Software Entrepreneurship Project – Revenue streams

Georg Singer

Georg dot singer ät ut dot ee

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Basics

• What is revenue?

• What is a revenue model?

• Who of you has a revenue model in place?

• What is important when thinking about a revenue model?

What revenue streams?

What revenue streams?

What revenue streams?

What revenue streams?

What revenue streams?

Revenue and pricing brief

1. How many of our product will we sell?

2. What‘s the revenue model?

3. How will we charge?

4. Does this add up to a business that‘s worth doing? (App based businesses?)

Steve Blank: The Startup Owner‘s Manual

Revenue Model

Strategy to generate cash from each customer segment

•Web/Mobile

•Physical

Web/Mobile Revenue Models

Different ways to classify RM

• One-off vs. recurring

• Direct vs. indirect

• B2B, B2C, C2C

“Direct” revenue models

• Sales (etailers) : Product, app, or service sales

• Subscriptions: SaaS, games, monthly subscription

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

• Advertising sales: unique and/or large audience

• Pay-per-use: revenue on a “per use” basis (also utility or on-demand model)

• Transaction brokerage: Small fee per transation for bringing buyers and sellers together and facilitate transactions, (Paypal, Ebay, Amazon, Fortumo)

• Virtual goods: selling virtual goods e.g. in games

• Infomediary model – Exploit data about consumers and their “consumption” habits (Nielsen, Netratings, FB?)

“Ancillary” revenue models

• Affiliate revenue: finder’s fees/commissions from other

sites for directing customers to make purchases at the affiliated site

• Back-end/complementary offers: add-on sales

items from other companies as part of their registration or purchase processes

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

Selected revenue models in more detail

Sales/Merchant model (B2C)

• Online version of traditional retailer

• Revenue model: Sales

• Variations: – Virtual merchant: Amazon.com

– Bricks-and-clicks (click-and-mortar): Barnes&Noble Books

– Catalog merchant: Otto.com

– Bit-Vendor: Apple iTunes Music store, e-book vendors, mobile apps sellers

Slide 2-16

Source: http://digitalenterprise.org/models/models.html

Subscription model (B2C) • Users are charged a periodic (daily, monthly or annual)

fee to subscribe to a service. – sites to combine free content with "premium" (i.e.,

subscriber- or member-only) content. – Subscription fees are incurred irrespective of actual usage

rates. – Subscription and advertising models are frequently

combined. • Content services: Netflix, Listen.com

• Internet service providers: offer network connectivity

• Professional social networks (membership feeds): xing.com, linkedin.com

• Newspaper subscriptions: ft.com (financial times), wsj.com (wall street journal)….

Slide 2-17 Source: http://digitalenterprise.org/models/models.html

Freemium model =Free + Premium

Fred Wilson 2006

“Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc., then offer premium priced value added services or an enhanced version of your service to your customer base.”

Requirements for Freemium

• Incremental cost of a new customer is negligible

• SaaS = cost close to 0

• Significant cannibalization is avoided

Restrictions

• Feature limited (e.g. a "lite" version of software, such as Skype, three-way video calling only in paid version)

• Capacity limited (e.g. Dropbox only up to 5 GB) • Seat limited (e.g. only usable on one computer) • Customer class limited (e.g. only educational users) • Effort limited (e.g. all or most features are available for free,

but require extended unlocking which can be shortcut for a fee, such as some software for virtual printing on PDF)

• Support limited (e.g. users of a "lite" version do not receive telephone and/or email support)

• Time or bandwidth limited (e.g. Spotify, which limits the time free users can use the service for, resetting each month or “seven day free trial with your credit card”)

http://en.wikipedia.org/wiki/Freemium

Strengths and Weaknesses of Freemium

• Strengths

– Accelerates trial and adoption at relatively low cost

– Terrific as launch strategy

• Weaknesses

– Free-to-pay is sexy but dangerous

– Get tons of users fast

– If the do not convert and pay you are dead

– Mapping profitable conversion of free to paid users crucial

Different kinds of „free“

http://www.freemium.org/wp-content/uploads/2008/10/4kinds1.jpg

Advertising based model (two-sided market)

• Extension of traditional media broadcast model – Core service free – Sell advertising space

• Variations: – Portal: Yahoo.com – Classifieds: Monster.com, Craigslist – Query based paid placement: Google, Yahoo paid

search – Content targeted advertising: Google, Facebook,

Android app ads – ….

