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An important part of our business is model is how we make and spend money. In this video, we look at our revenue model and how we plan on pricing our product or service. We also round things off with a high-level view of our costs.
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We're almost done.
0:00
At this point, we've walked through our
value proposition, the different types of
0:01
customers we can have, the ways in which
we will communicate with them, and
0:05
the activities, resources, and partners we
need to make this model a success.
0:10
But there are still two very important
pieces left to cover.
0:15
How do we plan on making money and what is
all this going to cost us?
0:19
Let's start with revenue.
0:23
In a business model, revenue [SOUND] is
what we collectively call the different
0:26
[SOUND] cash streams generated [SOUND] by
each customer segment.
0:29
[SOUND] If you have more than one customer
segment,
0:32
you can have more than one type of revenue
stream.
0:36
Each stream can have different pricing
structures as well to
0:39
maximize the revenue you get out of each
segment.
0:42
There are two main types of revenue
streams.
0:45
[SOUND] Transaction revenues resulting
from the one-time sale of
0:48
your value proposition.
0:52
When following a transaction revenue
model, you [SOUND] can generate revenue
0:53
through the sale of an asset, which is a
one-time purchase of a computer or car, or
0:57
like when Microsoft sells you a copy of
the latest version of Windows.
1:01
You can also do it through brokerage fees,
derived through intermediation,
1:05
such as when a credit card company takes a
percentage of a sale for
1:10
facilitating payment, and finally, through
advertising.
1:13
The second type is through [SOUND]
recurring revenue streams obtained by
1:17
continuously delivering your value
proposition.
1:21
There are multiple ways to generate a
recurring revenue stream.
1:25
The most common is through [SOUND]
subscription fees whereby you
1:28
sell continuous access to a service for a
fee.
1:32
You can also do it by a [SOUND] usage fee
where customers pay for
1:35
the portion of the service used.
1:39
An example of this is the
telecommunication industry,
1:41
where you pay for the amount of minutes
used.
1:44
The more minutes you use, the more you
pay.
1:47
Finally, you can generate recurring
revenue by [SOUND] lending, renting or
1:50
leasing a product or service.
1:55
Under this revenue stream, you temporarily
grant a customer full rights to
1:57
use your product or service in return for
a fee.
2:01
We're all familiar with this concept.
2:05
Most of us pay or have paid rent to live
in an apartment.
2:07
Your chosen revenue model is closely tied
to the pricing structure you implement.
2:12
The right pricing structure, paired with a
revenue model, can make or
2:17
break your company.
2:21
Let's start off by examining two main
pricing categories, fixed and
2:22
dynamic pricing.
2:27
Fixed pricing [SOUND] is a pricing
methodology based on
2:29
static predefined variables.
2:33
What does this mean?
2:35
Well, the price is not subject to any sort
of bargaining.
2:37
Fixed pricing can be further broken down
into different types.
2:40
First off, we have a [SOUND] list price.
2:45
Under a list price, you offer a fixed
price for each individual product or
2:47
service that you sell.
2:52
Then you have product [SOUND] feature
dependent.
2:55
With product feature dependent pricing,
the price you set depends on the number or
2:57
quality of value proposition features.
3:02
This is a means of setting different price
points for variations in the same product.
3:05
Treehouse is a great example of this type
of pricing scheme.
3:10
We have two pricing options, basic and
pro, where the higher-priced offering
3:14
gives you access to more specialized types
of video content.
3:18
The difficulty in product feature
dependent pricing is that you have to
3:22
clearly distinguish and
3:27
communicate the differences between the
product to justify the different prices.
3:28
[SOUND] Then we have customer segment
dependent pricing structures.
3:33
Sometimes, the price you charge can depend
on the different types of
3:37
customer segments you have.
3:41
Different customer segments pay different
prices for
3:43
either different or identical products.
3:46
The simplest example of this is movie
theater pricing.
3:49
In most countries, students or children
pay half of what adults pay for
3:52
the exact same product.
3:57
Finally, you have volume [SOUND] dependent
pricing.
4:00
The more of your product or
4:02
service your customers buy, the lower the
per unit price.
4:04
This is very common with software licenses
since there's no additional costs to
4:08
producing more of the software once it's
written.
4:13
The second main type of pricing is dynamic
pricing.
4:16
[SOUND] Under dynamic pricing,
4:18
your price constantly changes based on
certain market variables.
4:20
Let's look at some of the different types
of dynamic pricing.
4:24
When negotiating, [SOUND] two or
4:28
more parties barter with each other to
arrive at a desired price.
4:30
The price depends on the negotiating power
and skill of the parties involved.
4:34
Buying a car is a great example of when
negotiating comes in to play.
4:39
The salesperson tries to assess your upper
limit and
4:44
arrive at a price while you continuously
try to undercut him.
4:46
Under a yield [SOUND] management pricing
scheme, you take inventory and
4:51
time of purchase into account when setting
prices.
4:56
A great example of this is airline
seating.
4:59
When you look for airline tickets, the
price you're given depends on
5:02
how many seats are left on the plane and
how far ahead you purchase the ticket.
5:05
In a real [SOUND] time market,
5:11
price is established dynamically based on
supply and demand.
5:13
As more and more of the product or service
is purchased, the price is driven up.
5:16
As demand falters, the price drops back
down.
5:21
This happens daily in the stock markets.
