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

7. Web/Mobile Revenue Models

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

10. Physical Revenue Models

11. Asset Sale
• Sale of ownership right to a physical
product

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

13. Subscription Fee
• Fee for continuous access to a service

14. Renting
• Fee for temporary access to a good or service

15. Licensing
• Fee for use of some IP (including software)

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

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

18. PRICING MODEL =
the tactics you use to set the price in each
customer segment

19. How do we price the product?
Pricing Model Choices

20. How do we price the product?
Pricing Models - Physical
• Product-based pricing
• Competitive pricing
• Volume pricing
• Value pricing
• Portfolio pricing
• The “razor/razor blade” model
• Subscription
• Time/Hourly Billing
• Leasing
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21. How do we price the product?
Pricing Models – Web/Mobile/Cloud
• Product-based pricing
• Subscriptions
• Freemium
• Pay-per-use
• Virtual goods
• Advertising sales
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22. Payment Flows
• Draw the diagram
• Put in Numbers

23. Pricing

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?

33. New Market Revenue Forecast
New Market Sales Curve

34. Existing Market Revenue Forecast
Existing Market

35. Resegmented Market Revenue
Forecast

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