Slide 2-25

Source: http://digitalenterprise.org/models/models.html

Pay-per-use (Utility) model • The utility or "on-demand" model is based on

metering usage, or a "pay as you go" approach.

• Unlike subscriber services, metered services are based on actual usage

Slide 2-26 Source: http://digitalenterprise.org/models/models.html

Brokerage Model (B2B, B2C, C2C)

• Facilitate online transactions for consumers and businesses

– Primary value proposition—saving time and money

• Revenue model:

– Transaction fees

• Examples

– Auction Broker: ebay.com – Transaction broker: Paypal – Distributor: Alibaba.com (b2b) – Virtual marketplace – Amazon.com, Apple app store, Android

market

Slide 2-27

Source: http://digitalenterprise.org/models/models.html

Non Web/mobile

• Asset sale

– Sale of ownership right to a physical product

• Usage fee

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

• Renting – Fee for temporary access

• Subscription - e.g. x videos per month

• Questionnaire time!!!

Pricing

Pricing model

Tactics to set the price in each customer segment

Web/mobile pricing

• In web/mobile channels, pricing is very transparent and almost always easily found online

• Need to monitor competitive pricing

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

http://www.slideshare.net/sblank/lecture-6-revenue-model-120411

• What price tag to put on a service that helps streamline the process of getting divorced in the US?

• What pricing approach do you choose?

Example

• Crosby puts the average divorce at around $27,000 in legal fees; Wevorce charges a flat rate of $7,500. She imagines a Wevorce office for every 400,000 Americans and estimates $1 billion in annual revenue.

http://www.nytimes.com/2013/05/05/magazine/y-combinator-silicon-valleys-start-up-machine.html?pagewanted=3&_r=0&ref=magazine

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

http://www.slideshare.net/sblank/lecture-6-revenue-model-120411

Pricing Choices (2)

• Portfolio pricing. Mix of high markups and some with low,

depending on competition, lock-in, value delivered, and loyal customers; different prices for B2B or B2C e.g. Dropbox

• “Razor/razor blade” model: part of the product is free or

inexpensive; yet it pulls through repeat, highly profitable purchases on an ongoing basis (printer cartridges, razors…)

• 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

http://www.slideshare.net/sblank/lecture-6-revenue-model-120411

Price and quality (mass vs. Niche)

http://liveseysolar.com/wp-content/uploads/2011/09/Price-v-Quality1.png

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? (Economies of scale, mass markets vs niche markets, quality vs. price..)

“What pricing will make them feel the worst?”

http://www.slideshare.net/sblank/lecture-6-revenue-model-120411

New Market Revenue Forecast

New Market Sales Curve

http://www.slideshare.net/sblank/lecture-6-revenue-model-120411

Existing Market Revenue Forecast

Existing Market

http://www.slideshare.net/sblank/lecture-6-revenue-model-120411

Resegmented Market Revenue Forecast

http://www.slideshare.net/sblank/lecture-6-revenue-model-120411

Team Deliverable for Next Week

• What’s your revenue model? • How will you price your products? • How do competitors price? • Summarized in a 3 Minute PowerPoint

Presentation

Acknowledgements and further

reading

I have used the following sources and materials to

prepare this presentation:

• http://digitalenterprise.org/models/models.html

• http://www.slideshare.net/sblank/lecture-6-

revenue-model-120411

• Steve Blank: The Startup Owner‘s Manual

A big thank you to the according authors!

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