A presentation on the costs and revenue sections of a business model canvas utilising some well known examples

1. Costs and revenue

2. The business model canvas

5. Cost Structure
• What are the most important costs in our business?
• Which resources are most expensive?
• Are any prohibitive?
• This area describes all of the costs that the business is likely to be charged:
− Cost driven
− Lean delivery such as Easy Jet / Ryan Air
− Value driven
−Some companies look in the opposite way to cost driven businesses.
−Their focus is on value creation – for example luxury hotels
There are 2 further characteristics
− Fixed Costs
− Variable costs

6. Case Study – Easy Jet
• No frills travel experience for budget travellers
• Has key resources in secondary airports which charge lower landing fees and a standardised airplane fleet
which reduces maintenance and training costs
• Utilises key activities of short turnarounds minimising the time aircraft are on the ground and not
generating revenue and direct sales allowing the bypassing of travel agent fees.
• All of this drives down costs meaning that ticket prices can be reduced

7. Case Study – Easy Jet
Short
turnaround
Standardised
maintenance
and training
Secondary
airports
Free multi
player
game
Low cost airline
structure
Collectibles
Budget
travelers
Cheap tickets
Standardised
fleet
Direct sales

8. Direct costs & Indirect Costs
Direct Costs
• An expense that can be traced directly to a
process or product.
• Direct costs (such as for labor, material, fuel or
power) vary with the rate of output but are
uniform for each unit of production
• Also called direct expense, on cost, variable
cost, or variable expense, they are grouped
under variable costs.
Indirect Costs
• Indirect costs are costs that are not directly
accountable to a cost object.
• Indirect costs may be either fixed or variable.
• Indirect costs include administration, personnel
and security costs.
• These are those costs which are not directly
related to production.
• Also called overheads and fixed costs.

9. Direct costs
What are your direct costs?
Labour?
Materials?
Sub-contract costs?

10. Indirect costs
What are your indirect costs?
Rent?
Salaries?
Marketing?

11. Overheads
(for 12 months) Staff Salaries / wages
Business Rent 0.00
Business Rates 0.00
Water Rates 0.00
Light / Heat / Power 0.00
Repairs and Renewals 0.00
Business Insurance 0.00
Travel and Vehicle
costs 0.00
Phone and Postage 0.00
Printing and
Stationery 0.00
Marketing 0.00
Professional Fees 0.00
General Expenditure 0.00
Total Overheads 0.00

12. Profit & loss
Annual
Sales Income
Sales a £0.00
Sales b £0.00
Sales c £0.00
Sales d
Total Sales Income £0.00
Direct Costs
Cost of materials £0.00
Direct wages
Subcontract charges
Packaging and carriage
Total Direct Costs £0.00
Gross Profit £0.00
% GP Margin
Overheads
Staff Salaries / wages
Business Rent 0.00
Business Rates 0.00
Water Rates 0.00
Light / Heat / Power 0.00
Repairs and Renewals 0.00
Business Insurance 0.00
Travel and Vehicle costs 0.00
Phone and Postage 0.00
Printing and Stationery 0.00
Marketing 0.00
Professional Fees 0.00
General Expenditure 0.00
Total Overheads 0.00
Net Profit / Loss £0.00

13. Revenue Streams
• For what value are our customer really willing to pay?
• How are they currently paying?
• How would they prefer to pay?
• A business usually involves one of two different types of revenue streams:
− Transaction revenues resulting from a one off sale to a customer
− Recurring revenues resulting from on going payments to deliver services or to provide post purchase support

14. Transactional
• Faster growth. Since you’re charging a one-
time fee, you can charge more, which gives you
more immediate money to invest in growth.
• Big margins. A one-time fee means greater
opportunity for increased profit margins on
each purchase than recurring revenue
• Other offerings. Being a non-recurring
business doesn’t limit you to one offering; you
can also create related offerings.
Recurring
• Predictability. People paying you now are
likely to keep paying you in the future.
• More multiples. There are more stable
metrics which makes it easier to calculate the
value of the business in multiple ways.
• Higher lifetime value. Because you’re
providing value over time, the customer will do
the same for you.

