This course builds on previous concepts and outlines strategies and tactics for forming, financing and launching a new venture. Topics to be addressed will include building the new venture’s initial management team, identifying and reaching out to early customers, developing financial plans, raising startup and initial growth financing, and preparing for and managing rapid growth. Course objectives: Entrepreneurial Team Building: Develop an understanding of the what is required in a new venture Initial Go-to-Market Strategy: Develop a plan to identify and approach your first customers Financial Forecasting: Building financial projections for the new venture Entrepreneurial Financing: Raising Equity Capital for the new venture Growing the Business: Monitoring the new venture’s health and scalability
Revenue Models
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Do curso por University of Illinois at Urbana-Champaign
Entrepreneurship II: Preparing for Launch
35 classificações
University of Illinois at Urbana-Champaign
35 classificações
Curso 6 de 7 em Specialization Innovation: From Creativity to Entrepreneurship
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Module 1: Earning Revenue
In this module, we will discuss go-to-market strategies.
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Thomas E. ParkinsonVisiting Professor
University of Illinois College of Business
How are you planning to make money?
That's a pretty fundamental question, isn't it?
In this lesson, I'm going to focus on revenue models,
what types of models exist,
and how you can try to decide which revenue model might be best for your business.
Your customers are at the center of the word cloud again for this lesson.
Your goal in selecting a revenue model is to make it as
frictionless as possible for your customers to purchase your product or service.
Your business model describes how you intend to operate your company,
what customer needs you'll be addressing,
the goods or services you'll be offering to meet those needs,
the customers you'll be targeting,
how you're going to reach them,
and what resources you'll need to have to make all of this happen.
Your revenue model as a part of that business model,
it describes how you'll be charging for your goods and
services in order to generate revenue and earn a profit.
There are many different revenue models for products and services, physical and digital.
You could sell physical products for a specific price,
transferring ownership of that product in
exchange for the onetime payment you've received.
This is the most basic of revenue models used for selling everything from shoes,
to cars, to real estate.
You could sell digital products in the same way,
like an app, an e-book, or a digital photograph.
You may not be selling the copyright to the underlying content,
but the digital product itself is transferred to its new owner who can use it,
read it, or listen to it
whenever he or she wants.
You could sell a subscription,
the right to have access to and the use of the product for
a specific period of time in exchange for a monthly or annual fee.
For physical products, this would be like leasing a car
or a storage locker,
or subscribing to a magazine or a newspaper.
For digital products, it would be like buying software as
a service or subscribing to an online newspaper.
You could provide a product or service that aggregates
many users and then charge third parties to advertise on it.
This is what Zillow does,
they provide information about homes for sale to prospective buyers and then
they sell ads to real estate brokers and agents
who want those buyers as their customers.
You could sell other company's products or services and charge them a commission,
or you can introduce them to potential customers and charge them a referral fee,
or you could charge both buyers and sellers
a fee for accessing the marketplace that you have built for them.
There are even freemium models
where you offer your products or services to your customers for free
and then try to convert some of those users to paying customers.
You could do this by offering a free trial period
with the fee kicking in after the trial period has ended,
or you could offer a basic stripped-down version of your product or service and seek to
upsell your customers by providing
extra features or converting them to the premium version.
This is by no means a complete list,
in fact entrepreneurs are inventing new revenue models all the time.
So, how do you decide on a revenue model that makes sense for your company?
The first thing you have to do is understand the nature of your value proposition.
Ask yourself if you're selling a vitamin or a painkiller.
A vitamin is something that provides a value to the customer,
but that value is not always immediate or pressing.
It's a nice to have instead of a need to have.
Your customers, many of them anyway,
could live without it.
A painkiller is something that solves an immediate and hopefully
urgent need for your customer.
They need it, and they need it now.
Ask yourself how frequently your customers will have the need
for or want to use your product or service?
Are you able to charge a high price for a onetime sale,
or are you better off with a steady stream of small sales to loyal customers?
Along those lines, what's the nature of
the relationship that you need to have with your customers?
Will they be relying on you for training,
installation, or customer support?
Will you need to fix the product for them if it breaks?
Do they want you to deliver the service with a lot of bells and whistles?
Do your customers have preconceived ideas
about how they would like to purchase and pay for your product and service?
Getting the answers to this questions is part of
the customer discovery process, so ask them.
The answers to these questions will give you a lot
of insight about revenue models that might be appropriate.
In some cases, your revenue model itself might be your competitive advantage
if you're able to make it simpler, cheaper,
or more pleasant for your customers to buy from you instead of your competitors.
