existing Market
Resegmented Market Revenue
         Forecast
Common categories
of Web/Mobile revenue models
“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
“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
Asset Sale
• Sale of ownership right to a physical
  product
Usage Fee
• Usage of service. Fee is proportional to
  the usage of the service.
Subscription Fee
• Fee for continuous access to a service
Renting
• Fee for temporary access to a good or service
Licensing
• Fee for use of some IP (including software)
Intermediation Fee
• Often found in marketplaces of various
  types, a fee for bringing together two or more
  parties involved in a transaction
Advertising
• Fee paid by brands and companies to get in
  front of potential customers
Revenue Model Summary
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
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?
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?
Optical Equipment
Revenue Model Example
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
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
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
Nitrate Sensor
Revenue Model Example
Product
                        Money

  OEM                   Water
                        Data
                        only
           Large farm




           Small farm




USDA/EPA
Product
                                Money

       OEM                      Nutrient
                                 Data
                Large farm




Us




                Small farm




     USDA/EPA

                             Product sales
Product
                                Money

       OEM                      Nutrient
                                 Data
                Large farm




Us




                Small farm




     USDA/EPA

                             Licensing/sales
Product
                                Money

       OEM                      Nutrient
                                 Data
                Large farm




Us




                Small farm




     USDA/EPA

                             Independent of
                             licensing decision
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
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
Bio-Based Chemical Intermediates
     Revenue Model Example
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)
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
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/day
Feedstock           15 c/lb     19 c/lb   16 c/lb
Processing           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
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/day
Feedstock           15 c/lb     19 c/lb   16 c/lb
Processing           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
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/day
Feedstock           15 c/lb     19 c/lb   16 c/lb
Processing           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
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/day
Feedstock           15 c/lb         19 c/lb         16 c/lb          15 c/lb
Processing           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
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/lb
Distributor


               Surfactant                                  Formulation         90 c/lb
               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)

                Disposal            Regulations            Waste
Payment Flows Example
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
Medical Device
Pricing Example
Delft climate kic 070212 part 2
Delft climate kic 070212 part 2
Graphene
Revenue Model Example
Payment flow
                     Researchers
                Add value     More work

Current TEM          Distributors
grid provider


                Graphene Frontiers



                Material supplier
Payment flow

   Electronic User

     Distributors


E-reader manufacturer      Parts suppliers


   Flexible display     Graphene Frontiers
   manufacturer


   Parts suppliers      Material      Research, cost
                        supplier
Direct Cost Estimates: Scale Matters
• Cost per in2 – 1” Furnace = $.80

• Cost per in2 – 2” Furnace = $.45

• Cost per in2 – 4” Furnace = $.20

If we can move to N (replacing Ar, key direct cost driver)
• Cost per in2 – 1” Furnace = $.50

• Cost per in2 – 2” Furnace = $.25

• Cost per in2 – 4” Furnace = $.10

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

Cost per in2 – 4” Furnace, Batch/Continuous = … $.05
Sensor
Pricing Tactics Example
Understand Economics of Plant + Sensors    Industrial Plants

Understand Economics of Technology Supplier      Plant #1


                                                 Plant #2


                                                 Plant #3


                 Technology Supplier




Who does this?
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
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
Medical Device
Revenue Model Example
What we make


           Device cost
            (one time)

              ~$2000

Dental
                              Dentist
Optics
           Disposables
         ~$2.50 per patient
What the dentist normally makes
                                            $250
                                                               Insurance



                                                                          Membership
                                                       $250
                                                      Co-pay

                                            Dentist             Patient




                                                           Equipment / Variable Costs
Note: Assumes 50/50 copay-insurance split
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 Costs
Note: Assumes 50/50 copay-insurance split
Farm Nitrate Sensor
Revenue Model Example
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
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
Biofactories for Therapeutics
  Revenue Model Example
Revenue Model

                         = money              = relationship
                         = information        = AAT



                                                                          Patient

 Large Pharma                             Private Payor

                                                                     Employer

                                         Government Payor

Wholesalers
                   Hospital/Clinic
                                                 Government

                      Physicians

                                                               Taxpayer
                Pulmonary Function Lab    INFLUENCER
Optics Design Company
Revenue Model Example
™


                  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
Complex Sensor Networks
 Revenue Model Example
Revenue Model and Customer
SET 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
Healthcare Software
Revenue Model Example
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
The Lean LaunchPad

Lecture 6: Revenue Streams
   How Do You Make Money?




