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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$financial$gain$from$its$products,$
services,$technologies,$and$solu-ons.$$
•  A$cri-cal$component$of$the$business$model$where$it$
defines$the$way$the$enterprise$makes$money$or$
establishes$economic$sustainability.$$$
•  Describes$revenue$stream$and$extrapolates$financial$
gain$from$the$value$that$it$creates$for$customers.$$
Importance$of$a$Strong$RM$

•  Creates$clear$cut$direc-on$for$financial$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$flow$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$
&$value$flow)$is$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.$
*OverNcomplica-on$creates$a$barrier$to$money$for$any$org$in$
both$the$frontNend$and$backNend!$
$
Revenue$Models$

Revenue&Types& PlaAorms&
Subscrip-on& Contract$services,$Membership,$ _aaS,$Recurring$service$
Lead$gen$
Adver-sing& Ad$network$ Ad$publishing$

Transac-on& Markup,$POS$fees,$Lis-ng$fees,$ ENcommerce,$brokerages,$


marketplaces,$brickNandNmortar,$
Commission,$RazorNblade$
produc-on$
Licensing& Content$distribu-on,$IP$ Distribu-ve$systems,$Media$
commercializa-on$passNthrough$ outlets,$Technology$usage$

Other& Tip$Jar,$RazorNblade,$
Crowdfunding,$Affiliate/Referral,$
ThirdNparty$
Subscrip-on$

Pros Cons
•  Recurring revenue •  Cash flow problems
•  Steady growth toward scale •  Conversion strategies
•  Easy to define top-line •  Underestimate churn rate
•  Inaccurate pricing strategies
Adver-sing$

Pros Cons
•  Non-solicitation •  Requires critical mass
•  3rd-party through mature networks •  Content driven & page inventory
•  Viral effects •  Viewers vs. Active User dilemma
Transac-on$

Pros Cons
•  Seasoned & Time-tested •  Lack innovation
•  Low overhead •  Easy to underestimate marketing costs
•  Clear CM for forecasting •  Dual-sided curation
Licensing$

Pros Cons
•  Accessibility to content & •  Cost & maintenance of IP
distribution channel •  Relationship intensive
•  Operational minimization •  Covenants & restrictions
•  Cost minimization •  Dependency model
•  Speed to market
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!affect!R?!
Profit$Maximiza-on$

•  Two&ways&to&maximize&profits&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$increase$customer s$
WillingnessNtoNPay$(WTP)$through$value$crea-on.$

•  Revenue$modeling$dictates$your$pricing$strategy.$
–  Helps$define$target$customers$
–  Determines$product$posi-oning$$
Customer$Value$Equa-on$
End&Customer&Value&(BP2PC)& Business&Customer&Value&(BP2PB)&
Short Term Customer Satisfaction Service Support Needs of Customer
Relevance of Tangible Attributes of Relevance of the Product/Service to the
Brand/Service to Consumer Customer s Direct Operations
Relevance of Intangible Aspects of Relevance to Helping the Customer
Brand/Service to Consumer Deliver Value to Their Customers
Customer's Feeling of Being Treated Customer's Feeling of Being Treated
With Respect With Respect
Customer's Feeling of Supporting a Helping Customer Deliver CSR Value to
Socially Responsible/Ethical Company Their Customers and Supply Chain
Quality
Value = _______
Price Tangible Costs: Monetary, Time, and Tangible Costs: Monetary, Time, and
Other Transaction Costs Other Transaction Costs
Intangible Costs/Risks: Intangible Costs/Risks:
- Social: Customer s concern about how - Reputational: Effect on Customer s
others will view him/her with your product. reputation in doing business with you.
- Psychological: Customer s concern about - Morale: Effect on your customer s company
how s/he ll think of him/herself. morale in doing business with you.
- Functional: Customer s concern as to - Functional: Your customer s concern that your
whether your product will work. product will do what you say it will do.
Defining$the$Customer$

•  Things&to&consider:&
–  What$your$users$want$and$value?$$
•  Convenience,$vanity,$support$a$cause,$fit$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$inflows$&$ou^lows$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$N$VC$
–  Ou^lows$(CapEx,$CAC,$OpEx)$vs.$Inflows$(Rev,$CLTV)$
$
CAC$vs.$CLTV$
Forecas-ng$

•  Projec-ng$revenue$is$important$(even$if$preNrev):$
1.  Manage$cash$and$burn$rate.$
2.  Determine$financing$needs$and$-me$horizons.$
3.  Conduct$sensi-vity$analysis.$
4.  Op-mize&the&revenue&model.&&
•  Methods$
–  TopNdown$
–  BofomNup$
–  Exponen-al$Smoothing$
Forecas-ng$
Forecas-ng$
Forecas-ng$
Revenue$Modeling$
How to cash in on your new idea? Start here!
Do you want the users of your product
to open-up their wallet for you?
Cool! You just
No, let's give
teleported Yes!
it for free!
yourself here!
Maybe