5:24
Finally, we have [SOUND] auction pricing.
5:28
In this model,
5:30
the final prices is determined by the
outcome of competitive bidding.
5:31
I think we're all familiar with
traditional auctions, but
5:35
a perfect example of auctions on the web
is eBay,
5:38
where we try and outbid each other to buy
all sorts of crazy things.
5:41
The idea is that you first identify which
type of
5:45
pricing mechanism pairs well with your
value proposition.
5:48
Once you pick a pricing mechanism,
5:52
then you can fine-tune your approach
depending on your product.
5:54
If you have one standard product, a list
price might be best.
5:58
If you have slightly different products,
6:02
then a product feature dependent model
might work better.
6:04
In any case, rather than just picking a
pricing model out of thin air, you can
6:07
go down a list and identify what matches
perfectly with your business model.
6:11
The right pricing model,
6:17
implemented with the right revenue stream,
can lead to great results.
6:18
Now, all that being said, this model helps
you identify what revenue and
6:22
pricing model you want to implement.
6:26
Coming up with the actual price you want
to charge is a bit trickier.
6:29
Like most apps in the industry, I'm going
to implement a recurring revenue model.
6:33
I have a few different choices on the
pricing mechanism I want to implement.
6:38
Looking at Asana, they don't have a
product feature dependent model
6:42
because everyone uses the exact same
product.
6:46
What you pay for is the number of users.
6:48
So in a sense, it's volume-based.
6:51
One of my main issues with other software
is that it seemed
6:54
overly complicated because everyone used
the same product.
6:57
One of my options would be to offer two
versions of the product
7:00
where the second tier is priced higher and
you get more power features.
7:03
Basically, we would implement a product
feature dependent mechanism.
7:07
Remember, we're just going off of instinct
here.
7:12
Later on, when we validate our
assumptions,
7:14
we may have to change the way that we
charge people.
7:17
Use the revenue model that best highlights
your value proposition.
7:20
Since I feel that users only pay for the
features they want, I think I'm
7:23
highlighting value best by offering a
product feature dependent model.
7:27
Play around and talk to people until you
find what works for you.
7:31
The price you implement must not only take
into account your value proposition and
7:36
customer segments, but also accommodate
the cost of doing business,
7:40
highlight the value your product delivers,
respect the practices and
7:44
expectations of your market, and keep an
eye on competitive prices.
7:47
Like everything else in our business
model, our revenue model assumptions may
7:52
not be right the first time, so don't be
afraid to iterate on this as well.
7:56
Before we conclude our discussion on
revenue, let's recap.
8:01
[SOUND] There are two main types of
revenue streams.
8:04
Transaction [SOUND] revenues,
8:07
resulting from the one-time sale of your
value proposition.
8:08
[SOUND] Or recurring revenue streams
obtained by
8:11
continuously delivering your value
proposition.
8:14
Your chosen revenue model is closely tied
to the pricing structure you implement.
8:17
[SOUND] There are two main pricing
categories, fixed [SOUND] and
8:22
dynamic [SOUND] pricing.
8:25
Fixed pricing is a pricing [SOUND]
methodology based on static,
8:26
pre-defined variables.
8:30
Fixed pricing can be further broken down
into different types.
8:32
List pricing, [SOUND] product feature
[SOUND] dependent,
8:36
customer [SOUND] segment dependent, and
volume [SOUND] dependent pricing.
8:39
The second main type of pricing is dynamic
pricing.
8:42
Under [SOUND] dynamic pricing,
8:46
your price constantly changes based on
certain market variables.
8:48
Dynamic pricing is seen in instances of
[SOUND] negotiation,
8:51
[SOUND] yield management, [SOUND] real
time markets and [SOUND] auctions.
8:55
The last section of our business model is
costs.
8:59
A company's cost structure building block
describes the major costs incurred to
9:02
make the business model a success.
9:07
Once you have defined the rest of the
Business Model Canvas and
9:10
have explored your key resources,
activities, and partners, it should be
9:13
easy to come up with a cost associated
with making this business model work.
9:17
Cost structures in a business model fall
under two categories.
9:22
Business models that are [SOUND] cost
driven and
9:26
those that are [SOUND] value driven.
9:29
In a cost driven business model,
9:30
the focus is on minimizing costs as much
as possible.
9:32
This is reflected in the value
proposition,
9:36
where low cost is heavily emphasized.
9:38
These businesses also use lean strategies
Like automating significant parts of
9:41
their business model and outsourcing a
large portion of activities to partners.
9:46
Companies like Walmart exemplify a cost
driven business model.
9:51
In a value driven business model,
9:55
the main focus is on value creation,
rather than cost.
9:57
This type of business model is accompanied
by personalized customer relationships and
10:01
premium value propositions that highlight
the value you gain,
10:05
rather than any cost savings.
10:09
For my business, since human capital is
the bulk of our key resources,
10:11
the majority of our costs will be
salaries.
10:16
The rest of our cost structure will be
dependent on the partners we choose to
10:18
outsource some of our activities to.
10:22
Since these costs are proportional to our
user base,
10:25
it isn't as big a concern as the cost of
hiring a great team.
10:28
Now, if it feels like I'm glossing over
costs here,
10:32
it's because I intentionally am.
10:35
It's hard to get a bearing on your costs
early on, but at least we have
10:37
a good picture of what our largest cost
areas are and how we can plan for that.
10:41
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