“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
Each Revenue Stream may have different pricing tactics
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
Common Startup Mistake Cost + markupLets Price on Cost Typically not a strategic way to price Driven by internal economics and not customer insight
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
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?”
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” 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?
“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?
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
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?
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
Thought experiment• Time to doublings for monthly revenues• Key questions: – When will I get to $100k/month in revenues? – When will I get to $1M/month in revenues? – What assumptions about my business am I making when I reach these milestones?
Reading For Next Week• Startup Owners Manual – pages 176-179 partners 257-270 and 429-459
Academia Payment Flow activity payment Component Phi Optics vendorsQPI info & price Buys QPI device funds grant/contract request for equipment University Grant Agencies Researcher Business Industry Contracts Services applies for grants/contracts
Bio-Pharma Payment Flow activity payment Component Phi Optics vendors QPI specs + price Includes equipment in the budget Buys QPI device Purchasing CTO Researcher Dept. VP for R&D Justifies need for equipment
OEM Payment Flow activity payment Equipment Phi Optics suppliersQPI specs + price+ SOW Allocates funds in the Funds SOW budget Pays royalties/sub- licensing/other recurring fees Product Dev Accounting CTO Engineers + VP for R&D Dept. Business Dev ($) + Legal Dept (royalties) Justifies QPI integration in OEM system Suggests co-development deal
Product Money OEM Water Data only Large farm Small farmUSDA/EPA
Product Money OEM Nutrient Data Large farmUs Small farm USDA/EPA Product sales
Product Money OEM Nutrient Data Large farmUs Small farm USDA/EPA Licensing/sales
Product Money OEM Nutrient Data Large farmUs Small farm USDA/EPA Independent of licensing decision
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
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
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/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)
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
Understand Economics of Plant + Sensors Industrial PlantsUnderstand Economics of Technology Supplier Plant #1 Plant #2 Plant #3 Technology SupplierWho does this?
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
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
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
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
Biofactories for Therapeutics Revenue Model Example
Revenue Model = money = relationship = information = AAT Patient Large Pharma Private Payor Employer Government PayorWholesalers Hospital/Clinic Government Physicians Taxpayer Pulmonary Function Lab INFLUENCER
™ 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
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