Entrepreneurial Finance Part - 1

Transcription

1 Entrepreneurial Finance Part - 1 We ready to begin? Revenue Models A revenue model is how a business makes money Business Revenue 1

2 Revenue Models Customers pay for a solution to a problem. It s an exchange of value. Solution Business Customer Revenue Many types of Revenue Models Physical goods (i.e. Cars) Digital products (sobware) Service (i.e. haircuts) Usage fees (U:li:es) Auc:ons (transac:on fee) Adver:sements (newspapers) Rental (Real estate, tools) Brokerage (Stock trading) Marketplace (transac:on fee) Freemium (Pandora) Affiliate marke:ng (Amway) Subscrip:on (Magazines) Key points to remember 1) Your customer man not be your consumer; 2) Revenue model does not equal business model; 3) Each model has advantages and disadvantages 2

3 Revenue vs. Business Model A Revenue model is how you plan on making money and business models are how you plan to continue to make money. Defining your revenue model is the first step for your business, but eventually you need to defend your profits with a sound business model that makes it difficult for competitors to replicate. (i.e. brand, defensible position, etc.) Revenue Model Questions What is your product? How much are you going to charge? Who are you going to charge? Why are they going to buy your product? (ie. What s Pain Point?) Transaction Revenue One- :me sale of goods or services Can have low barrier to trial (i.e. get in business quickly) Need to con:nuously generate new sales Retailers, Amazon 3

4 Project Revenue One- :me project Large payouts Scalability issues, long sales cycles, large upfront investments truc:on company Recurring Revenue Customer pays for access to a product or service in installments (monthly, yearly) Do not have to resell customer for each revenue installment Long sales cycle, large upfront investment Salesforce, Food Manufacturer Service Revenue Service provided to customer. Customer pays for :me and exper:se Low upfront investments Scalability issues Law firm, consultants 4

5 Freemium Offer a subset of features for free. Try to convert free customers to paying customers Low barrier to trial Hard to convert to paid Pandora Advertisements Sell adspace Large market of poten:al customers. Poten:al source of secondary revenue Need a lot of eyeballs to make viable. Can detract from user experience. Google, Facebook Marketplace Connect buyers to produces (middleman) Strong defensible posi:on if established Two sided markets are difficult to create Airbnb 5

6 2/18/17 Let s run through some company examples (today s homework) 6

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9 2/18/17 Concept of Free 9

10 Concept of free Based on the fact that cost of products themselves is falling fast: - Cost of a making a movie or song, for example, is a sunk cost. Cost of distribution has very little cost. - Price of a t-shirt less than the price of a cup of coffee - The cost to build software is a sunk cost (the cost to distribute is near zero) Two trends driving free Trend #1 > Extension of King Gillette s crosssubsidy to more and more industries. There s more freedom to give away products or services to one set of customers while selling to another set. (i.e. free DVD if you come in and shop at our store) Trend #2 > Anything that touches digital networks quickly feels the effect of falling costs. (i.e. Google/Facebook using software to solve an advertising problem). Free from the consumer s view Give a product away and it can go viral. Charge a single cent for it and you re in an entirely different business, one of clawing and scratching for every customer. Penny Gap > the difference between cheap and free. The huge psychological gap between almost zero and zero is why companies like Google and Facebook don t charge you anything. 10

11 The most common strategy of free Marketplaces (Three-tiered systems) Radio, TV, Internet Amass an audience by providing content for free. Then finding another audience willing to pay to gain access to that first audience. Going Forward When developing revenue models, a Founder should strongly consider applying freeconomics whenever possible. It reduces the friction of acquiring a customer significantly. 11