                             Version 6/22/12
Revenue Streams
How do you Make Money?
© 2012 Steve Blank
The Two Key Questions
• What’s my revenue model?
• Within the revenue model – how do I
  price the product?
Revenue Model =

 the strategy the company uses to
generate cash from each customer
              segment
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?
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
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
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?
Pricing Model =

the tactics you use to set the price in
      each customer segment
How to price the product?
            Pricing Models - Physical


•   Cost plus
•   Competitive pricing          •      “Razor/razor blade” model
•   Volume pricing               •      Subscription
•   Value pricing                •      Time/Hourly Billing
•   Portfolio pricing            •      Leasing
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
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?
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?”
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
Single versus
Multi-sided Markets
Single/Multi-side Markets

• Single-sided markets care about revenues

• Multi-sided markets may care about users
  first, revenues second
  – Often Web-based
“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?
“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?
Market Type and Revenue
Other Issues
• Distribution channel affects
  revenue streams
• Market type affects revenue streams
• Demand curve affects revenue streams
• Consider lifetime value
New Market
       Revenue Forecast




New Market Sales Curve
Existing Market Revenue Forecast




        Existing Market
Resegmented Market Revenue
         Forecast
Common categories
of Web/Mobile revenue models
“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
“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
Asset Sale
• Sale of ownership right to a physical
  product
Usage Fee
• Usage of service. Fee is proportional to
  the usage of the service.
Subscription Fee
• Fee for continuous access to a service
Renting
• Fee for temporary access to a good or service
Licensing
• Fee for use of some IP (including software)
Intermediation Fee
• Often found in marketplaces of various types,
  a fee for bringing together two or more
  parties involved in a transaction
Advertising
• Fee paid by brands and companies to get in
  front of potential customers
Revenue Model Summary
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
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?
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?
Optical Equipment
Revenue Model Example
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
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
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
Nitrate Sensor
Revenue Model Example
Product
                        Money

  OEM                   Water
                        Data
                        only
           Large farm




           Small farm




USDA/EPA
Product
                                Money

       OEM                      Nutrient
                                 Data
                Large farm




Us




                Small farm




     USDA/EPA

                             Product sales
Product
                                Money

       OEM                      Nutrient
                                 Data
                Large farm




Us




                Small farm




     USDA/EPA

                             Licensing/sales
Product
                                Money

       OEM                      Nutrient
                                 Data
                Large farm




Us




                Small farm




     USDA/EPA

                             Independent of
                             licensing decision
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
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Delft climate kic 070212 part 2

