NSF I-CorpsThe Lean LaunchPadLecture 6: Revenue Streams  How Do You Make Money?                             Version 7/22/12
Revenue StreamsHow do you Make Money?
© 2012 Steve Blank
Common Mistakes• A Revenue Stream is the price I charge customers• I set the price of the product based on how much it  co...
The Two Key Questions• What’s my revenue Streams?• Within the revenue streams– how do I  price the product?
Revenue Stream = the strategy the company uses togenerate cash from each customer              segment
Pricing Model =the tactics you use to set the price in      each customer segment
Revenue Stream   The strategy
What value are customers willing          to pay for?
How do customers pay For    products today?
How are they currently paying?
Revenue Stream Choices                             Channel                     Web               Physical              Bit...
Revenue Stream Choices                             Channel                     Web                    Physical            ...
Revenue Stream Choices                                         Channel                             Web                    ...
Common categories of revenue models
“Direct” revenue models•   Sales: Product, app, or service sales•   Subscriptions: SAAS, games, monthly subscription•   Fr...
“Ancillary” revenue models• Referral revenue: pay for referring traffic/customers to other  web or mobile sites or product...
Asset Sale• Sale of ownership right to a physical  product
Usage Fee• Usage of service. Fee is proportional to  the usage of the service.
Subscription Fee• Fee for continuous access to a service
Renting• Fee for temporary access to a good or service
Licensing• Fee for use of some IP (including software)
Intermediation Fee• Often found in marketplaces of various types,  a fee for bringing together two or more  parties involv...
Advertising• Fee paid by brands and companies to get in  front of potential customers
Each Revenue Stream may have different pricing tactics
Pricing Model  the tactics
Two Types of Pricing                Cost + markup Fixed          Value priced (by customer segment Pricing         or fe...
Common Startup Mistake                      Cost + markupLets Price on Cost    Typically not a strategic way to price   ...
Common Startup Mistake                      Cost + markupLets Price on Cost    Typically not a strategic way to price   ...
Market-Type Affects Pricing                  • Pure competition   Nature ofExisting Market                  • Oligopoly   ...
Single versusMulti-sided Markets
Single/Multi-side Markets• Single-sided markets care about revenues• Multi-sided markets may care about users  first, reve...
“Users First” CompaniesIf you say your business is advertising based:• How do you get to 10M monthly users?• How do you be...
“Revenue First” Companies• Time to doublings for monthly revenues• Key questions:• When will I get to $100k/month in  reve...
Market Type and Revenue
New Market       Revenue ForecastNew Market Sales Curve
Existing Market Revenue Forecast        Existing Market
Resegmented Market Revenue         Forecast
Revenue Model Summary
Draw The Diagram                   Put in numbers                                          Tennant                    send...
Key Revenue Model Questions• What are my customers paying for?• What capacity do my customers have to  pay?• How will you ...
How Many Will You Sell?•   What’s the Market Size & estimate of Market Share?•   How many can your channel sell?•   How mu...
Thought experiment• Time to doublings for monthly revenues• Key questions:  – When will I get to $100k/month in    revenue...
Reading For Next Week• Startup Owners Manual  – pages 176-179 partners 257-270 and 429-459
Optical EquipmentRevenue Model Example
Academia Payment Flow                                                                         activity                    ...
Bio-Pharma Payment Flow                                                                 activity                          ...
OEM Payment Flow                                                                               activity                   ...
Nitrate SensorRevenue Model Example
Product                        Money  OEM                   Water                        Data                        only ...
Product                                Money       OEM                      Nutrient                                 Data ...
Product                                Money       OEM                      Nutrient                                 Data ...
Product                                Money       OEM                      Nutrient                                 Data ...
Using $1000 per sensor (2x cost) puts us ~$350 more expensive than current commercialnitrate sensors. We’re including pH, ...
Using $1000 per sensor (2x cost) puts us ~$350 more expensive than current commercialnitrate sensors. We’re including pH, ...
Bio-Based Chemical Intermediates     Revenue Model Example
Revenue model: Hypothesis        Here’s what we hypothesized…           Biomass supplier                              Biom...
Revenue Model: Experiment 1                     Here’s what we did…                                      Production Econom...
Revenue model: Result 1                    Financial metrics                    Ethanol      DMF       Lactic    Bi-functi...
