1 00:00:00,460 --> 00:00:01,750 We're almost done. 2 00:00:01,750 --> 00:00:05,530 At this point, we've walked through our value proposition, the different types of 3 00:00:05,530 --> 00:00:10,000 customers we can have, the ways in which we will communicate with them, and 4 00:00:10,000 --> 00:00:15,580 the activities, resources, and partners we need to make this model a success. 5 00:00:15,580 --> 00:00:19,450 But there are still two very important pieces left to cover. 6 00:00:19,450 --> 00:00:23,660 How do we plan on making money and what is all this going to cost us? 7 00:00:23,660 --> 00:00:24,720 Let's start with revenue. 8 00:00:26,060 --> 00:00:29,844 In a business model, revenue [SOUND] is what we collectively call the different 9 00:00:29,844 --> 00:00:32,902 [SOUND] cash streams generated [SOUND] by each customer segment. 10 00:00:32,902 --> 00:00:36,065 [SOUND] If you have more than one customer segment, 11 00:00:36,065 --> 00:00:39,240 you can have more than one type of revenue stream. 12 00:00:39,240 --> 00:00:42,301 Each stream can have different pricing structures as well to 13 00:00:42,301 --> 00:00:44,830 maximize the revenue you get out of each segment. 14 00:00:45,970 --> 00:00:48,460 There are two main types of revenue streams. 15 00:00:48,460 --> 00:00:52,047 [SOUND] Transaction revenues resulting from the one-time sale of 16 00:00:52,047 --> 00:00:53,490 your value proposition. 17 00:00:53,490 --> 00:00:57,573 When following a transaction revenue model, you [SOUND] can generate revenue 18 00:00:57,573 --> 00:01:01,964 through the sale of an asset, which is a one-time purchase of a computer or car, or 19 00:01:01,964 --> 00:01:05,709 like when Microsoft sells you a copy of the latest version of Windows. 20 00:01:05,709 --> 00:01:10,248 You can also do it through brokerage fees, derived through intermediation, 21 00:01:10,248 --> 00:01:13,959 such as when a credit card company takes a percentage of a sale for 22 00:01:13,959 --> 00:01:17,622 facilitating payment, and finally, through advertising. 23 00:01:17,622 --> 00:01:21,942 The second type is through [SOUND] recurring revenue streams obtained by 24 00:01:21,942 --> 00:01:25,120 continuously delivering your value proposition. 25 00:01:25,120 --> 00:01:28,620 There are multiple ways to generate a recurring revenue stream. 26 00:01:28,620 --> 00:01:32,558 The most common is through [SOUND] subscription fees whereby you 27 00:01:32,558 --> 00:01:35,466 sell continuous access to a service for a fee. 28 00:01:35,466 --> 00:01:39,101 You can also do it by a [SOUND] usage fee where customers pay for 29 00:01:39,101 --> 00:01:41,147 the portion of the service used. 30 00:01:41,147 --> 00:01:44,347 An example of this is the telecommunication industry, 31 00:01:44,347 --> 00:01:47,280 where you pay for the amount of minutes used. 32 00:01:47,280 --> 00:01:49,080 The more minutes you use, the more you pay. 33 00:01:50,350 --> 00:01:55,351 Finally, you can generate recurring revenue by [SOUND] lending, renting or 34 00:01:55,351 --> 00:01:57,393 leasing a product or service. 35 00:01:57,393 --> 00:02:01,852 Under this revenue stream, you temporarily grant a customer full rights to 36 00:02:01,852 --> 00:02:05,530 use your product or service in return for a fee. 37 00:02:05,530 --> 00:02:07,380 We're all familiar with this concept. 38 00:02:07,380 --> 00:02:10,650 Most of us pay or have paid rent to live in an apartment. 39 00:02:12,050 --> 00:02:17,270 Your chosen revenue model is closely tied to the pricing structure you implement. 40 00:02:17,270 --> 00:02:21,200 The right pricing structure, paired with a revenue model, can make or 41 00:02:21,200 --> 00:02:22,830 break your company. 42 00:02:22,830 --> 00:02:27,310 Let's start off by examining two main pricing categories, fixed and 43 00:02:27,310 --> 00:02:28,140 dynamic pricing. 44 00:02:29,390 --> 00:02:33,160 Fixed pricing [SOUND] is a pricing methodology based on 45 00:02:33,160 --> 00:02:35,431 static predefined variables. 46 00:02:35,431 --> 00:02:37,070 What does this mean? 47 00:02:37,070 --> 00:02:40,920 Well, the price is not subject to any sort of bargaining. 48 00:02:40,920 --> 00:02:45,380 Fixed pricing can be further broken down into different types. 