  • 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
  • 6. Channels How does your Product Get to Customers?
  • 8. Who Are Our Customers and How Do We Reach Them
  • 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
  • 15. Types of Channels Direct Indirect Licensing – OEM – VAR – Reseller – Distributor 15
  • 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
  • 26. Example: Book Publishing National Publisher Printer Wholesaler Retailer Customer Distributor 26
  • 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
  • 33. Farm Sensor Industry Channel Example
  • 34. Channel Model: Service Provider Product Money OEM Nutrient Data Large farm Us Small farm USDA/EPA Licensing/sales
  • 35. Channel Model: Service Provider Product Money OEM Nutrient Data Large farm Product Us Small farm Service USDA/EPA Licensing/sales
  • 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
  • 43. Channels Direct Sales Big Distributors Private Practice Institutional Purchasing Dentist Dentist Department
  • 44. Channels Direct Sales Big Distributors 80% Market Share 30% Margin Private Practice Institutional Purchasing Dentist Dentist Department
  • 45. Channels Continuing Education Magazines Trade Courses & Email Shows Direct Sales Big Distributors 80% Market Share 30% Margin Private Practice Institutional Purchasing Dentist Dentist Department
  • 47. 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.co Maintenance Furnishing Moving Find information Maintenance Finding Service Zoospi.com Providers Redbeacon.com Taskrabbit.com Servicemagic.com Schedule Tools Setster.com Web Info Zoospi.com 47
  • 49. 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
  • 50. 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
  • 52. • F-dopa iodonium intermediate • F-dopamine iodonium intermediate Precursor Synthesis Reagents • ABX • Siemens Explora GMP • Eckert & Ziegler Precursor in Cassette Cassette • GE MX module for TracerLab Components • Eckert & Ziegler • Synthra GMP • Siemens Explora Cassette (device) Compliant • Neoprobe • TracerLab/ GE Synthesizer • Siemens PETNet • GE Amersham PET Drug • Cardinal Health Finished product Distributor • AAA • Iason 52 I-Corps Final Presentation 12/14/11
  • 55. Travel Services: Impact of Changing Technology
  • 56. The Advent of GDS Systems (1980 -1995)
  • 57. Turning the Screen Around Online Travel (1995-2010)
  • 58. The Lean LaunchPad Lecture 5 Customer Relationships How Do You Get/Keep/Grow Customers? Version 6/13/12
  • 59. Customer Relationships How do you Get, Keep and Grow Customers?
  • 60. © 2012 Steve Blank
  • 61. Customer Relationships Physical & Web Mobile Are Different © 2012 Steve Blank
  • 62. Customer Relationships Physical Products – Get Customers © 2012 Steve Blank
  • 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
  • 66. Customer Relationships Physical Products – Get Customers © 2012 Steve Blank
  • 67. Customer Relationships Physical Products – Get Customers CAC = Customer Acquisition Cost © 2012 Steve Blank
  • 68. Customer Acquisition Cost versus Sales Complexity No Touch Light Touch High Touch Field Sales Freemium 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
  • 69. Customer Relationships Physical Products – Keep Customers © 2012 Steve Blank
  • 70. Customer Relationships Physical Products – Keep Customers Attrition/Churn © 2012 Steve Blank
  • 71. Customer Relationships Physical Products – Grow Customers © 2012 Steve Blank
  • 72. Customer Relationships Physical Products – Get/Keep/Grow LTV = Customer Lifetime Value © 2012 Steve Blank
  • 73. Customer Relationships Web/Mobile Products– Get Customers © 2012 Steve Blank
  • 74. Web/Mobile Products– Get Customers CPM = cost per thousand hits © 2012 Steve Blank
  • 75. Web/Mobile Products– Get Customers CPA = Cost per Action © 2012 Steve Blank
  • 76. SaaSProducts– Get Customers Organic Traffic, SEM, Oth er Paid Sources Registered Visitors Raw Leads Qualified Leads Inside Sales Closed Deal © 2012 Steve Blank
  • 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
  • 86. Customer Relationships Web/Mobile Products– Keep Customers © 2012 Steve Blank
  • 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
  • 92. Customer Relationships Web/Mobile Products– Grow Customers © 2012 Steve Blank
  • 93. Customer Relationships Web/Mobile Products Get/Keep/Grow © 2012 Steve Blank
  • 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
  • 111. What We Did: Landing Page + Web App
  • 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
  • 119. Success Depends on Virality> Churn Ratio of early stage viralityrate to churn rate = 2.00x
  • 120. Success Depends on Virality>Churn Ratio of early stage viralityrate to churn rate = 1.50x
  • 121. Success Depends on Virality>Churn Ratio of early stage viralityrate to churn rate = 1.0x
  • 122. Demand creation via website 1 2 3 “Not a landing page” Doesn’t show the No Indonesian version product
  • 123. Demand creation via website - results Clicks CTR 100 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 learning 1.5 1.34 6.00% 4.05% 1 0.62 4.00% 2.94% 0.54 0.5 2.00% 0.00% 0 0.00% 1 2 3 1 2 3
  • 124. Software Reference Tool Customer Relationships Example
  • 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
  • 131. Search Keywords Lesson Learned: Very little search traffic -> a “missionary” sales effort
  • 132. Highly Competitive Keywords Lesson Learned: AdWords (paid SEM) is not going to be an efficient channel with these keywords
  • 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
  • 137. Revenue Streams How do you Make Money?
  • 138. © 2012 Steve Blank
  • 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
  • 152. Single/Multi-side Markets • Single-sided markets care about revenues • Multi-sided markets may care about users first, revenues second – Often Web-based
