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Revenue

Models
The Founder Ins-tute

Revenue Model
Jay Tsao
Mentor
Los Angeles 2015

Revenue Model
Revenue model is a system by which a business
mone-zes or derives nancial gain from its products,
services, technologies, and solu-ons.
A cri-cal component of the business model where it
denes the way the enterprise makes money or
establishes economic sustainability.
Describes revenue stream and extrapolates nancial
gain from the value that it creates for customers.

Importance of a Strong RM
Creates clear cut direc-on for nancial sustainability.
Sharpens business objec-ves and direc-on.
Determine business viability, strength of business
model, and pivot points.
Examine and understand unit economics.
Derives valua-on, cash ow forecast and ROI metrics
for internal and external (investor) purposes.

Revenue Model Rules


Shortest distance between points is a straight
line.
Ensure the path between you and your customers (money
& value ow) is as fric%onless as possible.

KISS Keep It Simple Stupid


Make sure revenue genera-on methods are simple and
easy to understand by you and, more importantly,
investors.
*Over-complica-on creates a barrier to money for any org in
both the front-end and back-end!

Revenue Models
Subscrip-on

Revenue Types

PlaAorms

Contract services, Membership,

_aaS, Recurring service

Lead gen
Adver-sing

Ad network

Ad publishing

Transac-on

Markup, POS fees, Lis-ng fees,

E-commerce, brokerages,
marketplaces, brick-and-mortar,
produc-on

Commission, Razor-blade
Licensing

Content distribu-on, IP
commercializa-on pass-through

Other

Tip Jar, Razor-blade,


Crowdfunding, Aliate/Referral,
Third-party

Distribu-ve systems, Media


outlets, Technology usage

Subscrip-on

Pros
Recurring revenue
Steady growth toward scale
Easy to define top-line

Cons
Cash flow problems
Conversion strategies
Underestimate churn rate
Inaccurate pricing strategies

Adver-sing

Pros
Non-solicitation
3rd-party through mature networks
Viral effects

Cons
Requires critical mass
Content driven & page inventory
Viewers vs. Active User dilemma

Transac-on

Pros
Seasoned & Time-tested
Low overhead
Clear CM for forecasting

Cons
Lack innovation
Easy to underestimate marketing costs
Dual-sided curation

Licensing

Pros
Accessibility to content &
distribution channel
Operational minimization
Cost minimization
Speed to market

Cons
Cost & maintenance of IP
Relationship intensive
Covenants & restrictions
Dependency model

Revenue Drivers

R = C x P x T x F
Customers (Number of Customers)
Price (Sales Price)
Transac-on (Avg. Volume or Transac-on Size)
Frequency (Rate of Purchase)

What strategies do you derive and implement to


impact these variables to aect R?

Prot Maximiza-on
Two ways to maximize prots according to
fundamental economic theory:
Lower cost (FC, VC, MC)
Increase price (TR, MR)

Revenue Model
Many ways of cost control and managing unit
economics.
Trick is to understand and increase customers
Willingness-to-Pay (WTP) through value crea-on.
Revenue modeling dictates your pricing strategy.
Helps dene target customers
Determines product posi-oning

Customer Value Equa-on


End Customer Value (B-2-C)

Business Customer Value (B-2-B)

Short Term Customer Satisfaction

Service Support Needs of Customer

Relevance of Tangible Attributes of


Brand/Service to Consumer

Relevance of the Product/Service to the


Customers Direct Operations

Relevance of Intangible Aspects of


Brand/Service to Consumer

Relevance to Helping the Customer


Deliver Value to Their Customers

Customer's Feeling of Being Treated


With Respect

Customer's Feeling of Being Treated


With Respect

Customer's Feeling of Supporting a


Socially Responsible/Ethical Company

Helping Customer Deliver CSR Value to


Their Customers and Supply Chain

Quality

Value = _______
Price

Tangible Costs: Monetary, Time, and


Other Transaction Costs

Tangible Costs: Monetary, Time, and


Other Transaction Costs

Intangible Costs/Risks:
-Social: Customers concern about how
others will view him/her with your product.
-Psychological: Customers concern about
how s/hell think of him/herself.
-Functional: Customers concern as to
whether your product will work.

Intangible Costs/Risks:
-Reputational: Effect on Customers
reputation in doing business with you.
-Morale: Effect on your customers company
morale in doing business with you.
-Functional: Your customers concern that your
product will do what you say it will do.

Dening the Customer


Things to consider:
What your users want and value?
Convenience, vanity, support a cause, t in, exclusivity

What problem or pain point are you solving?


How do you heighten the perceived value to increase their
willingness to pay?
What are the switching costs (Dropbox)

Must align your value proposi-on, competencies


and customer segment with the revenue model(s).

Unit Economics
Analysis of the inows & ou^lows of a business unit
to understand contribu-on margins and ROI metrics.

(BE) Breakeven = (FC) Fixed Cost .


(SP) Sales Price (VC) Variable Cost
Contribu-on Margin (MC) = SP - VC
Ou^lows (CapEx, CAC, OpEx) vs. Inows (Rev, CLTV)

CAC vs. CLTV

Forecas-ng
Projec-ng revenue is important (even if pre-rev):
1.
2.
3.
4.