Of course! How Will users have to give their Do you believe other companies
can I let them personal details in order to use would have interest in targeting Check!
your product/service? your customer base?
pay otherwise?
14. Advertising
Not really...
Do you think your users could No! Ads, are
feel uncomfortable if all their It's not about the
you crazy? Advice to trusted
friends know that they use ability to pay. I'm
Obviously...
your product/service ? Do you want more than one just not sure if partner is fine!
contact moment with your
everyone will pay! 15. Affiliate/
customer? Shht... user data Referral
Not relevant Do you generate user-data
is our competitive
for my product! relevant for others?
High chance that you'll advantage!
Not
find more reasons for
necessary! Do you want to offer a 16. Data Resell
customers to pay! product/service to people No!
8. Privacy/ that can't afford it? Integrated
Anonymity
They would be Solution
Remember:
devastated if Are your users able to start Exactly! 17. Matchmaking You can only walk
over from scratch every time
their user data they use your product/service? What do you choose? An platform
Are there any complementary this road once!
was lost! integrated solution that seems
services/products to your offer Yes!
Do your users have non monetary to be your own offering or just
that your customers expect?
resources the company (or other a referral to a trusted partner?
Not relevant! Yes, that would users) normally would have to pay for?
My product is all
be useful! It's not about
they need!
the money!

Can the user receive a higher Not at all, they already 1. Early Exit
7. Loss/Aversion status by using the product? In fact, yes!
use everything they have! Does your product need a critical Is it your goal to have
Absolutely! Nope! Definitely!
amount of users to show it's value? direct revenue from this
product/service?

Don't forget Did you develop a feature/product Nope, no critical


Would the status only be relevant
to check this significantly more convenient than mass needed!
amongst the user base of your product? One Laptop Per Child Of course!
one as well! the best alternative users have?
That's how
13. Get one -
it works! 3. Barter 2.Tip jar/donation
Give one
No! Amongst everyone! That's why
No... Is the variabel cost per extra user
we make
non-existent or negligible?
software!
Seriously? We are 5. Pay-what-you-
Hell yeah! What about offering a Charity? But what if
Would users value the possibility to
box without telling not living in the want
share the product with their peers? No thanks! We do have some everyone chooses
what's inside? Middle Ages anymore!
extra costs... to use it for free?
Harder, better,
6. Vanity/
Reputation faster, stronger!
Not knowing
No, it would
Yes, they what's coming Can you think of features that only You can probably
lower the Yes!
would love it! is always kind part of your user base would pay for?
make even more
value!
of exciting! money on this! Just
10. Convenience/
Sounds like 4. Freemium
Shortcuts give it a try!
Nothing better gambling! Didn't I say I don't
want them to pay? Your journey requires
than the smell F*ck off!
a teleportation! Find
of fresh money
Hmmm... the exit...
in the morning... Making money on your product seems to be a tough one. Ever played Monopoly?
Get out of your comfort zone! It's innovate or die.
Go back to start!

Close...
11. Helping peers/ 12. Exclusivity/ but yet so far...
9. Mystery/Surprises
Gifts Limited Availability

#Awesome! You have some Would you like proof of Damn right
Do you want the user to own the
options that your users Yes! interest from your customers
might be willing to pay for.
product once they pay?
before you launch? about that!

Also offering a 23. Crowdfunding


Not service next to We will launch Crowdfunding is
nessecarely! that product? anyway! only the beginning...

What about these colours?


Go here as well!

Will the user have the Do your users want to Do you think the user might Can one product
exclusive right to use Not really! pay every time they use have trouble paying the entire Yes! be shared amongst Yes!
this product? your product/service? product at once? different users?
22. Fractional
Ownership
Yes! No! Could you introduce
Yes! consumables to be used
together with the product?
Paid! Monetization driver Free! Third party Nope! Nope!
The user = Client (How to cash in) For the user. pays the bills
No!

Always come together Always come together


Do allow Do allow
users to users to Good
spend all spend all idea!
19. Subscription their money! their money! 18. Flat rate
(time related) 20. Leasing 21. Pay-per-use 24. Add-ons (one-time-fee) 25. Razor-blade
Revenue$Mantra$

Revenue Requires Regular


Review, Revision, and Refinement.
Revenue$Model$

Jay Tsao
Mentor
Los Angeles 2015