49 00:02:45,380 --> 00:02:47,609 First off, we have a [SOUND] list price. 50 00:02:47,609 --> 00:02:52,243 Under a list price, you offer a fixed price for each individual product or 51 00:02:52,243 --> 00:02:53,750 service that you sell. 52 00:02:55,070 --> 00:02:57,190 Then you have product [SOUND] feature dependent. 53 00:02:57,190 --> 00:03:02,179 With product feature dependent pricing, the price you set depends on the number or 54 00:03:02,179 --> 00:03:05,390 quality of value proposition features. 55 00:03:05,390 --> 00:03:10,455 This is a means of setting different price points for variations in the same product. 56 00:03:10,455 --> 00:03:14,270 Treehouse is a great example of this type of pricing scheme. 57 00:03:14,270 --> 00:03:18,980 We have two pricing options, basic and pro, where the higher-priced offering 58 00:03:18,980 --> 00:03:22,958 gives you access to more specialized types of video content. 59 00:03:22,958 --> 00:03:27,174 The difficulty in product feature dependent pricing is that you have to 60 00:03:27,174 --> 00:03:28,650 clearly distinguish and 61 00:03:28,650 --> 00:03:33,650 communicate the differences between the product to justify the different prices. 62 00:03:33,650 --> 00:03:37,630 [SOUND] Then we have customer segment dependent pricing structures. 63 00:03:37,630 --> 00:03:41,031 Sometimes, the price you charge can depend on the different types of 64 00:03:41,031 --> 00:03:43,460 customer segments you have. 65 00:03:43,460 --> 00:03:46,250 Different customer segments pay different prices for 66 00:03:46,250 --> 00:03:49,190 either different or identical products. 67 00:03:49,190 --> 00:03:52,910 The simplest example of this is movie theater pricing. 68 00:03:52,910 --> 00:03:57,480 In most countries, students or children pay half of what adults pay for 69 00:03:57,480 --> 00:03:58,730 the exact same product. 70 00:04:00,250 --> 00:04:02,820 Finally, you have volume [SOUND] dependent pricing. 71 00:04:02,820 --> 00:04:04,398 The more of your product or 72 00:04:04,398 --> 00:04:08,650 service your customers buy, the lower the per unit price. 73 00:04:08,650 --> 00:04:13,150 This is very common with software licenses since there's no additional costs to 74 00:04:13,150 --> 00:04:16,150 producing more of the software once it's written. 75 00:04:16,150 --> 00:04:18,970 The second main type of pricing is dynamic pricing. 76 00:04:18,970 --> 00:04:20,753 [SOUND] Under dynamic pricing, 77 00:04:20,753 --> 00:04:24,670 your price constantly changes based on certain market variables. 78 00:04:24,670 --> 00:04:27,640 Let's look at some of the different types of dynamic pricing. 79 00:04:28,828 --> 00:04:30,753 When negotiating, [SOUND] two or 80 00:04:30,753 --> 00:04:34,683 more parties barter with each other to arrive at a desired price. 81 00:04:34,683 --> 00:04:39,430 The price depends on the negotiating power and skill of the parties involved. 82 00:04:39,430 --> 00:04:44,180 Buying a car is a great example of when negotiating comes in to play. 83 00:04:44,180 --> 00:04:46,970 The salesperson tries to assess your upper limit and 84 00:04:46,970 --> 00:04:50,300 arrive at a price while you continuously try to undercut him. 85 00:04:51,940 --> 00:04:56,031 Under a yield [SOUND] management pricing scheme, you take inventory and 86 00:04:56,031 --> 00:04:59,042 time of purchase into account when setting prices. 87 00:04:59,042 --> 00:05:02,260 A great example of this is airline seating. 88 00:05:02,260 --> 00:05:05,920 When you look for airline tickets, the price you're given depends on 89 00:05:05,920 --> 00:05:09,800 how many seats are left on the plane and how far ahead you purchase the ticket. 90 00:05:11,450 --> 00:05:13,134 In a real [SOUND] time market, 91 00:05:13,134 --> 00:05:16,862 price is established dynamically based on supply and demand. 92 00:05:16,862 --> 00:05:21,570 As more and more of the product or service is purchased, the price is driven up. 93 00:05:21,570 --> 00:05:24,920 As demand falters, the price drops back down. 94 00:05:24,920 --> 00:05:27,040 This happens daily in the stock markets. 95 00:05:28,490 --> 00:05:30,400 Finally, we have [SOUND] auction pricing. 