1. The Lean LaunchPad
Lecture 6: Revenue Streams
Steve Blank
Jon Feiber
John Burke
Ann Miura-Ko
Jerry Engel
Jim Hornthal
Oren Jacob
2. key activities value customer
proposition relationships
key customer
partners segments
cost revenue
structure key streams
resources channels
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images by JAM
3. REVENUE STREAMS
what are customers really willing to pay for? how?
are you generating transactional or recurring revenues?
4. REVENUE MODEL =
the strategy the company uses to generate
cash from each customer segment
5. How Many Will You Sell?
• What was the Market size and estimate of market share?,
– Translate into the anticipated number of customers (as in 10% of a million-
person market=100,000 customers)
• 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?
6. Where is the money coming from?
Revenue Model Choices
Channel
Web Physical
Direct Sales
Products
Direct Sales
Subscription
Bits Products
Add-on services
Subscription
Upsell/Next Sell
Upsell/Next Sell
Referrals
Product
Ancillary Sales: Direct Sales
•Referral revenue Products
•Affiliate revenue
•E-mail list rentals
Service
Physical
•Back-end offers Upsell/Next Sell
Referrals
Leasing
8. “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
9. “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
24. Other words we use in the place of price
• Fee
• Commission
• Subscription
• Toll
• Interest
• Rent
• Tax
• Shipping
25. 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
26. Pricing Choices (1)
• Cost-based pricing: based on a multiple of actual
product cost. Typically priced for maximum
revenue/profit versus volume
• Value pricing:based on the value delivered by the
product rather than the cost itself
• Competitive pricing:positions the product vs. others in
its competitive set, typically in existing markets
• Volume pricing:designed to encourage multiple
purchases or users
27. Pricing Choices (2)
• Portfolio pricing. Mix of high markups and some with
low, depending on competition, lock-in, value delivered,
and loyal customers
• “Razor/razor blade” model:part of the product is
free or inexpensive; yet it pulls through repeat, highly
profitable purchases on an ongoing basis
• Subscription: while now thought of a software
strategy, the “Book of the Month Club” pioneered this for
physical products
• Leasing: lowers the entry cost for customers. Provides
constant earnings over a period of years
28. 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?
29. Competition as an influence
• Pure competition
Nature of
• Oligopoloy
Market
• Monopoloy
What is their product?
How they will
react? What are their costs and prices?
“What pricing will make them
feel the worst?”
30. Multi-side Markets and Revenue
• Single-sided markets that care about
revenues
• Web-based Multi-sided markets may care
about users first, revenues second
31. “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?
32. “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?
36. Other Revenue Issues
• Channel issues
– Return rights?
– Channel discounts? SPIFs?
• Market Type affects Revenue Streams
• Demand curve affects Revenue
• Consider Lifetime Value
37. Other 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?
• What constitutes cost for the company?
• What are the key financials metrics for your
business model?
• What are the risks involved?
38. Start with Key Assumptions
• 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
• Product development year 8
– 4 people in the beginning Financing
– $2 million
Series A – $3 M
– 1.5 years to develop (for BP)
Series B – $10 M
Price per package: $150
COGS Operating Expenses Profit
$60 per unit $90 per unit
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39. Does it add up?
• Is the revenue adequate to cover costs in the short term;
• Are you confident the revenue will grow materially if not
dramatically over time; and
• Does the profitability get better as the revenues get
bigger?
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40. Team Deliverable for Next Week
• What’s your revenue model?
• How will you price your products?
• Draw the diagram of payment flows
• What are your key financial metrics?
• Test pricing 100 web customers 10/15 non web?
• How do competitors price?
• Assemble a rough income statement
• Summarized in a 5 Minute PowerPoint Presentation