Designing Great Revenue Models

Mohammad ZebianJan 2018

Where are you at Today

Idea Does It Solve

a Problem ?

What Is My

Solution

(Prototype) ?

How Will I

Deliver

Value?

Where are you at Today

Where are you at Today

Revenue Model – What Is It

3 key parts of a revenue model

1. How you make money ?

2. How Much are customers willing to pay ?

3. What is your Revenue Potential and Profitability

(key to securing seed investors)

Revenue Model – What Is It

A key principle of success.

Revenue (LTV) > Cost (CAC)

Revenue Model – Why is it Important

• Indicator of Cash flow stability….critical to

startups and investors.

Volatility is the enemy of investors

• A competitive advantage, even if you have

the exact same product (Sun Edison)

Some Key Points for Startups –The Sales Funnel Trickle Down Effect

Generating revenue is part of a Customer Conversion process

that takes time http://startitup.co/guides/374/aarrr-startup-metrics

Some Key Points for Startups –The Sales Funnel Trickle Down Effect

Conversion rate decreases the further you go in the Funnel.

This is part of CAC….you need to monitor it

Some Key Points for Startups –The Sales Funnel Trickle Down Effect

Lack of Revenue is a symptom of an earlier problem

Some Key Points for Startups –Activation and Retention

At this stage (MVP) you want to focus on Activation and Retention

• Activation tells you if you created something of value that people want

• Retention is King…if people like your product, they will keep coming back for

more and tell others

Some Key Points for Startups –Activation and Retention

Tips for Activation

- Good website content (value proposition clear)

- One Step registration with email or Facebook

- Easy to download and use your app

Tips for Retention

- Loyalty campaigns (ex. Dropbox referrals)

- Push notifications (app is at the top of mind)

- Re-engagement adds (Amazon cookies)

Common Types of Revenue Models

See Monetization Cards in AIA Handbook

• Freemium (Spotify, Dropbox)

• Pay what you want / use

• Advertising (Metro News, Google tools)

• Marketplace (Supply and Demand driven) (AirBnB, Ebay)

• Flat rate (one time fee for a lifetime)

• Subscription (for a fixed period of time)

• Pay per use (Zipcar)

How Much Should Customers Pay?Don’t ask the customer what they are willing to pay. TELL THEM.

Set your price against

– Existing alternatives

– Cost savings your solution will provide

– Market conditions for customers

Example: Diabetic device

Strong Revenue Model• Low CAC (customers act as your sales team)

Strong Revenue Model

• High LTV (high customer retention, recurring

revenue)

– The more you use Dropbox, the less likely you will switch

• Easily Scalable product / service

• Product and Revenue model provide a

competitive advantage

– More value than a hard drive (but not cheaper)

Weak Revenue Model

• High CAC

• Low LTV (low customer retention, expensive to

get customers, no recurring revenue)

• Not a Scalable product / service (ex. Restaurant)

• Product and Revenue model are similar to

existing solutions and competitors. Competing

solely on price.

What Investors Look for

Investors want a high revenue potential to mitigate the

risk of failure when investing with a startup.

• Experienced Team

• Revenue Potential (Cash flow)

– Large Market size, clear competitive advantage

• Profitability. Good unit price economics

– LTV > CAC

What Investors Look for

• Scalability

– Ability to expand customer base with minimal cost

– Tech vs Non-Tech

• Recurring Revenue preferred (more stable revenues, lower

CAC, higher LTV)

• Customer lock-in features (Ex. Facebook)

• High Frequency of Purchases

Day 6 TaskUse the Revenue Model Decision Tree to define the best revenue model for your startup.

Use Monetization Cardsto study different revenuemodels, and select your write revenue model.

Thank You