96 00:05:30,400 --> 00:05:31,194 In this model, 97 00:05:31,194 --> 00:05:35,670 the final prices is determined by the outcome of competitive bidding. 98 00:05:35,670 --> 00:05:38,480 I think we're all familiar with traditional auctions, but 99 00:05:38,480 --> 00:05:41,020 a perfect example of auctions on the web is eBay, 100 00:05:41,020 --> 00:05:45,430 where we try and outbid each other to buy all sorts of crazy things. 101 00:05:45,430 --> 00:05:48,400 The idea is that you first identify which type of 102 00:05:48,400 --> 00:05:52,030 pricing mechanism pairs well with your value proposition. 103 00:05:52,030 --> 00:05:54,290 Once you pick a pricing mechanism, 104 00:05:54,290 --> 00:05:58,140 then you can fine-tune your approach depending on your product. 105 00:05:58,140 --> 00:06:02,010 If you have one standard product, a list price might be best. 106 00:06:02,010 --> 00:06:04,080 If you have slightly different products, 107 00:06:04,080 --> 00:06:07,510 then a product feature dependent model might work better. 108 00:06:07,510 --> 00:06:11,780 In any case, rather than just picking a pricing model out of thin air, you can 109 00:06:11,780 --> 00:06:17,070 go down a list and identify what matches perfectly with your business model. 110 00:06:17,070 --> 00:06:18,280 The right pricing model, 111 00:06:18,280 --> 00:06:21,700 implemented with the right revenue stream, can lead to great results. 112 00:06:22,920 --> 00:06:26,840 Now, all that being said, this model helps you identify what revenue and 113 00:06:26,840 --> 00:06:29,230 pricing model you want to implement. 114 00:06:29,230 --> 00:06:33,360 Coming up with the actual price you want to charge is a bit trickier. 115 00:06:33,360 --> 00:06:38,080 Like most apps in the industry, I'm going to implement a recurring revenue model. 116 00:06:38,080 --> 00:06:42,578 I have a few different choices on the pricing mechanism I want to implement. 117 00:06:42,578 --> 00:06:46,290 Looking at Asana, they don't have a product feature dependent model 118 00:06:46,290 --> 00:06:48,930 because everyone uses the exact same product. 119 00:06:48,930 --> 00:06:51,430 What you pay for is the number of users. 120 00:06:51,430 --> 00:06:52,994 So in a sense, it's volume-based. 121 00:06:54,150 --> 00:06:57,010 One of my main issues with other software is that it seemed 122 00:06:57,010 --> 00:07:00,490 overly complicated because everyone used the same product. 123 00:07:00,490 --> 00:07:03,325 One of my options would be to offer two versions of the product 124 00:07:03,325 --> 00:07:07,830 where the second tier is priced higher and you get more power features. 125 00:07:07,830 --> 00:07:12,320 Basically, we would implement a product feature dependent mechanism. 126 00:07:12,320 --> 00:07:14,680 Remember, we're just going off of instinct here. 127 00:07:14,680 --> 00:07:17,090 Later on, when we validate our assumptions, 128 00:07:17,090 --> 00:07:20,110 we may have to change the way that we charge people. 129 00:07:20,110 --> 00:07:23,960 Use the revenue model that best highlights your value proposition. 130 00:07:23,960 --> 00:07:27,770 Since I feel that users only pay for the features they want, I think I'm 131 00:07:27,770 --> 00:07:31,920 highlighting value best by offering a product feature dependent model. 132 00:07:31,920 --> 00:07:35,000 Play around and talk to people until you find what works for you. 133 00:07:36,330 --> 00:07:40,140 The price you implement must not only take into account your value proposition and 134 00:07:40,140 --> 00:07:44,020 customer segments, but also accommodate the cost of doing business, 135 00:07:44,020 --> 00:07:47,780 highlight the value your product delivers, respect the practices and 136 00:07:47,780 --> 00:07:52,500 expectations of your market, and keep an eye on competitive prices. 137 00:07:52,500 --> 00:07:56,270 Like everything else in our business model, our revenue model assumptions may 138 00:07:56,270 --> 00:08:00,230 not be right the first time, so don't be afraid to iterate on this as well. 139 00:08:01,270 --> 00:08:04,720 Before we conclude our discussion on revenue, let's recap. 140 00:08:04,720 --> 00:08:07,030 [SOUND] There are two main types of revenue streams. 