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: Practices and Approaches
32 ratings
University of Illinois at Urbana-Champaign
32 ratings
Curso 6 de 7 em Specialization Innovation: From Creativity to Entrepreneurship
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Module 2: Financial Planning
This module focuses on laying the financial foundation for a new startup company. It starts with discussions of revenue models and pricing strategies for bringing new products or services to the market, and continues with lessons on preparing and presenting financial projections.
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Thomas E. ParkinsonVisiting Professor
University of Illinois College of Business
I'm Tom Parkinson. Welcome to Entrepreneurship
two: Practices and approaches.
So 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 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 is 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 lots of different revenue models to choose from.
You could sell physical products for a specific price,
transferring ownership of that product in exchange for a one-time payment.
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 or 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 monthly or annual payments.
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 could introduce them to potential customers and charge them a referral fee.
Or you could charge both buyers and sellers a fee for
accessing a marketplace that you have built for them.
And then there are even freemium models, where you offer your product 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
a 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 also 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 one-time sale?
Are you better off with a steady stream of small sales to loyal customers?
Along those lines, what's the nature of
the relationship 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?
Finally, do your customers have preconceived notions about
how they'd like to purchase and pay for your product and service?
Getting the answer to this question is part of
the customer discovery process, so ask them.
The answers to these questions and others 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 much 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 some 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 newspaper is 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 get both sides of that market to pay
you or would it be better off if you provided 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.
They're the product that's being sold to the advertisers.
Let's also focus a little 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 could 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.
This is like a subscription to an online news service.
You could also 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 is an example of this.
Your goal must be to convert as many of
your free users into paying customers as quickly as possible.
Most of the time, these conversion rates are going to be pretty low.
According to Tech Crunch,
the average is between 2 and 4%.
Whatever revenue model you choose,
you should develop 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 acquire each month
will continue to be customers next month or next year?
What percentage 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 for you.
And finally, you want to carefully monitor
your revenue and your sales and marketing efforts
to stay on top of your customer lifetime value and your customer acquisition cost.
We'll talk about these again when we discuss financial modeling and projections.
Customer lifetime value is the amount of profit that
an average customer can be expected to create for your business over time,
taking into consideration your revenue model,
repeat purchases and subscription renewals
and the length of time that they remain as customers without churning.
I'm on the board of a company that sells real estate photography to real estate agents.
For every new customer,
we track the number of times they purchase photography packages from us each year,
the price they pay for each package,
our profit margin on each package and how long they remain as customers.
This is the lifetime value of a new customer.
We also track the amount that we spend on sales and marketing and the number of
new customers we acquire to determine our average customer acquisition cost.
So long as the lifetime value is greater than what we paid to acquire that customer,
we have a viable business model.
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