Class 11, Week 6 – Revenue Streams

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After 6 weeks, I wanted to meet with each team one on one to get a deeper progress report, check on the current status of the business model canvas assumptions (meaning can the company make money as it is currently positioned), and set in place a good plan for the sprint to the finish line. Rehearsal day is a short three weeks away!

I also asked for questions about accounting and finance, because Pat Jones, CFO from Petra (and formerly Hobby Lobby) is coming in to teach. Here are the questions that were posed:

  • How to keep books balanced and legal
  • Rundown of balance sheet, income statement, statement of cash flows, how they correlate
  • Taxes – How to file taxes and how to avoid personal taxes on $10k investment they got (most are LLCs)
  • Double-entry accounting intro
  • Essential guidelines on business expenses and taxes
  • How to maximize small amount of cash, leverage investors
  • W2 and 1099 employees – withholding and filing quarterly (escrow accounts?)

I had originally envisioned the teams teaching more of the classes themselves, since I believe there is no better way to learn a subject than to teach it. Ultimately I scrapped that idea. I preferred to keep the teams laser focused on their customer and product development. However, the day before the rehearsal dinner I’m going to NY to teach lean with GA and GE, so I asked the students to meet and help each other prepare. During our last pitch session I felt the teams gave each other great advice so I’m confident they will once again do so.

Present last week’s experiments

As always, the teams started the day by presenting the results of their last week’s experiments. They followed the formula of hypothesis, test, results and insights. I thought after 6 weeks of going through this process this would be second nature but the teams have varying levels of comfort with presenting their ideas in this manner. I need to think more about about how I teach the students to present their ideas and come up with new exercises to improve this ability. I rely very heavily on practice and real-time feedback and it seems more is needed.

Revenue Streams

We then discussed the next box in the business model canvas – Revenue Streams. Steve Blank defines “Revenue Model” as the strategy the company uses to generate cash from each Customer Segment. In short, it’s how the company gets paid. When devising the revenue strategy, each customer segment needs its own revenue model.

A key question that always comes up for new companies is how to price themselves. The specific dollars and cents that make up pricing is called a tactic and is different from a revenue model, which is more of a strategy for converting customer value into money. In addition, revenue streams are not income statements, balance sheets and cash flow. Those are accounting terms, and while critical for the startups health, do not describe how the company makes money.

Steve identifies a variety of types of revenue streams.

  • Asset sale – like an apple or a house (you buy it, you own it)
  • Usage fee – like amazon web services or electricity (the more you use, the more you pay)
  • Subscription – like a newspaper or SaaS (repeating fee over a set time period)
  • Renting – like hardware or houses (use it as much as you like during a set time period)
  • Licensing – like IP (you can use the IP but you don’t own it)
  • Intermediation – like ebay or airbnb (connect two sides of a market, take a transaction fee)
  • Advertising – like magazines or google (sell ads next to the primary content)

A good jumping off point for thinking about revenue streams is to ask how are customers paying for your type of product today. In some cases, you’ll want to follow the same model, since that’s what consumers are already familiar with. But disruption frequently occurs when you find a different revenue model. Zipcar started by renting by the hour, not by the day. Google charged advertisers by the click, not by the number of viewers. Amazon web services charges by usage, rather than selling hardware.

Another big question is how do you price your product – on cost or value? I think it’s always a good idea to go for value! Don’t start with how much the product costs to make. Think from the customer’s perspective and find out how much they are willing to pay for the value you bring them.

The teams then presented their current thinking on revenue streams and we closed with the presentation of new experiments for the week.

 

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Posted in Lean Startup, Startup, Testing ideas in the real world

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