Chapter 10 - Creating Revenue Models

Revenue

The income gained from sales of goods or services.

Revenue Model

A key component of the business model and identifies how the company will earn income and make profits;

explains how entrepreneurs will make money and capture value from delivering on the customer value proposition that is outlines as part of their business model

Unit Sales Revenue Model

The amount of revenue generated by the number of items (units) sold by a company;

you earn revenue when you sell the product/service to the end user;

2 different types: physical goods and intangibles;

Ex: retail businesses

a variation of this model is the razor-and-razor model: generates revenue through offering a physical product at no/low cost to encourage sales of more expensive products

Advertising Revenue Model

The amount of revenue gained through advertising products and services;

meaningful revenue generated in the digital world is dependent on attracting traffic or developing a dominant niche

Ex: cost-per-click (CPC), cost-per-action (CPA), promoted/sponsored content

Data Revenue Model

A type of revenue model whereby companies generate revenue by selling high-quality, exclusive, valuable information to other parties.

Intermediation Revenue Model

The different methods by which third parties such as brokers (or "middlemen") can generate money.

Brokers

The people who organize transactions between buyers and sellers; play an important role in connecting people to different services

Licensing Revenue Model

A way of earning revenue by giving permission to other parties to use protected intellectual property (patents, copyrights, trademarks) in exchange for fees- takes place in the technology industry

Franchising Revenue Model

A type of revenue model whereby franchises are sold by an existing business to allow another party to trade under the name of that business.

Subscription Revenue Model

A type of model that involves charging customers to gain continuous access to a product or service; Ex: Netflix or Hulu

Professional Revenue Model

Professional services on a time and materials contract.

Utility and Usage Revenue Model

A pay-as-you-go model that charges customers fees on the basis of how often goods or services are used.

Freemium Revenue Model

A type of revenue model whereby free (mainly web-based) basic services are mixed with premium or upgraded services- company gives away the low-end version of the service for free with limits on usage and functionality

The 10 Types of Revenue Models

Unit Sales; Advertising; Data; Intermediation; Licensing; Franchising; Subscription; Professional; Utility & Usage; Freemium.

Direct Cross-Subsidies

Pricing a product or service above its market value to pay for the loss of giving away a product or service for free or below its market value;

attracts customers by eliminating or reducing the up-front cost of a product/service- it then makes up the loss with subsequent charges which the company expects customers to be willing to pay

Four Key Revenue Drivers

Customers, Purchase Frequency, Selling Process, and Price

Cost of Goods Sold (COGS)

The value of goods sold when a sale takes place; there needs to be a balance between reducing costs and satisfying customers

Operating Expenses

The costs of running your business, including your rent, utilities, administration, marketing/advertising, employee salaries and, so on; these expenses are more difficult to reduce- cutting these expenses can yield beneficial short-term gains but it generally doesn't work in the long-term

Income Statement ( aka Profit & Loss Statement)

A financial report that measures the financial performance of your business on a monthly or annual basis;

it subtracts the COGS and expenses from the total revenue to give you a net income figure which will be either a profit or loss;

reflects depreciation (cost of wear and tear of physical assets) and amortization (relates to costs of intangible assets) of your company's assets

Competition-led Pricing

A type of pricing strategy when prices are guided by other businesses selling the same or very similar products and services;

for products that match those of your competitors you can copy your competitors' pricing for your own product

Customer-led Pricing

A type of pricing strategy when you ask customers how much they are willing to pay, and then offer it at that price

Loss Leader

A pricing method whereby a business offers a product or service at a lower price in an attempt to attract more customers- involves giving special discounts or reducing prices- can be effective way of competing with an established brand offering similar products/services; Ex: retail stores

Introductory Offer

A pricing method to encourage people to try an new product by offering it for free or at a heavily discounted price for a certain number of days or for the first 100 customers for example;

generally used for new products/services in the market

Skimming

A form of high pricing method, generally used for new products or services that face very little or no competition;

Ex: iPad or PlayStation 3

Psychological Pricing

A pricing method intended to encourage customers to buy on the basis of their belief that the product or service is cheaper than it really is- Ex: flash sales or bundled products

Fair Pricing

The degree to which both businesses and customers believe that the pricing is reasonable; use market testing to define the fair price

Bundled Pricing

A type of pricing strategy whereby companies package a set of goods or services together and then sell them for a lower price than if they were to be sold separately- the customers feel they are getting a bargain and the increased sales generate more profit for the company

Cost-led Pricing

A type of pricing strategy that involves calculating all the costs involved in manufacturing or delivering the product or service, plus all other expenses, and adding an expected profit or margin by predicting your sales volume to get the approximate price.

Target-Return Pricing

A pricing method whereby the price is based on the amount of investment you have put into your business.

Value-Based Pricing

A pricing method that involves pricing a product based on how in benefits the customer- buyers have a major influence over pricing strategy- 2 factors to take into consideration: your livelihood and mistakes

multiparty business

a type of free model that involves giving one party product/service free but charging the other party(s);

the challenge is to prevent costly overuse by those who get the service for free as well as making the business valuable enough to the party that does pay

define a revenue model and distinguish it from the business model

the revenue model specifies exactly how income and earnings will be generated from the value proposition, whereas the business model is the framework established to create value for the consumer while preserving some of that value for the entrepreneur

explain how companies generate revenue by profiting from "free"

the freemium concept has exploded in popularity in recent times- many companies are finding that small experience-amplifying transactions can be profitable after introducing consumers to a limited version of their product/service for free

identify different strategies entrepreneurs use when pricing their product/service

pricing is critical for a product/service- some common pricing strategies include competition-led pricing, customer-led pricing, loss leader, introductory offer, skimming, psychological pricing, fair pricing, bundled pricing

explain different methods of calculating price

cost-led pricing, target-return pricing, and value-based pricing

According to the chapter 10 video on How Google Makes Money, it was stated that Google has ______________ searches each day.

3.5 billion

According to the chapter 10 video on How Amazon Makes Money, Amazon captures 50% of its revenue from online retail sales. This is it's biggest money maker.

false

According to the chapter 10 interview with Terrance Thames, his company's revenue model could best be described as:

professional service

According to the chapter 10 interview with Terrance Thames, he would occasionally discount his pricing model for new clients in specific circumstances. This pricing strategy is called:

introductory offer

The key to sustaining a new business is to create:

consistent revenue streams

This type of pricing involves pricing a product based on how it benefits the customer.

value-based pricing

The key to pricing is to ensure that you make a profit.

true

The best place to begin to find out the "going rate" of a product you want to sell is to ask your customers what they want to pay.

false

This is the best way to figure out the underlying factors that will drive revenue for your business.

actively testing assumptions and hypotheses

For this type of pricing, prices are guided by other business' selling the same or very similar products or services.

competition-led pricing

All businesses share the need to generate revenue.

true

This type of pricing is created to encourage people to try a new product with a special deal.

the introductory offer

This statement is also known as the profit and loss statement.

income statement

If these get too high, the freemium business model will not work.

costs of supporting free customers