Revenue and Costs10:46 with Pasan Premaratne
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.
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
You need to sign up for Treehouse in order to download course files.Sign up