Manage cash and burn rate.


Determine nancing needs and -me horizons.
Conduct sensi-vity analysis.
Op-mize the revenue model.

Methods
Top-down
Bofom-up
Exponen-al Smoothing

Forecas-ng

Forecas-ng

Forecas-ng

Revenue Modeling
Start here!

How to cash in on your new idea?


Do you want the users of your product
to open-up their wallet for you?

Cool! You just

No, let's give

Yes!

teleported

it for free!

yourself here!

Maybe
Of course! How
can I let them

pay otherwise?

Obviously...

Do you think your users could


feel uncomfortable if all their
friends know that they use
your product/service ?

No!

for my product!

devastated if

their user data


was lost!

7. Loss/Aversion

Don't forget

to check this
one as well!

That's how
it works!

Definitely!

Is it your goal to have


direct revenue from this
product/service?

mass needed!

One Laptop Per Child

Of course!
2.Tip jar/donation

3. Barter

That's why

Is the variabel cost per extra user


non-existent or negligible?

What about offering a


box without telling
what's inside?

we make

software!

Seriously? We are

Charity?

No thanks!

not living in the

Middle Ages anymore!

5. Pay-what-youwant

We do have some

But what if

everyone chooses

to use it for free?

extra costs...

Harder, better,

faster, stronger!

Not knowing

what's coming

lower the

Can you think of features that only


part of your user base would pay for?

is always kind
of exciting!

10. Convenience/
Shortcuts

than the smell

money on this! Just


give it a try!

Your journey requires

want them to pay?


Hmmm...
Making money on your product seems to be a tough one.
Get out of your comfort zone! It's innovate or die.

in the morning...

make even more

Didn't I say I don't

F*ck off!

of fresh money

You can probably

Yes!
4. Freemium

Sounds like
gambling!

11. Helping peers/


Gifts

the money!

Does your product need a critical


amount of users to show it's value?
Nope, no critical

Did you develop a feature/product


significantly more convenient than
the best alternative users have?

No, it would
value!

this road once!

1. Early Exit

In fact, yes!

use everything they have!

You can only walk

It's not about

they need!

Not at all, they already

Hell yeah!

Yes!

Remember:

17. Matchmaking
platform

What do you choose? An


integrated solution that seems
to be your own offering or just
a referral to a trusted partner?

My product is all

be useful!

6. Vanity/
Reputation

would love it!

Integrated

Are there any complementary


services/products to your offer
that your customers expect?

No...

Nothing better

16. Data Resell

No!

Do your users have non monetary


resources the company (or other
users) normally would have to pay for?

Yes, that would

No! Amongst everyone!

Yes, they

15. Affiliate/
Referral

advantage!

Solution

13. Get one Give one

Would users value the possibility to


share the product with their peers?

partner is fine!

is our competitive

Exactly!

Nope!

Would the status only be relevant


amongst the user base of your product?

Do you want to offer a


product/service to people
that can't afford it?

Are your users able to start


over from scratch every time
they use your product/service?

Can the user receive a higher


status by using the product?

Absolutely!

Advice to trusted

Shht... user data

Do you generate user-data


relevant for others?

necessary!

Not relevant!

Ads, are

you crazy?

everyone will pay!

Not

customers to pay!

They would be

14. Advertising

Not really...

just not sure if

Do you want more than one


contact moment with your
customer?

find more reasons for


8. Privacy/
Anonymity

It's not about the

Check!

ability to pay. I'm

Not relevant

High chance that you'll

Do you believe other companies


would have interest in targeting
your customer base?

Will users have to give their


personal details in order to use
your product/service?

a teleportation! Find
the exit...

Ever played Monopoly?


Go back to start!

Close...

12. Exclusivity/
Limited Availability

but yet so far...

9. Mystery/Surprises

#Awesome! You have some


options that your users
might be willing to pay for.

Do you want the user to own the


product once they pay?

Not

nessecarely!

What about these colours?

Yes!

Would you like proof of


interest from your customers
before you launch?

Also offering a

Damn right

about that!
23. Crowdfunding

We will launch

service next to

Crowdfunding is

anyway!

that product?

only the beginning...

Go here as well!
Will the user have the
exclusive right to use
this product?

Not really!

Do your users want to


pay every time they use
your product/service?

Do you think the user might


have trouble paying the entire
product at once?

Yes!

No!

Yes!

Can one product


be shared amongst
different users?

Yes!
22. Fractional
Ownership

Paid!
The user = Client

Monetization driver
(How to cash in)

Free!
For the user.

Third party
pays the bills

Nope!

Could you introduce


consumables to be used
together with the product?

Yes!

Nope!
No!

Always come together

Always come together

Do allow

Do allow

users to

users to

spend all

19. Subscription
(time related)

20. Leasing

21. Pay-per-use

their money!

Good

spend all

24. Add-ons

their money!

idea!

18. Flat rate


(one-time-fee)

25. Razor-blade

Revenue Mantra

Revenue Requires Regular


Review, Revision, and Refinement.

Revenue Model
Jay Tsao
Mentor
Los Angeles 2015