Revenue model: Result 1                    Financial metrics                    Ethanol      DMF       Lactic    Bi-functi...
Revenue model: Result 1                    Financial metrics                    Ethanol      DMF       Lactic    Bi-functi...
Revenue model: Result 1                    Financial metrics                    Ethanol          DMF            Lactic    ...
Revenue model: Result 2                               Payment Flow           Biomass supplier                             ...
Payment Flows Example
Payment Flows         Clinical Diagnostic Services                Pharmaceutical Products            Private              ...
Medical DevicePricing Example
GrapheneRevenue Model Example
Payment flow                     Researchers                Add value     More workCurrent TEM          Distributorsgrid p...
Payment flow   Electronic User     DistributorsE-reader manufacturer      Parts suppliers   Flexible display     Graphene ...
Direct Cost Estimates: Scale Matters• Cost per in2 – 1” Furnace = $.80• Cost per in2 – 2” Furnace = $.45• Cost per in2 – 4...
SensorPricing Tactics Example
Understand Economics of Plant + Sensors    Industrial PlantsUnderstand Economics of Technology Supplier      Plant #1     ...
75         Diaphragm                                             Membrane                                             $240...
Soft product launch projected for Q1-Q2 2012      General launch projected for Q4 2012Diaphragm                      Membr...
Medical DeviceRevenue Model Example
What we make           Device cost            (one time)              ~$2000Dental                              DentistOpt...
What the dentist normally makes                                            $250                                           ...
What we’d add for the dentist                                                                              Device creates ...
Farm Nitrate SensorRevenue Model Example
Economics of TSP OperationIncentives:        Best case scenario $45.89/acre                   Worst case:        $9.65/acr...
Economics of TSP OperationIncentives:        Best case scenario $45.89/acre                   Worst case:        $9.65/acr...
Biofactories for Therapeutics  Revenue Model Example
Revenue Model                         = money              = relationship                         = information        = A...
Optics Design CompanyRevenue Model Example
™                  Revenue Model & Payment Flows                                                                          ...
Complex Sensor Networks Revenue Model Example
Revenue Model and CustomerSET Sensor Node Product                        Acquisition                                      ...
Healthcare SoftwareRevenue Model Example
Revenue Model                                                                 Health           Healthcare                P...
Nsf online lecture 6 revenue models
Nsf online lecture 6 revenue models
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  • ----- Meeting Notes (3/6/12 10:38) -----what the dentist makes for a perio procedure
  • Progression: larger and larger sensor networks deployed
  • Nsf online lecture 6 revenue models

    1. 1. NSF I-CorpsThe Lean LaunchPadLecture 6: Revenue Streams How Do You Make Money? Version 7/22/12
    2. 2. Revenue StreamsHow do you Make Money?
    3. 3. © 2012 Steve Blank
    4. 4. Common Mistakes• A Revenue Stream is the price I charge customers• I set the price of the product based on how much it costs me to make it• My price has to be less than my competitors price
    5. 5. The Two Key Questions• What’s my revenue Streams?• Within the revenue streams– how do I price the product?
    6. 6. Revenue Stream = the strategy the company uses togenerate cash from each customer segment
    7. 7. Pricing Model =the tactics you use to set the price in each customer segment
    8. 8. Revenue Stream The strategy
    9. 9. What value are customers willing to pay for?
    10. 10. How do customers pay For products today?
    11. 11. How are they currently paying?
    12. 12. Revenue Stream Choices Channel Web Physical BitsProduct Physical
    13. 13. Revenue Stream Choices Channel Web Physical  Direct Sales Bits  Products  SubscriptionProduct  Add-on services  Upsell/Next Sell Physical  Referrals  Leasing
    14. 14. Revenue Stream Choices Channel Web Physical  Direct Sales  Direct Sales  Products  Products Bits  License  Subscription  Subscription  Upsell/Next Sell  Add-on servicesProduct  Ancillary Sales:  Upsell/Next Sell • Referral revenue  Referrals Physical • Affiliate revenue • E-mail list rentals  Leasing • Back-end offers
    15. 15. Common categories of revenue models
    16. 16. “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
    17. 17. “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
    18. 18. Asset Sale• Sale of ownership right to a physical product
    19. 19. Usage Fee• Usage of service. Fee is proportional to the usage of the service.
