The Lean LaunchPad

Session 5: Revenue Model and PricingSession 5: Revenue Model and Pricing

Professors Steve Blank,Jon Feiber, Jim Hornthal, Oren Jacob

https://sites.google.com/site/xmba296t/

XMBA296T

2images by JAM

customer segments

key partners

cost structure

revenue streams

channels

customer relationships

key activities

key resources

value proposition

REVENUE STREAMS

what are customers really willing to pay for? how? are you generating transactional or recurring

revenues?

Test Hypotheses:• Problem• Customer• User• Payer

Test Hypotheses:• Demand Creation

Test Hypotheses:• Channel

Test Hypotheses:• Product• Market Type• Competitive

Test Hypotheses:• Pricing Model / Pricing

Test Hypotheses:• Size of Opportunity/Market• Validate Business Model

Test Hypotheses:• Channel• (Customer)• (Problem) Customer

Development Team

Agile Development

Two types of companies

• Single-sided markets that care about revenues

• Multi-sided markets that care about users first, revenues second

“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?

“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?

The Two Key Questions

• What’s my revenue model?• Within the revenue model – how do I price

the product?

Revenue Model =

the strategy the company uses to generate cash from each customer

segment

Pricing Model =

the tactics you use to set the price in each customer segment

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Web/Mobile Revenue Models

“Direct” revenue models

• Sales: Product, app, or service sales

• Subscriptions: SAAS, games, monthly subscription

• Freemium: use the product for free: upsell/conversion

• Pay-per-use: revenue on a “per use” basis

• Virtual goods: selling virtual goods

• Advertising sales: unique and/or large audience

“Ancillary” revenue models

• Referral revenue: pay for referring traffic/customers to other web or mobile sites or products.

• Affiliate revenue: finder’s fees/commissions from other sites for directing customers to make purchases at the affiliated site

• E-mail list rentals: rent your customer email lists to advertiser partners

• Back-end offers: add-on sales items from other companies as part of their registration or purchase confirmation processes, or “sell” their existing traffic to a company that strives to monetize it and share the resulting revenu3

Physical Revenue Models

Asset Sale

• Sale of ownership right to a physical product

Usage Fee

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

Subscription Fee

• Fee for continuous access to a service

Renting

• Fee for temporary access to a good or service

Licensing

• Fee for use of some IP (including software)

Intermediation Fee

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

Advertising

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

Pricing

Other words we use in the place of price

• Fee• Commission• Subscription• Toll• Interest• Rent• Tax• Shipping

Common approaches to pricing

Cost + markup Typically not a strategic way to

price Driven by internal economics and

not customer insight

Cost based

Value based

Based on buyer’s perception of value (e.g. time saved, new efficiency created, etc.)

Customers don’t necessarily feel that they want to pay this way

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

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

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?

Competition as an influence

• Pure competition• Oligopoloy• Monopoloy

Nature of Market

How they will react?

What is their product? What are their costs and prices? “What pricing will make them

feel the worst?”

Other Revenue Issues

• Channel issues– Return rights? – Channel discounts? SPIFs?

• Market Type?

New Market Revenue Forecast

New Market Sales Curve

Existing Market Revenue Forecast

Existing Market

Resegmented Market Revenue Forecast

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?

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