  • 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?
  • 155. Market Type and Revenue
  • 156. Other Issues • Distribution channel affects revenue streams • Market type affects revenue streams • Demand curve affects revenue streams • Consider lifetime value
  • 157. New Market Revenue Forecast New Market Sales Curve
  • 158. Existing Market Revenue Forecast Existing Market
  • 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
  • 163. Asset Sale • Sale of ownership right to a physical product
  • 164. Usage Fee • Usage of service. Fee is proportional to the usage of the service.
  • 165. Subscription Fee • Fee for continuous access to a service
  • 166. Renting • Fee for temporary access to a good or service
  • 167. Licensing • Fee for use of some IP (including software)
  • 168. Intermediation Fee • Often found in marketplaces of various types, a fee for bringing together two or more parties involved in a transaction
  • 169. Advertising • Fee paid by brands and companies to get in front of potential customers
  • 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
  • 185. Bio-Based Chemical Intermediates Revenue Model Example
  • 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
  • 188. 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/day Feedstock 15 c/lb 19 c/lb 16 c/lb Processing 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
  • 189. 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/day Feedstock 15 c/lb 19 c/lb 16 c/lb Processing 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
  • 190. 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/day Feedstock 15 c/lb 19 c/lb 16 c/lb Processing 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
  • 191. 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/day Feedstock 15 c/lb 19 c/lb 16 c/lb 15 c/lb Processing 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
  • 192. 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/lb Distributor Surfactant Formulation 90 c/lb 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) Disposal Regulations Waste
  • 194. 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
  • 199. Payment flow Researchers Add value More work Current TEM Distributors grid provider Graphene Frontiers Material supplier
  • 200. Payment flow Electronic User Distributors E-reader manufacturer Parts suppliers Flexible display Graphene Frontiers manufacturer Parts suppliers Material Research, cost supplier
  • 201. Direct Cost Estimates: Scale Matters • Cost per in2 – 1” Furnace = $.80 • Cost per in2 – 2” Furnace = $.45 • Cost per in2 – 4” Furnace = $.20 If we can move to N (replacing Ar, key direct cost driver) • Cost per in2 – 1” Furnace = $.50 • Cost per in2 – 2” Furnace = $.25 • Cost per in2 – 4” Furnace = $.10 “Holy Grail”: 4” or larger continuous production w/Nitrogen Cost per in2 – 4” Furnace, Batch/Continuous = … $.05
  • 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
  • 207. What we make Device cost (one time) ~$2000 Dental Dentist Optics Disposables ~$2.50 per patient
  • 208. What the dentist normally makes $250 Insurance Membership $250 Co-pay Dentist Patient Equipment / Variable Costs Note: Assumes 50/50 copay-insurance split
  • 209. 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 Costs Note: Assumes 50/50 copay-insurance split
  • 210. Farm Nitrate Sensor Revenue Model Example
  • 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
  • 213. Biofactories for Therapeutics Revenue Model Example
  • 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
  • 217. Complex Sensor Networks Revenue Model Example
  • 218. Revenue Model and Customer SET 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
  • 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
  • 221. The Lean LaunchPad Lecture 6: Revenue Streams How Do You Make Money? Version 6/22/12
  • 222. Revenue Streams How do you Make Money?
  • 223. © 2012 Steve Blank
  • 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
  • 237. Single/Multi-side Markets • Single-sided markets care about revenues • Multi-sided markets may care about users first, revenues second – Often Web-based
  • 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?
  • 240. Market Type and Revenue
  • 241. Other Issues • Distribution channel affects revenue streams • Market type affects revenue streams • Demand curve affects revenue streams • Consider lifetime value
  • 242. New Market Revenue Forecast New Market Sales Curve
  • 243. Existing Market Revenue Forecast Existing Market
  • 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
  • 248. Asset Sale • Sale of ownership right to a physical product
  • 249. Usage Fee • Usage of service. Fee is proportional to the usage of the service.
  • 250. Subscription Fee • Fee for continuous access to a service
  • 251. Renting • Fee for temporary access to a good or service
  • 252. Licensing • Fee for use of some IP (including software)
  • 253. Intermediation Fee • Often found in marketplaces of various types, a fee for bringing together two or more parties involved in a transaction
  • 254. Advertising • Fee paid by brands and companies to get in front of potential customers
  • 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

  1. 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
  2. ----- Meeting Notes (3/6/12 10:38) -----what the dentist makes for a perio procedure
  3. Progression: larger and larger sensor networks deployed
  4. ----- Meeting Notes (3/6/12 10:38) -----what the dentist makes for a perio procedure
  5. Progression: larger and larger sensor networks deployed
  6. (need to do this as a build…)
  7. 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.