    20. 20. Subscription Fee• Fee for continuous access to a service
    21. 21. Renting• Fee for temporary access to a good or service
    22. 22. Licensing• Fee for use of some IP (including software)
    23. 23. Intermediation Fee• Often found in marketplaces of various types, a fee for bringing together two or more parties involved in a transaction
    24. 24. Advertising• Fee paid by brands and companies to get in front of potential customers
    25. 25. Each Revenue Stream may have different pricing tactics
    26. 26. Pricing Model the tactics
    27. 27. Two Types of Pricing  Cost + markup Fixed  Value priced (by customer segment Pricing or features)  Volume priced  NegotiationDynamic  Yield Management Pricing  Real-time market  Auctions
    28. 28. Common Startup Mistake  Cost + markupLets Price on Cost  Typically not a strategic way to price  Driven by internal economics and not customer insight
    29. 29. Common Startup Mistake  Cost + markupLets Price on Cost  Typically not a strategic way to price  Driven by internal economics and not customer insight  Based on buyer’s perception of value (e.g. time saved, newPrice on Value efficiency created, etc.)  Customers don’t necessarily feel that they want to pay this way
    30. 30. Market-Type Affects Pricing • Pure competition Nature ofExisting 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?”
    31. 31. Single versusMulti-sided Markets
    32. 32. Single/Multi-side Markets• Single-sided markets care about revenues• Multi-sided markets may care about users first, revenues second – Often Web-based
    33. 33. “Users First” CompaniesIf you say your business is advertising based:• How do you get to 10M monthly users?• How do you become one of the top 5 websites visited?• How much do the “payers” actually pay?
    34. 34. “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?
    35. 35. Market Type and Revenue
    36. 36. New Market Revenue ForecastNew Market Sales Curve
    37. 37. Existing Market Revenue Forecast Existing Market
    38. 38. Resegmented Market Revenue Forecast
    39. 39. Revenue Model Summary
    40. 40. Draw The Diagram Put in numbers Tennant send monthly water bill water bill plus $2/month $2/month Property Owners install meter $9/month (2yrs)activities $200 one time Leasing companypayments
    41. 41. 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?
    42. 42. 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
    43. 43. Thought experiment• Time to doublings for monthly revenues• Key questions: – When will I get to $100k/month in revenues? – When will I get to $1M/month in revenues? – What assumptions about my business am I making when I reach these milestones?
    44. 44. Reading For Next Week• Startup Owners Manual – pages 176-179 partners 257-270 and 429-459
    45. 45. Optical EquipmentRevenue Model Example
    46. 46. Academia Payment Flow activity payment Component Phi Optics vendorsQPI info & price Buys QPI device funds grant/contract request for equipment University Grant Agencies Researcher Business Industry Contracts Services applies for grants/contracts
    47. 47. Bio-Pharma Payment Flow activity payment Component Phi Optics vendors QPI specs + price Includes equipment in the budget Buys QPI device Purchasing CTO Researcher Dept. VP for R&D Justifies need for equipment
    48. 48. OEM Payment Flow activity payment Equipment Phi Optics suppliersQPI specs + price+ SOW Allocates funds in the Funds SOW budget Pays royalties/sub- licensing/other recurring fees Product Dev Accounting CTO Engineers + VP for R&D Dept. Business Dev ($) + Legal Dept (royalties) Justifies QPI integration in OEM system Suggests co-development deal
    49. 49. Nitrate SensorRevenue Model Example
    50. 50. Product Money OEM Water Data only Large farm Small farmUSDA/EPA
    51. 51. Product Money OEM Nutrient Data Large farmUs Small farm USDA/EPA Product sales
    52. 52. Product Money OEM Nutrient Data Large farmUs Small farm USDA/EPA Licensing/sales
    53. 53. Product Money OEM Nutrient Data Large farmUs Small farm USDA/EPA Independent of licensing decision
