The document outlines an agenda for a workshop on customer development and business models, including sessions on developing a value proposition, identifying customer segments, creating a business model canvas, developing a customer discovery action plan, and discussing customer relationships, revenue streams, and the customer development manifesto. Homework assignments involve updating the business model canvas and developing a customer discovery action plan.

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?

7. © 2012 Steve Blank

8. Who Are Our
Customers and How
Do We Reach Them

9. Physical versus Virtual Channels

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

12. Web Channels
12

13. Physical Channels
13

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

25. Book Publishing
Channel Example

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

30. Medical Device
Channel Example

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

36. Dental Product
Channel Example

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

39. Medical Device
Channel Example 2

40. •
•
•
•
•
•

42. Dental Product 2
Channel Example

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

46. Online Rental
Channel Example

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

48. Dental Product 3
Channel Example

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

51. Channel Example

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

53. Channel Example

54. Travel Industry
Channel Example

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

77. Web/Mobile Products– Keep Customers

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

94. Ag Robot
Customer Relationships Example

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

96. Medical Device
Customer Relationships Example

98. Key Opinion
Leaders (KOLs)

99. Key Opinion
Leaders (KOLs)

100. Key Opinion
Leaders (KOLs)

101. Key Opinion
Leaders (KOLs)

102. Key Opinion
Leaders (KOLs)

103. Key Opinion
Leaders (KOLs)

105. Housing App
Customer Relationship Example

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

110. Online Dating
Customer Relationships Example

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

116. Online Sales
Customer Relationships Example

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

118. Mobile App
Customer Relationships Example

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

125. AdWords Testing

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

130. Customer Relationships Example

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

133. Medical Device
Customer Relationships Example

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

151. Single versus
Multi-sided Markets

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

159. Resegmented Market Revenue
Forecast

160. Common categories
of Web/Mobile revenue models

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

170. Revenue Model Summary

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?

174. Optical Equipment
Revenue Model Example

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

178. Nitrate Sensor
Revenue Model Example

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

193. Payment Flows Example

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

195. Medical Device
Pricing Example

198. Graphene
Revenue Model Example

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

202. Sensor
Pricing Tactics Example

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

206. Medical Device
Revenue Model Example

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

215. Optics Design Company
Revenue Model Example

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

219. Healthcare Software
Revenue Model Example

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

236. Single versus
Multi-sided Markets

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

244. Resegmented Market Revenue
Forecast

245. Common categories
of Web/Mobile revenue models

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

255. Revenue Model Summary

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?

259. Optical Equipment
Revenue Model Example

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

263. Nitrate Sensor
Revenue Model Example

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

269. 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

270. Bio-Based Chemical Intermediates
Revenue Model Example

271. 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)

272. 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

273. 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

274. 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

275. 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

276. 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

277. 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

278. Payment Flows Example

279. 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

280. Medical Device
Pricing Example

283. Graphene
Revenue Model Example

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

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

286. 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

287. Sensor
Pricing Tactics Example

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

289. 290
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

290. 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
291

291. Medical Device
Revenue Model Example

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

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

294. 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

295. Farm Nitrate Sensor
Revenue Model Example

296. 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

297. 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

298. Biofactories for Therapeutics
Revenue Model Example

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

300. Optics Design Company
Revenue Model Example

301. ™
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 302

302. Complex Sensor Networks
Revenue Model Example

303. 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

304. Healthcare Software
Revenue Model Example

305. 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

306. The Lean LaunchPad
Lecture 7: Partners
Who are your Partners and Suppliers?
Version 6/13/12

307. Key Partners
Who are your Partners and Suppliers?

308. © 2012 Steve Blank

309. What defines a “Partner?”
• Shared economics
• Mutual success / failure
• Co-development/invention
• Common customer
But remember - you’re a startup

310. Why Have Partners?
● Faster time to market
● Broader product offering
● More efficient use of capital
● Unique customer knowledge or expertise
● Access to new markets
311

311. Types of Partners
312

312. Partners – Strategic Alliances
• Reduce the list of things your startup needs to build or provide
to offer a complete product or service.
• Use partners to build the “whole product”
• using 3rd parties to provide a customer with a complete solution
• complement your core product with other products or services
• Training, installation, service, etc
Example:
In 1996, Starbucks partnered with Pepsico to bottle, distribute and
sell the popular coffee-based drink, Frappacino
313

313. Partners – Joint Business Development
• Joint promotion of complementary products
• Share advertising, marketing, and sales programs
• One may be the dominant player
Example:
Intel offered advertising fees to PC Vendors

314. Startup mistake
Strategic alliances and joint partnerships
Not needed for Earlyvangelists
Are needed for Mainstream customers
Usually fail
315

