Self-Understanding for Opportunity Creation
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Neck1ePPT10.pptxChapter 10: Creating Revenue Models
10.1
Define a revenue model and distinguish it from the business model.
10.2
Illustrate the ten most popular revenue models being used by entrepreneurs.
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Learning Objectives
10.3
Explain how companies generate revenue by profiting from “free.”
10.4
Identify the drivers that affect revenue as well as cost.
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Learning Objectives
10.5
Identify different strategies entrepreneurs use when pricing their product and service.
10.6
Explain different methods of calculating prices.
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Learning Objectives
Notable Quote
“Remind people that profit is the difference between revenue and expense. This makes you look smart.”
Scott Adams, “Dilbert” cartoonist
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10.1 What Is a Revenue Model?
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Revenue and Revenue Models
Revenue: the income gained from sales of goods or services.
Revenue model: a key component of the business model that identifies how the company will earn income and make profits.
What Is a Revenue Model?
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Questions to Ask
How much are customers willing to pay?
How many customers do I need?
How much cash can be generated through sales?
How much does each revenue stream contribute to the total?
What Is a Revenue Model?
10.2 Different Types of Revenue Models
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Figure 10.1: The Razor-and-Razor-Blade Model
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Different Types of Revenue Models
Source: http://www.rogersfamilyco.com/index.php/story-2-0-brewer/
Credit: ©iStockphoto.com/JoseAntonioRevidiegoPavon
Table 10.1: Ten Types of Revenue Models
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Table 10.1: Ten Types of Revenue Models
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Do you believe there should be an ethical boundary on the percent of profit a company should get? If so, who would decide on the boundary and how would it be enforced?
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Should the ethical boundary on profit margins depend on the type of product or service?
10.3 Generating Revenue From “Free”
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Three Free Financial Models
Direct Cross-Subsidies
Multi-Party Markets
Freemium
Generating Revenue From “Free”
Credit: ©iStockphoto.com/venimo
Figure 10.2: Freemium
Table 10.2: Ideas for Direct Cross-Subsidies
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Generating Revenue From “Free”
Table 10.3: Ideas for Multiparty Markets
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Generating Revenue From “Free”
Source: Anderson, C. (2009). Free: The future of a radical price. New York, NY: Hyperion.
Table 10.4: Freemium Ideas
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Generating Revenue From “Free”
Source: Anderson, C. (2009). Free: The future of a radical price. New York, NY: Hyperion.
What do you see as the benefits and disadvantages to the freemium business model?
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What considerations would you take into account when designing your freemium model strategy?
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How would you encourage your user to convert from freemium to premium?
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10.4 Revenue and Cost Drivers
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Figure 10.3: Four Key Revenue Drivers
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Revenue and Cost Drivers
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Cost Drivers
Cost of good sold (COGS): the value of goods sold when a sales takes place
Operating expenses: administrative, marketing, research, salaries, etc.
Revenue and Cost Drivers
Figure 10.4: Retail Operating Expenses
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Revenue and Cost Drivers
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Income Statements
A financial report that measures the financial performance of your business on a monthly or annual basis
Also called a “profit and loss statement”
Subtracts the COGS and expenses from the total revenue to show net income
Revenue and Cost Drivers
Figure 10.5: Sample Income Statement
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Revenue and Cost Drivers
10.5 Pricing Strategies
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Where Do You Begin?
See how your competition handles pricing.
Ask questions to others in the industry.
Ask potential customers how much they would pay or have paid in the past.
Pricing Strategies
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Common Pricing Strategies
Competition-led Pricing
Customer-led Pricing
Loss Leader
Introductory Offer
Pricing Strategies
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Common Pricing Strategies
Skimming
Psychological Pricing
Fair Pricing
Bundle Pricing
Pricing Strategies
Figure 10.6: Pricing Strategies
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Source: www.learnmarketing.net
Figure 10.7: Bundled Pricing
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Pricing Strategies
10.6 Calculating Prices
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Cost-Led Pricing
Price based on all costs associated with producing and adding an expected profit
Calculating Prices
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Target-Return Pricing
Price based on the amount of investment
Calculating Prices
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Value-Based Pricing
Price based on how it benefits the customer
Calculating Prices
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Is Value the Same Thing as Price?
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Mindshift: Is Value the Same Thing as Price?
Using this chart, identify what you think you pay, or would pay, for the listed items. Then, look up the actual price on the Internet.
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1. What are the differences between your pricing estimates and the actual pricing? What do you believe is the source of the differences?
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MINDSHIFT: CRITICAL THINKING
2. As a consumer, do you care more about the price of certain items than others? What influences your level of concern about price?
MINDSHIFT: CRITICAL THINKING
3. In this exercise, did you learn anything that surprised you?
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MINDSHIFT: CRITICAL THINKING