    54. 54. Using $1000 per sensor (2x cost) puts us ~$350 more expensive than current commercialnitrate sensors. We’re including pH, moisture, and conductivity, though.Incentives: Best case scenario $45.89/acre Worst case: $9.65/acre or state dependent25% 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
    55. 55. Using $1000 per sensor (2x cost) puts us ~$350 more expensive than current commercialnitrate sensors. We’re including pH, moisture, and conductivity, though.Incentives: Best case scenario $45.89/acre Worst case: $9.65/acre or state dependent25% 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
    56. 56. Bio-Based Chemical Intermediates Revenue Model Example
    57. 57. Revenue model: Hypothesis Here’s what we hypothesized… Biomass supplier Biomass 15 c/lb Biomass Range 5-20c/lb Monomer manufacturer Monomer ? Detergent alcohols 80c/lbDistributor Surfactant Formulation ? formulator Formulated Surfactant 90c/lb Surfactant Surfactant 100 c/lbDecision user Formulated Detergent 100c/lbMakers Consumer facing Detergent 200 c/lb company 10% Surfactant in Detergent Consumer Market Pull Product (Sustainability agenda)
    58. 58. 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
    59. 59. Revenue model: Result 1 Financial metrics Ethanol DMF Lactic Bi-functional fatty acid Scale (T/day) 500,0001b/da 600,000 300,000 y lb/day lb/dayFeedstock 15 c/lb 19 c/lb 16 c/lbProcessing 2 c/lb 26 c/lb 25 c/lbCapital 1 c/lb 2 c/lb 41 c/lbOther 3 c/lb 15 c/lb 39 c/lbMSP (c/lb) 21 c/lb 62 c/lb 120 c/lb
    60. 60. Revenue model: Result 1 Financial metrics Ethanol DMF Lactic Bi-functional fatty acid Scale (T/day) 500,0001b/da 600,000 300,000 y lb/day lb/dayFeedstock 15 c/lb 19 c/lb 16 c/lbProcessing 2 c/lb 26 c/lb 25 c/lbCapital 1 c/lb 2 c/lb 41 c/lbOther 3 c/lb 15 c/lb 39 c/lbMSP (c/lb) 21 c/lb 62 c/lb 120 c/lb
    61. 61. Revenue model: Result 1 Financial metrics Ethanol DMF Lactic Bi-functional fatty acid Scale (T/day) 500,0001b/da 600,000 300,000 y lb/day lb/dayFeedstock 15 c/lb 19 c/lb 16 c/lbProcessing 2 c/lb 26 c/lb 25 c/lbCapital 1 c/lb 2 c/lb 41 c/lbOther 3 c/lb 15 c/lb 39 c/lbMSP (c/lb) 21 c/lb 62 c/lb 120 c/lb
    62. 62. Revenue model: Result 1 Financial metrics Ethanol DMF Lactic Bi-functional fatty acid Scale (T/day) 500,0001b/da 600,000 300,000 ? y lb/day lb/dayFeedstock 15 c/lb 19 c/lb 16 c/lb 15 c/lbProcessing 2 c/lb 26 c/lb 25 c/lb ?Capital 1 c/lb 2 c/lb 41 c/lb ?Other 3 c/lb 15 c/lb 39 c/lb ?MSP (c/lb) 21 c/lb 62 c/lb 120 c/lb < 100 c/lb Less than 100 c/lb is achievable when: 1. Large reactor with 500,000 lb/day capacity 2. Optimized fermentation and processing costs
    63. 63. Revenue model: Result 2 Payment Flow Biomass supplier Biomass 15 c/lb Biomass Range 5-20c/lb Monomer manufacturer Monomer 80 c/lb Detergent alcohols 80c/lbDistributor Surfactant Formulation 90 c/lb formulator Formulated Surfactant 90c/lb Surfactant Surfactant 100 c/lbDecision user Formulated Detergent 100c/lbMakers Consumer facing Detergent 200 c/lb company 10% Surfactant in Detergent Consumer Market Pull Product (Sustainability agenda) Disposal Regulations Waste
    64. 64. Payment Flows Example
    65. 65. 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
    66. 66. Medical DevicePricing Example
    67. 67. GrapheneRevenue Model Example
    68. 68. Payment flow Researchers Add value More workCurrent TEM Distributorsgrid provider Graphene Frontiers Material supplier
    69. 69. Payment flow Electronic User DistributorsE-reader manufacturer Parts suppliers Flexible display Graphene Frontiers manufacturer Parts suppliers Material Research, cost supplier
    70. 70. Direct Cost Estimates: Scale Matters• Cost per in2 – 1” Furnace = $.80• Cost per in2 – 2” Furnace = $.45• Cost per in2 – 4” Furnace = $.20If we can move to N (replacing Ar, key direct cost driver)• Cost per in2 – 1” Furnace = $.50• Cost per in2 – 2” Furnace = $.25• Cost per in2 – 4” Furnace = $.10“Holy Grail”: 4” or larger continuous production w/NitrogenCost per in2 – 4” Furnace, Batch/Continuous = … $.05
    71. 71. SensorPricing Tactics Example
    72. 72. Understand Economics of Plant + Sensors Industrial PlantsUnderstand Economics of Technology Supplier Plant #1 Plant #2 Plant #3 Technology SupplierWho does this?