141 00:08:07,030 --> 00:08:08,430 Transaction [SOUND] revenues, 142 00:08:08,430 --> 00:08:11,293 resulting from the one-time sale of your value proposition. 143 00:08:11,293 --> 00:08:14,054 [SOUND] Or recurring revenue streams obtained by 144 00:08:14,054 --> 00:08:17,099 continuously delivering your value proposition. 145 00:08:17,099 --> 00:08:22,310 Your chosen revenue model is closely tied to the pricing structure you implement. 146 00:08:22,310 --> 00:08:25,344 [SOUND] There are two main pricing categories, fixed [SOUND] and 147 00:08:25,344 --> 00:08:26,575 dynamic [SOUND] pricing. 148 00:08:26,575 --> 00:08:30,485 Fixed pricing is a pricing [SOUND] methodology based on static, 149 00:08:30,485 --> 00:08:32,191 pre-defined variables. 150 00:08:32,191 --> 00:08:36,196 Fixed pricing can be further broken down into different types. 151 00:08:36,196 --> 00:08:39,103 List pricing, [SOUND] product feature [SOUND] dependent, 152 00:08:39,103 --> 00:08:42,923 customer [SOUND] segment dependent, and volume [SOUND] dependent pricing. 153 00:08:42,923 --> 00:08:46,732 The second main type of pricing is dynamic pricing. 154 00:08:46,732 --> 00:08:48,370 Under [SOUND] dynamic pricing, 155 00:08:48,370 --> 00:08:51,970 your price constantly changes based on certain market variables. 156 00:08:51,970 --> 00:08:55,449 Dynamic pricing is seen in instances of [SOUND] negotiation, 157 00:08:55,449 --> 00:08:59,553 [SOUND] yield management, [SOUND] real time markets and [SOUND] auctions. 158 00:08:59,553 --> 00:09:02,800 The last section of our business model is costs. 159 00:09:02,800 --> 00:09:07,370 A company's cost structure building block describes the major costs incurred to 160 00:09:07,370 --> 00:09:10,010 make the business model a success. 161 00:09:10,010 --> 00:09:13,070 Once you have defined the rest of the Business Model Canvas and 162 00:09:13,070 --> 00:09:17,800 have explored your key resources, activities, and partners, it should be 163 00:09:17,800 --> 00:09:21,490 easy to come up with a cost associated with making this business model work. 164 00:09:22,780 --> 00:09:26,840 Cost structures in a business model fall under two categories. 165 00:09:26,840 --> 00:09:29,063 Business models that are [SOUND] cost driven and 166 00:09:29,063 --> 00:09:30,781 those that are [SOUND] value driven. 167 00:09:30,781 --> 00:09:32,729 In a cost driven business model, 168 00:09:32,729 --> 00:09:36,670 the focus is on minimizing costs as much as possible. 169 00:09:36,670 --> 00:09:38,890 This is reflected in the value proposition, 170 00:09:38,890 --> 00:09:41,730 where low cost is heavily emphasized. 171 00:09:41,730 --> 00:09:46,220 These businesses also use lean strategies Like automating significant parts of 172 00:09:46,220 --> 00:09:51,030 their business model and outsourcing a large portion of activities to partners. 173 00:09:51,030 --> 00:09:54,710 Companies like Walmart exemplify a cost driven business model. 174 00:09:55,810 --> 00:09:57,520 In a value driven business model, 175 00:09:57,520 --> 00:10:01,230 the main focus is on value creation, rather than cost. 176 00:10:01,230 --> 00:10:05,940 This type of business model is accompanied by personalized customer relationships and 177 00:10:05,940 --> 00:10:09,520 premium value propositions that highlight the value you gain, 178 00:10:09,520 --> 00:10:11,740 rather than any cost savings. 179 00:10:11,740 --> 00:10:16,050 For my business, since human capital is the bulk of our key resources, 180 00:10:16,050 --> 00:10:18,810 the majority of our costs will be salaries. 181 00:10:18,810 --> 00:10:22,770 The rest of our cost structure will be dependent on the partners we choose to 182 00:10:22,770 --> 00:10:25,300 outsource some of our activities to. 183 00:10:25,300 --> 00:10:28,085 Since these costs are proportional to our user base, 184 00:10:28,085 --> 00:10:32,570 it isn't as big a concern as the cost of hiring a great team. 185 00:10:32,570 --> 00:10:35,050 Now, if it feels like I'm glossing over costs here, 186 00:10:35,050 --> 00:10:36,500 it's because I intentionally am. 187 00:10:37,750 --> 00:10:41,540 It's hard to get a bearing on your costs early on, but at least we have 188 00:10:41,540 --> 00:10:46,210 a good picture of what our largest cost areas are and how we can plan for that.