Keep in mind that it may very well be possible to have
different revenue models for different customer segments.
Investors will often place a high value on companies that have recurring revenue models.
This is why software as a service companies are generally valued more
highly than software companies that sell using a traditional licensing model.
This is because recurring revenue companies can be expected to have
steadily growing and predictable revenue as they make new sales.
If the business has a bad sales month,
the ongoing revenue from its existing customer base will still be there.
A recurring revenue model can also make it easier to close sales because you're asking
customers to commit to
modest monthly payments rather than a large outlay of cash up front.
There are disadvantages as well.
Without a large upfront investment in your solution,
your customers may be less loyal.
It's easier for them to justify switching to a competitor.
It can also take longer for you to recover your costs of developing
the product, since your customers' payments will be
spread out over an extended period of time.
This might mean that you have to raise more capital early on.
I want to talk specifically about two-sided markets.
This is where the business has to bring together
two completely different customer segments to create a value proposition.
A newspaper is a two-sided market,
it has to bring together subscribers who are
interested in the content that the newspapers publishing with
advertisers who are willing to pay to have
their messages delivered to the subscribers alongside that content.
ebay has a two-sided market, or perhaps,
it's best thought of as having thousands of two-sided markets.
It brings together sellers of let's say,
Beanie Babies, with potential buyers of Beanie Babies.
If you're developing a two-sided market,
you're likely to want to have a different revenue model for each side of that market.
Can you even get both sides of that market to pay you?
Would you'd be better off if you provide your service to one market
for free in order to get rapid adoption,
and generated all of your revenue from the other market?
Think of a service like Facebook.
It has billions of users who use the service for free.
It generates the vast majority of its revenue
from advertisers who are trying to reach those users.
In this case, the users are not really customers,
their attention is the product that's being sold to the advertisers.
Let's also focus on freemium models.
If you have a digital product,
you're probably already thinking about whether a freemium model might make sense for you.
It probably does if you need to acquire a large number of users quickly
and you have a distribution channel available
that allows you to acquire these customers very cheaply.
You can make your product free for a limited period of time
and then hope to convince them of the value of the product
so that they'll convert to paying customers when the free trial period is over.
Think of a subscription to an online news service.
You could offer the product for free with a limited set
of features or for a limited number of users.
When they see the value of the product or they decide they
want their entire organization to start using it,
they would become a paying customer.
Dropbox as an example of this.
Your goal must be to convert as many of
your free users into paying customers as possible.
Most of the time these conversion rates are pretty low.
According to TechCrunch, the average is between 2% and 4%.
A freemium model might make sense for you if you need to acquire
large numbers of customers or users very quickly,
and you have some other way to monetize them or create value.
You'll have to be in a position where your
incremental cost to acquire each new customer is very low.
Whatever revenue model you choose,
you should have metrics that you can monitor to track your effectiveness.
These include sales conversion rates, such as the percentage of
qualified prospects that you contact that actually purchase,
the percentage of unique website visitors that purchase,
and the percentage of freemium users that convert to paid users.
You also need to track churn.
What percentage of the customers you acquired each
month will continue to be customers next month, or next year?
What percent of your subscribers will renew
their subscriptions rather than letting them lapse?
If you have a viral marketing strategy,
you'll want to track your viral coefficient.
That's the number of new customers that each existing customer will bring in.
Finally, you want to carefully monitor customer acquisition cost.
That's the average cost that you're incurring to add each new customer.
It's your total sales and marketing expenditures
divided by the number of new customers you obtain.
Your customer acquisition cost should be looked
at in context with the customer lifetime value.
That's the amount of profit that an average customer
can be expected to create for your business over time,
taking into consideration the revenue model,
the number of repeat purchases or subscription renewals,
and the length of time that they remain as customers without churning.
It's your price minus your cost per transaction
times the average number of times that the customer purchases from you over time.
For a subscription, it's the subscription price
minus the monthly cost of supporting the customer times
the average number of months that this customer pays for before churning.
I've told you about the real estate photography company in my portfolio.
For every new customer,
we track the number of times they purchase photography from us,
the price that they pay for each package,
our profit margin on each package, and how long they remain as customers.
This is the customer lifetime value.
As I said, customer acquisition cost and
customer lifetime value should be evaluated in context with each other.
So long as your lifetime value is greater than what you pay to acquire that customer,
you have a potentially viable business model.
If the lifetime value is a lot greater than the customer acquisition cost,
then your business model is probably scalable.
It's time to step on the gas and grow the company.
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