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Revenue Streams and Costs4:40 with Pasan Premaratne
A basic component of every business plan is your strategy for spending and making money. In this video, we're going to explore the revenue streams and cost structures of our business model.
[Pasan Premaratne] The last 2 sections in our business model are revenue streams and costs. 0:00 These should be self-explanatory, revenue being the money we earn and costs, the cost of doing so. 0:04 The only difference is that in our business model, 0:11 we make sure to look at the possible revenue streams for each customer segment 0:13 and how we can maximize each of these streams. 0:18 For example, Google has what we call a multi-sided market. 0:21 Google's main revenue stream is add revenue. 0:24 Advertisers pay Google through a complex keyword option system to display ads all over the place. 0:28 To make it worthwhile, Google has to get tons of eyeballs on their products and services 0:34 and they do this by offering everything else for free. 0:39 So for its 2 distinct customer segments, Google has 2 different revenue streams. 0:42 Each revenue stream has its own set of resources, activities, and partners to ensure it's success. 0:47 When you identify a potential revenue stream, there are several factors to consider. 0:54 What value are customers really paying for and how can you highlight this value to maximize your revenue? 1:00 What are customers currently paying for existing solutions? 1:06 and, what value are they paying for in your competitors? 1:10 Once you've highlighted a potential revenue stream, 1:14 you can start thinking about what type of revenue stream you're going to implement. 1:17 Will it be a one-time payment from customers or can you charge them a recurrent fee? 1:21 This can be further broken down into the specific type of pricing mechanism you want to implement. 1:26 Will it be a fixed price or will it be a dynamic one that changes based on certain variables. 1:32 I'm going to highlight a few examples so you can understand the distinction. 1:38 Let's say our overall revenue strategy is a one time payment. 1:43 We can then choose to implement a fixed pricing mechanism over a dynamic one. 1:47 Here are a few examples. You can start with a list price for individual products. Buying music on itunes is a simple example of this. 1:51 We can also have product feature dependent prices. 2:00 There are many desktop versions of quick books the accounting software that are based on the industry you are in 2:04 and you pay a fixed price for the software suite that you choose. 2:10 You can also have volume dependent pricing. 2:13 If you buy products in bulk from a whole sale, the fixed price you pay depends on the quantity purchased. 2:17 Finally, you can have customer segment dependent pricing. 2:24 When you go to the movies, adults pay different fixed price than kids for the exact same product. 2:28 So that was a one time payment revenue stream with fixed pricing. 2:34 We can also have one time payment with dynamic pricing. 2:38 When you buy a car, you're paying that one time price after bartering for a while. 2:42 Then, there's yield management pricing where the price you pay is based on demand or inventory. 2:47 A great example is airline seats where the price you pay is determined by availability and the time frame. 2:53 You can have real-time markets. This one's easy. 2:59 Stock purchases. Finally, you can have auctions. Google's keyword auctions fit this model well. 3:02 Our second type of revenue stream is recurring revenue stream. 3:09 You can also break this down further. Let's say it's product feature dependent pricing. 3:13 When you use treehouse, you have 2 different price points for a gold or silver account that you pay on a recurring basis 3:18 or you can have volume dependent pricing 3:26 and I'm going to back up my photos on Amazon's cloud storage. 3:29 I'd pay a recurring fee for this that increases or decreases base on the amount of photos that I have backed up. 3:32 Similarly, I'm sure you can find examples of a recurring revenue system with dynamic pricing mechanisms. 3:38 Dig deep--There are lots of ways you can charge your customers once you have a proper value proposition 3:45 and have identified your customer segments. 3:52 The last thing we're going to look at is cost structures. 3:55 This section explores all of the costs incurred in operating our business model. 3:58 If we go through and fill out the rest of the sections first. 4:02 We should be able to arrive at a pretty good initial cost structure by looking at what our key resources, activities, partners, 4:06 channels, and relationships will cost. 4:15 The goal here is to minimize cost. All right. 4:17 So now we've walked through the very sections of our proposed or existing business. 4:22 Using this wealth of information we now have, we can easily compile as many business plans as we want to 4:26 but before we look at putting one together, let's check out some of the different types of business plans used nowadays. 4:32
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