15. Revenue streams
• Different ways to generate revenue:
− Asset sale – standard product purchase model.
− Usage fee – mobile phones – the more you use something the more it costs
− Subscription – gym membership for example
− Lending / Renting – Temporarily using an asset
− Licensing – Image rights – music / sport
− Brokerage fees – Go Compare etc
− Advertising – fee generated by allowing advertising
Page

16. Case Study - Fortnite
• Fortnite is a free to play, multiplayer game
• Initially charged £40 for the game however
switched its revenue stream to in app
purchases
• This has meant huge growth in the number of
players without impacting on revenue

17. Case Study - Fortnite
Attract free
players
Conversion
to in app
purchases
Millions of
players
Free multi
player
game
Cost of free game In app purchases
Cost of collectables
Collectibles
Mass market
players
Free to play

18. Can you identify at least two ways
of generating revenue for your
business?

19. Awareness
Interest
Desire
Action
Attract
Engage
Nurture
Engage
Customer acquisition
ModernVsTraditional
Customer doesn’t
know me
Customer has
heard of me
Customer starts to
listen
Customer buys

20. Close
Nurture
Engage
Attract
How long
will this
take?
What media
will you use?

21. More importantly, how much does
it cost?

22. Customer Lifetime value
• Customer lifetime value is a measure of customer profitability over time
• CLV can be defined as “a measure of a customer’s aggregate profit to the firm over the total time
that the customer deals with the firm”
• CLV is calculated as a single financial number, which summarizes the net profit/loss position of the
customer’s total relationship with the firm
• It is calculated on per customer basis, but is more usually determined for an the average customer
within a particular market segment

23. Why is customer lifetime value important?
The best customers might be
– Brand loyal
– Don’t “shop around”
– Rich
– Different from the
average
20% of our customers
account for 80% of our
sales
Customer acquisition costs
keep rising
It is often more cost effective to
spend money retaining existing
customers than acquiring new
customers

24. Calculating customer lifetime value: 2 challenges
• We need to be able to attribute profit to a customer over his / her entire lifetime
− Profit across sales channels (on and offline)
− Single customer view?
− Web analytics packages visit rather than customer-centric
• We need to be able to forecast lifetime value based on past behaviour to date
− Need a model that matches the data (reasonably well)
− Needs to be done fast if used to acquire customers
− Limited data set
− Prediction is an art, not a science

25. Customer lifetime value
THE FORMULA
Annual profit contribution per customer X
Average number of years that they remain a customer
Less the initial cost of customer acquisition
WHAT INFORMATION DO WE NEED?
1. Initial cost of customer acquisition
2. Annual profit contribution per customer
3. Average customer retention rate

26. Customer lifetime value

27. Pricing methods
Pricing
methods
Cost
MarketingCompetition

28. Pricing Checklist
Know your real costs
for each product /
service
Work out the
minimum at which its
worth selling at all
Find out from your
customers what each
product or service is
worth to them
Check your
competitors prices
If their price is lower
than your worth
selling at price
THINK AGAIN
Be prepared to make
range and pricing
changes
Keep checking that
you price is right

29. Profit and loss
Annual
Sales Income
Sales a £0.00
Sales b £0.00
Sales c £0.00
Sales d
Total Sales Income £0.00
Direct Costs
Cost of materials £0.00
Direct wages
Subcontract charges
Packaging and carriage
Total Direct Costs £0.00
Gross Profit £0.00
% GP Margin
Overheads
Staff Salaries / wages
Business Rent 0.00
Business Rates 0.00
Water Rates 0.00
Light / Heat / Power 0.00
Repairs and Renewals 0.00
Business Insurance 0.00
Travel and Vehicle costs 0.00
Phone and Postage 0.00
Printing and Stationery 0.00
Marketing 0.00
Professional Fees 0.00
General Expenditure 0.00
Total Overheads 0.00
Net Profit / Loss £0.00

30. Cashflow
Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10Month 11Month 12
Income
Sales a
Sales b
Total Income £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00
Expenditure
Materials
Subcontract Charges
Packaging and Carriage
Wages
Business Rent
Business Rates
Water Rates
Light / Heat / Power
Repairs and Renewals
Business Insurance
Travel and Vehicle costs
Printing and Stationery
Marketing
Professional Fees
General Expenditure
Total Expenditure £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00
Monthly net inflow / outflow £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00
Cumulative monthly flow £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00

31. Final questions to ask

32. Revenue streams
• We can get customers to pay a
specific price for our value
propositions
• We can generate sufficient revenue
Profit
• We can generate more revenues
than costs in order to make a profit
Cost structure
• We can manage our costs and keep
them under control
Is it viable?

33. Any questions?