Entrepreneurship: Revenue Streams and Pricing

Money Matters in Business

  • Business people use specific terms to describe money: profit, revenue, income, assets, cash flow.
  • Entrepreneurs need to understand the financial aspects of their business to succeed.
  • Making money should be less of a mystery.

Basic Financial Concepts

  • Revenue: The amount of money from customers for a service or product.
    • Calculated as the number of items sold ×\times the price of each item.
  • Expenses (Operating Costs): Money spent on operations to generate revenue (e.g., employees, supplies).
  • Profit: Money made when revenue is greater than expenses.
    • Calculated as Revenue −- Expenses.

Generating Revenue

  • Revenue Streams: Ways in which customer sales are structured.

Types of Revenue Streams

  • Product Sale (Asset Sale): Transfer of ownership rights in exchange for money.
  • Usage Fee: Customers pay based on how much they use a service or product.
  • Renting/Leasing: Charging a fee for exclusive rights to use an asset for a fixed period.
  • Licensing: Granting permission to use protected intellectual property for a fee.
  • Subscription Fee: Selling continuous access to a service for a recurring fee.
  • Brokerage Fee: Charging a fee for acting as a go-between in a transaction.
  • Advertising: Promoting products/services from other companies for a fee.

GoldieBlox Example

  • Sells physical toy sets and books.
  • Partnerships with organizations like Girl Scouts of America for special kits.
  • Generates advertising revenue through their YouTube channel.
  • Future animated show may add subscription fees

Choosing Revenue Streams

  • Match revenue streams to key activities and partners.
  • Look at competitors for ideas.
  • Revenue streams can evolve over time and should not be considered permanent.

Pricing Strategies

  • Consider costs, competition, and desired profit margin when setting prices.
  • Avoid underpricing products in the long run.
  • Pricing Strategies (McKinsey):
    • Margin Expander: Differentiate with competitive pricing.
    • Pricing Disruptor: Change the pricing model to address customer complaints and differentiate.
    • Revenue Driver: Using prices to bundle additional products and acquire new customers.
    • Pricing Pioneer: Radically change the pricing model and introduce new products/services.