1. NSF I-Corps
The Lean LaunchPad
Lecture 6: Revenue Streams
How Do You Make Money?
Version 7/22/12

2. Revenue Streams
How do you Make Money?

3. © 2012 Steve Blank

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. The Two Key Questions
• What’s my revenue Streams?
• Within the revenue streams– how do I
price the product?

6. Revenue Stream =
the strategy the company uses to
generate cash from each customer
segment

7. Pricing Model =
the tactics you use to set the price in
each customer segment

8. Revenue Stream
The strategy

9. What value are customers willing
to pay for?

10. How do customers pay For
products today?

11. How are they currently paying?

12. Revenue Stream Choices
Channel
Web Physical
Bits
Product
Physical

13. Revenue Stream Choices
Channel
Web Physical
 Direct Sales
Bits  Products
 Subscription
Product  Add-on services
 Upsell/Next Sell
Physical  Referrals
 Leasing

14. Revenue Stream Choices
Channel
Web Physical
 Direct Sales  Direct Sales
 Products  Products
Bits  License
 Subscription  Subscription
 Upsell/Next Sell  Add-on services
Product
 Ancillary Sales:  Upsell/Next Sell
• Referral revenue  Referrals
Physical • Affiliate revenue
• E-mail list rentals  Leasing
• Back-end offers

15. Common categories
of revenue models

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. “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. Asset Sale
• Sale of ownership right to a physical
product

19. Usage Fee
• Usage of service. Fee is proportional to
the usage of the service.

20. Subscription Fee
• Fee for continuous access to a service

21. Renting
• Fee for temporary access to a good or service

22. Licensing
• Fee for use of some IP (including software)

23. Intermediation Fee
• Often found in marketplaces of various types,
a fee for bringing together two or more
parties involved in a transaction

24. Advertising
• Fee paid by brands and companies to get in
front of potential customers

25. Each Revenue Stream may have different pricing tactics

26. Pricing Model
the tactics

27. Two Types of Pricing
 Cost + markup
Fixed  Value priced (by customer segment
Pricing or features)
 Volume priced
 Negotiation
Dynamic  Yield Management
Pricing
 Real-time market
 Auctions

28. Common Startup Mistake
 Cost + markup
Lets Price on Cost  Typically not a strategic way to price
 Driven by internal economics and not
customer insight

29. Common Startup Mistake
 Cost + markup
Lets 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, new
Price on Value efficiency created, etc.)
 Customers don’t necessarily feel
that they want to pay this way

30. Market-Type Affects Pricing
• Pure competition
Nature of
Existing 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. Single versus
Multi-sided Markets

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. “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?

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. Market Type and Revenue

36. New Market
Revenue Forecast
New Market Sales Curve

37. Existing Market Revenue Forecast
Existing Market

38. Resegmented Market Revenue
Forecast

39. Revenue Model Summary

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 company
payments

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. 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. 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. Reading For Next Week
• Startup Owners Manual
– pages 176-179 partners 257-270 and 429-459

45. Optical Equipment
Revenue Model Example

46. 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

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. 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

49. Nitrate Sensor
Revenue Model Example

50. Product
Money
OEM Water
Data
only
Large farm
Small farm
USDA/EPA

51. Product
Money
OEM Nutrient
Data
Large farm
Us
Small farm
USDA/EPA
Product sales

52. Product
Money
OEM Nutrient
Data
Large farm
Us
Small farm
USDA/EPA
Licensing/sales

53. Product
Money
OEM Nutrient
Data
Large farm
Us
Small farm
USDA/EPA
Independent of
licensing decision

54. 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

55. 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

56. Bio-Based Chemical Intermediates
Revenue Model Example

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/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)

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. 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

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/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

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/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

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/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/lb is achievable when:
1. Large reactor with 500,000 lb/day capacity
2. Optimized fermentation and processing costs

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/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

64. Payment Flows Example

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. Medical Device
Pricing Example

69. Graphene
Revenue Model Example

70. Payment flow
Researchers
Add value More work
Current TEM Distributors
grid provider
Graphene Frontiers
Material supplier

71. Payment flow
Electronic User
Distributors
E-reader manufacturer Parts suppliers
Flexible display Graphene Frontiers
manufacturer
Parts suppliers Material Research, cost
supplier

72. 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

73. Sensor
Pricing Tactics Example

74. Understand Economics of Plant + Sensors Industrial Plants
Understand Economics of Technology Supplier Plant #1
Plant #2
Plant #3
Technology Supplier
Who does this?

75. 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

76. 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
76

77. Medical Device
Revenue Model Example

78. What we make
Device cost
(one time)
~$2000
Dental
Dentist
Optics
Disposables
~$2.50 per patient

79. What the dentist normally makes
$250
Insurance
Membership
$250
Co-pay
Dentist Patient
Equipment / Variable Costs
Note: Assumes 50/50 copay-insurance split

80. 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

81. Farm Nitrate Sensor
Revenue Model Example

82. 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

83. 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

84. Biofactories for Therapeutics
Revenue Model Example

85. Revenue Model
= money = relationship
= information = AAT
Patient
Large Pharma Private Payor
Employer
Government Payor
Wholesalers
Hospital/Clinic
Government
Physicians
Taxpayer
Pulmonary Function Lab INFLUENCER

86. Optics Design Company
Revenue Model Example

87. ™
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

88. Complex Sensor Networks
Revenue Model Example

89. 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

90. Healthcare Software
Revenue Model Example

91. 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