    73. 73. 75 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
    74. 74. Soft product launch projected for Q1-Q2 2012 General launch projected for Q4 2012Diaphragm Membrane Membrane Header $2,500 $270 $10,600 Year Type % Revenue [/year] 1 Innovators (US) 2.5 $271,500 Operating costs for 1st year projected to be $350,000 2 Early Adopters 16 $15,040,000 3 Early Majority 50 $47,000,000 4 Late Majority 84 $78,960,000 Full Penetration 100 $94,000,000 76
    75. 75. Medical DeviceRevenue Model Example
    76. 76. What we make Device cost (one time) ~$2000Dental DentistOptics Disposables ~$2.50 per patient
    77. 77. What the dentist normally makes $250 Insurance Membership $250 Co-pay Dentist Patient Equipment / Variable CostsNote: Assumes 50/50 copay-insurance split
    78. 78. What we’d add for the dentist Device creates $250 additional Insurance periodontal procedures Device cost (one time) Membership ~$2000 $250 Co-pay Dental Dentist Patient Optics Disposables ~$2.50 per patient Equipment / Variable CostsNote: Assumes 50/50 copay-insurance split
    79. 79. Farm Nitrate SensorRevenue Model Example
    80. 80. Economics of TSP OperationIncentives: Best case scenario $45.89/acre Worst case: $9.65/acre or state dependent 25% cost coverage Install sensors, provide service 400 acres, 4 soil Us Pay for 2-3 year contract service monthly types: 8 sensors Small farm $3860 for 400 acre Average $10.40 in N- nutrient management fertilizer lost to groundwater per acre $1K/sensor less incentive = $4140 to USDA/EPA recover in contract
    81. 81. Economics of TSP OperationIncentives: Best case scenario $45.89/acre Worst case: $9.65/acre or state dependent 25% cost coverage Install sensors, provide service 400 acres, 4 soil Us Pay for 2-3 year contract service monthly types: 8 sensors Small farm Onion Case Study (44K acres): $3860 for 400 acre Cost: DAP - $700/ton + $25/a nutrient management Rate: 280lb/a for 400a farm $1K/sensor less = $39K incentive = $4140 to USDA/EPA recover in contract 30% Improvement: $13K saved Charge: $6K/season = $660K/yr contract revenue
    82. 82. Biofactories for Therapeutics Revenue Model Example
    83. 83. Revenue Model = money = relationship = information = AAT Patient Large Pharma Private Payor Employer Government PayorWholesalers Hospital/Clinic Government Physicians Taxpayer Pulmonary Function Lab INFLUENCER
    84. 84. Optics Design CompanyRevenue Model Example
    85. 85. ™ 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 87
    86. 86. Complex Sensor Networks Revenue Model Example
    87. 87. Revenue Model and CustomerSET Sensor Node Product Acquisition Middleware and Reusable Software OEM HW components Subsystems ($100 COGS)SET’s price $400 Year 1: Year 2: Year 3: Year 4: Year 5: (3 Customers) (10 Customers) (30 Customers) (100 Customers) (200 Customers) 1K nodes 5K nodes 30K nodes 200K nodes 400K nodes $400K $2M $12M $80M $160M First target customers Leverage our partners’ existing customers
    88. 88. Healthcare SoftwareRevenue Model Example
    89. 89. Revenue Model Health Healthcare Patient Data Information Providers ExchangesTailored Messaging Portal $$$for + Patient Outcomes Patient Data Patient Analytics $$$ Resources/To Health ols Patient Profile Insights Patient
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