315. Partners – Coopetition
• Joint promotion of competitive products
• Competitors might join together in programs to grow
awareness of their industry
• Tradeshows
• Industry Associations
Example:
Automotive Suppliers form the Automotive Industry Action Group (AIAG) - 900 members
316

316. Partners – Key Suppliers
• Outsource suppliers
• Backoffice, supply chain, manufacturing
• Direct suppliers
• Components, raw materials, etc.
Example:
Apple builds the iPhone from multiple suppliers
317

317. Traffic Partners – Virtual Channels
• Long-term agreements with other companies
• deliver long-term, predictable levels of customers
• “Cross referral” or swapping basis
• Paid on a per-referral basis
• Partners drive traffic using text-links, with onsite promotions, and with
ads on the referring site
• Partners sometimes exchange email lists
http://medical-tools.com/dental/

318. Partner Risks
319

319. Partnership Disaster: Boeing
Collaborative
Looked great
on paper.
Worst
business
decision of
the 21st
century
320

320. Managing partners - Risks
• Impendence mismatch
• Longest of partners schedule becomes your longest item
• No clear ownership of customer
• Products lack vision – shared product design
• Different underlying objectives in relationship
• Churn in partners strategy or personnel
• IP issues
• Difficult to unwind or end

321. Should I take an investment from a
Large Company?
• They are interested in their bottom line, not yours
• Their objectives are not to make you a large company
• Who’s the sponsor? What’s the motivation?
• Needs to come from the business side
• Not the venture side
•Try to get sales deals not investment
• Or try to offer warrants based on sales success

322. Startup Partner Strategies
• Don’t confuse partners for Earlyvangelists vs. mainstream
• Don’t confuse big company partnering with startup strategy
• Find the one that gives you an unfair advantage
• Recognize you don’t matter to a large partner
323

323. Catalysts
Partner Examples
324

324. Thru-Pore Partners:
Technologies
Hypothesis and Experiments
Catalyst
Companies
Research Catalysts, Inc.
Contract
Manufacturers
Distributors
T3

325. Materials Coating
Partner Examples
326

330. Molecular Diagnostics
Partner Examples
331

331. Partners
Back End Front End
Sample Prep Dx Test Company
(not for RUO)
Hospitals
Chip
Manufacturers
LiquiLume Clinical Labs
Packaging
Reagents Doctors
(IDT, Fisher)
OEMs Distributors
Research Labs
(Fisher)
Shippers (UPS,
FedEx)

332. Back-End Partners
Type Examples Benefit Risk / Need
Chip HTE Labs Make optofluidic chips (key High / Critical
manufacturer element of technology)
Packaging ? Keep device costs low Low / Essential
OEMs Laser or detector Parts needed to build Low, Med /
manufacturers complete instrument Essential
Reagents IDT, Fisher Provide custom probes and Med / Essential
Supplier control targets.
Sample Prep. Qiagen Partner for validation of Low / Nice
Instrument input target samples

333. Front-End Partners
Type Examples Benefit Risk / Need
Distributor Fisher Sell chips, reagents Low / Not critical
for RUO
Research labs UCSF oncologists, Will validate technology; Low / Critical
Stanford MDx Lab, publish; develop assays during phase I
UCSF Micro. Lab
Dx test Genentech; Possibly unique test on Low / Synergistic
company Companion Dx w unique platform, partner
pharma and biotechs; develops assay
Specialty Dx test cos. Strategic alliance
Clinical labs Quest, LabCorp Help develop CLIA-waived Med / Crucial
application; 510(k); clinical during phase II
trials

334. Complex Sensor Networks
Partner Examples
335

335. Universe of Partners
Sensor device/network co’s Embedded platform makers
SET
Application specialists

336. Potential Partnerships
Sensor device/network co’s Embedded platform makers
SET
Application specialists

337. Medical Device
Partner Examples

342. The Lean LaunchPad
Lecture 8:
Resources, Activities & Costs
Version 6/22/12

343. Key Activities
What’s Most Important for the Business?

344. © 2012 Steve Blank

345. Key Resources
What’s Are Your Most Important Assets?

347. Cost Structure
What are the Costs and Expenses

348. © 2012 Steve Blank

349. How You Make Money
<

350. Key Resources

351. Four Critical Resources
• Physical
• Financial
• Human
• Intellectual

352. Physical Resources
• company facilities
– office space, company location
• product/services
– supply of silicon wafers or iron ore, or
thousands of feet of warehouse space?
• Many physical goods are capital intensive

353. Financial Resources
• Friends and Family
• Crowdfunding
• Angels
• Venture Capital
• Corporate partners
• Others: SBA or SBIR grants
• Lease-lines
• Factoring
• Vendor-financing

354. Human Resources
• qualified employees
• mentors, teachers, coaches, advisors

355. Mentors, Teachers, Coaches
• Mentors, teachers, coaches advance your
personal career
– If you want to learn a specific subject find a teacher
– If you want to hone specific skills or reach an exact
goal hire a coach
– If you want to get smarter and better over your career
find someone who cares about you enough to be a
mentor

356. Advisors
• Advisors are people you need to help advance
your company’s success
– Founders fail when they believe their visions are facts
– Listening to experienced advice can help you sort
through whether your vision is a hallucination
– Getting an advisory board (by expanding your circle
of accumulated wisdom past their investors) is so
important that it’s an explicit step in the Customer
Development process

357. Qualified Employees/Culture
• Are the difference between a good idea that
never went anywhere and a billion dollar firm

359. MBA295F
Customer Development
36

360. Executive Traits by Stage
Entrepreneurial- Mission-Oriented Process-Managed
Driven Learning and Management Execution and Growth
Discovery
Personal Superstar Leader Manager of plans,
Contribution goals, process, and
personnel
Time Commitment 24/7 As needed Long term 9 to 5
Planning Opportunistic and Mission- and goal- Process-, and goal-
agile driven driven
Process Hates and eliminates As needed, driven Implements and uses
by mission
Management Style Autocratic, star Distributed to May be bureaucratic
system departments
Span of Control Hands-on Mission-driven, Distributed down the
synchronized organization
Focus High and passionate Mission Execution
vision
Uncertainty/Chaos Brings order out of Focuses on fast Focuses on
chaos response repeatability

361. Executive Traits by Stage

362. Executive Traits by Stage

363. Executive Traits by Stage

364. Intellectual Property

365. Trademark protects branding & marks
• Trademark gives you the right to prevent others from
using “confusingly similar” marks and logos
• Trademark protection lasts as long as you use the mark
• The more you use the mark, the stronger your protection
• Trademark registration is optional, but has significant
advantages if approved
• Country by country

366. Copyright protects creative
works of authorship
• Copyright gives right to prevent others from copying,
distributing or making derivatives of your work
– Protects “expressions” of ideas but does not protect the
underlying ideas
• (Way) more than just technology:
– songs, books, movies, photos, etc.
• Copyright protection lasts practically forever
• Copyright does not prevent independent development
• Registration is optional, but is required to sue for
infringement

367. Trade Secrets
• Information that is kept secret and has economic
value to the business
• Coke recipe, customer lists, product road maps.
• No registration required
• Can last for as long as you take reasonable
steps to keep confidential

368. Contract
• Protection agreed to by contract
• No registration process
• You have whatever protection is defined in the contract
(e.g., NDA gives you certain rights to protection of your
confidential information)
• The protection lasts for the time period defined in the
contract

369. Patents
• A government granted monopoly
– prevents others from making, using or selling your invention
– Even if the other’s infringement was innocent or accidental
• Invention must be non-obvious
• Protection lasts typically for 15-20 years
• Application and examination is required
– Typical cost for application and exam is $10-30k
– Typical time for application and exam is 1-4 years
• Must file in U.S. within one year of sale, offer for sale,
public disclosure or public use
• Provisional application alternative

370. What Can be Patented?
• Just about anything . . .
– Circuits, hardware
– Software, applied algorithms
– Formulas, designs
– User interfaces
– Applications, systems
– Business processes (sometimes)
• But not these . . .
– Scientific principles
– Pure mathematical algorithms
• And, pending Supreme Court Case raises concerns regarding
patentability of “methods” inventions

371. Costs
Metrics that Matter

372. Search vs. Execution Metrics
• Existing companies execute plans
• Startups search for them
• Income Statement, Balance Sheet, etc are
execution documents
• You first need to derive the metrics that matter

373. Metrics That Matter
• Value proposition: product cost, mkt size/share, competition?
• Customer Relationships: customer acquisition costs, conversion
rates, lifetime value?
• Market Type: revenue curves
• Operating Costs: basic operating costs of the business?
• Channel: Channel margin, promotion, shelf-space charges?
• Revenue Streams: average selling price, # of customers/year,
achievable revenue?
• Burn Rate: per month? When will the company run out of cash?

374. Life Science
Intellectual Property Example

375. Intellectual Property
Does Y Does Y Will they Y
Harvard Harvard license it
own it? want it? to us?
N N N
Proceed with
Extreme Pivot patent filing
 and pre-
clinical trials
N
Does Does Will they
Berkeley Y Berkeley Y license it Y
own it? want it? to us?
N N
Meeting with Berkeley Technology Transfer at LBNL (This Week)
Meeting with Harvard Technology Office (Next Week)
Class 7 - Update 3.12.2012

376. Robotic Agriculture
Resource, Activities Example

377. We’ve hit our first milestones
Mar 2013
Jun 2011 Dec 2011 Jun 2012 First unit
Technology Track
Post-processed Real-time First unit
Prototype
Image recognition image
recognition
Customer Discovery Track
Select 1st Testing agreement Customer trial and
target crop with top producer customer order
Finance Track
Friends and Seed Round Series A
Applied
family round for grants
$125 K $800 K $3-5 M
F&F Seed Series
A
Confidential

378. Medical Device
Resource, Activities & Cost Example

387. Apple
Resource, Activities & Cost Example

388. Product User Digital Hub Digital Lifestyle Digital Platform
PARTNER KEY VALUE CUSTOMER CUSTOMER
NETWORK ACTIVITIES PROPOSITON RELATIONSHIPS SEGMENTS
build whole differentiated
component High-end
devices both solutions for markets
makers, shipping & mass market
logistic suppliers h/w & s/w differentiated
customers -
professional &
consumer
KEY DISTRIBUTION
brand - Apple,
RESOURCES CHANNELS
PowerMac, online store
iMac
COST STRUCTURE REVENUE STREAMS
Computers,
Invest in
software &
R&D
services

389. Product User Digital Hub Digital Lifestyle Digital Platform
PARTNER KEY VALUE CUSTOMER CUSTOMER
NETWORK ACTIVITIES PROPOSITON RELATIONSHIPS SEGMENTS
build whole differentiated
component High-end
devices both solutions for markets
makers, shipping & mass market
logistic suppliers h/w & s/w differentiated
customers -
professional &
consumer
KEY DISTRIBUTION
brand - Apple,
RESOURCES CHANNELS
PowerMac, online store
iMac
COST STRUCTURE REVENUE STREAMS
Computers,
Invest in
software &
R&D
services

390. Product User
PARTNER KEY VALUE CUSTOMER CUSTOMER
NETWORK ACTIVITIES PROPOSITON RELATIONSHIPS SEGMENTS
component build whole High-end
makers solutions for differentiated
devices both differentiated markets mass market
h/w & s/w customers -
Shipping & professional &
logistic consumer
suppliers
KEY DISTRIBUTION
brand - Apple,
RESOURCES CHANNELS
PowerMac,
Wholesalers,
iMac
retailers, re-
sellers
innovative online store
designers
IP & patents
&
agreements
COST STRUCTURE REVENUE STREAMS
Computers,
Invest in
software &
R&D
services

391. Product User Digital Hub
PARTNER KEY VALUE CUSTOMER CUSTOMER
NETWORK ACTIVITIES PROPOSITON RELATIONSHIPS SEGMENTS
KEY DISTRIBUTION
RESOURCES CHANNELS
COST STRUCTURE REVENUE STREAMS

392. Product User Digital Hub Digital Lifestyle
PARTNER KEY VALUE CUSTOMER CUSTOMER
NETWORK ACTIVITIES PROPOSITON RELATIONSHIPS SEGMENTS
KEY DISTRIBUTION
RESOURCES CHANNELS
COST STRUCTURE REVENUE STREAMS

393. Product User Digital Hub Digital Lifestyle Digital Platform
PARTNER KEY VALUE CUSTOMER CUSTOMER
NETWORK ACTIVITIES PROPOSITON RELATIONSHIPS SEGMENTS
KEY DISTRIBUTION
RESOURCES CHANNELS
COST STRUCTURE REVENUE STREAMS

394. The Customer Development
Manifesto
15 Rules to Live By

395. A Startup is:
A temporary organization
designed to search
for a repeatable and scalable business
model

396. 1. There are No Facts Inside Your Building

397. 2. Pair Customer Development with
Agile Development

398. 3.Failure is an Integral Part of Search

399. 4. Continuous Iteration and Pivots

400. 5. No Business Plan Survives First
Contact with Customers

401. 6. Validate Hypotheses with Experiments

402. 7. Market Type Changes Everything

403. 8. Startup Metrics are Different

404. 9. Fast and Fearless Decision-Making

405. 9. Cycle Time, Speed and Tempo

406. 10. Startup Job Titles Are Very
Different from a Large Company’s

407. 11. Preserve Cash While Searching

408. 12. Spend When It’s a Repeatable Model

409. 13. Communicate and Share Learning

410. 14. Startups demand Comfort with
Chaos, Uncertainty and Change

411. 15. It’s Not A Job, It’s All About Passion