Delft climate kic 070212 part 2

How to Fail Less

Business Models and Customer Development

Steve Blankwww.steveblank.com

@sgblank

http://www.steveblank.com/

Agenda – Day One

• 9:00 - 11:00 Introduction to Customer Development• 11:00 - 11:30 break

• 11:30 - 13:00 value proposition

customer segments• 13:00 – 14:30 lunch working session

Students prepare first version of business model canvas• 14:30 – 16:00 Student presentation of business

model canvas• 16:00 – 16:15 break

• 16:15 – 17:00 distribution channels

Agenda – Day One

• 9:00 - 11:00 Introduction to Customer Development• 11:00 - 11:30 break

• 11:30 - 13:30 value proposition

customer segments• 12:30 – 13:30 lunch working session

Students prepare first version of business model canvas• 13:30 – 15:00 Student presentation of business

model canvas• 15:00 – 15:15 break

• 15:30 – 16:30 distribution channels

Homework: 1) update your canvas

2) develop a customer discovery action plan

Agenda – Day Two

• 9:00 - 10:30 Student presentations on customer discovery action plan

• 10:30 - 11:30 customer relationships (get/keep/grow)• 11:30 – 12:00 break

• 12:00 - 13:00revenue streams• 13:00 – 14:00 lunch working session

Students present• 13:30 – 14:15 partners• 14:15 - 15:00resources, activities, costs• 15:00 – 15:15 break

• 15:30 – 16:30 Customer Development Manifesto

The Lean LaunchPad

Lecture 4: Distribution Channels

How does your Product Get to Customers?

Version 6/22/12

Channels

How does your Product Get to Customers?

© 2012 Steve Blank

Who Are Our Customers and How Do We Reach Them

Physical versus Virtual Channels

How Do You Want Your Product to Get to Your Customer?

11

Yourself

Through someone else

Retail

Wholesale

Bundled with other goods or services

üüüüü

Web Channels

12

Physical Channels

13

How Does Your Customer Want to Buy Your Product from your Channel?

14

• Same day

• Delivered and installed

• Downloaded

• Bundled with other products

• As a service

• …

üüüüüü

Types of Channels

15

– OEM– VAR– Reseller– Distributor

Direct Indirect Licensing

Distribution Complexity

16

Evangelists

ServiceTechnicians

Higher Value Added

Higher Volume

Direct Sales

VARs

Retail

Web, Telesales

Systems Integrators

Mainframes

MinisLANs

PC ServersDesktop PCs

PrintersKeyboards

Toner

WANs

Global Systems

Solution Complexity

Ma

rke

tin

g C

om

ple

xity

How Do the Economics Work in Different Sales Channel?

How Are Channels Compensated?

18

– Commission

– Percentage of sales price

– Discounted pre-purchase

Channel Economics: “Direct” Sales

19

Profit + SG&A + R&D

En

d C

on

sum

er

EU

D

isco

un

ts

Your RevenueList

Price

Source: Mark Leslie, Stanford GSB

Cost of Goods(Supply Chain)

Channel Economics: Resellers

20


Profit + SG&A + R&D

En

d C

on

sum

er

EU

D

isco

un

ts

Reseller

Your RevenueList

Price


Profit + SG&A + R&D

Channel Economics: Distributors/Resellers

21

En

d C

on

sum

er

EU

D

isc

ou

nts

Reseller

Dis

trib

uto

r

Your RevenueList

Price



The Channel as a Customer

22

– Some products are embedded in others (OEM)

– Some products are resold by others (VARs)

– Some products are distributed by others

– Who’s the customer?

Channel Economics: OEM or IP Licensing

23

Your Product Becomes Your Customer’s Cost of Goods Source: Mark Leslie, Stanford GSB

En

d C

on

sum

er

ResellerProfit + SG&A

+ R&D

Cost of Goods

(Supply Chain)

EU

D

isc

ou

nts

Reseller

Dis

trib

uto

r

Mas

ter

Dis

trib

uto

r

Profit + SG&A + R&D


Your RevenueList

Price

How Are Channels Motivated or Incented?

24

– Money! – what makes them the most?

– Training

– Marketing to the channel

– SPIF

Book Publishing Channel Example

Example: Book Publishing

26

PublisherNational

DistributorPrinter Wholesaler Retailer Customer

Book Publishing

27

•Percent of

Retail

• You get- 35% of retail- the distributor gets 10%- the wholesaler gets 15% - the retailer gets 40%

- less any discount they offer the customer

PublisherNational

WholesalerDistributor Retailer Customer

35% 15% 10% 40%

$7.00 $3.00 $2.00 $8.00 $20.00

Book Publishing Economics

28

PublisherNational

DistributorWholesaler Retailer Customer

Wholesale costs

Markup

Allowances

Payment guarantees

Payments

Bills

Credit guarantees

Payment guarantees

Return rights

Credits

Book Publishing Delivery

29

PublisherNational

DistributorPrinter Wholesaler Retailer

Merchandise titles

Sell magazines

Acknowledge returns

Determine allocations

Dispose of returns

Prepare film (content)

Establish identity

Create demand

Prepare galleys

Receive Schedules Print orders Bundle

counts Film

Print and ship magazines

Deliver orders

Medical Device Channel Example

Patients

Product flow/Channel

Fluid SynchronyElectronic

Health Records

.Partners/

OEMS

Hospitals(AnesthesiologistsNeurosurgeons)

Pain Clinic(AnesthesiologistsNeurosurgeons)

Pump + Controller

Support Services

Bundled Kits

Electronic Records

Channels (Direct)

• Direct to institutions• Some formularies involved in purchase decisions• Some doctors make purchase decision directly

• Device company/Doctor relationship is key • Heavily influenced by :

• Clinical study results • Regulatory approval• Reimbursement

Hospitals

Pain Clinics

Farm Sensor IndustryChannel Example

Channel Model: Service Provider

OEM

Us

Large farm

USDA/EPA

Small farm

Product

Money

Nutrient Data

Licensing/sales

Channel Model: Service Provider

OEM

Us

Large farm

USDA/EPA

Small farm

Product

Money

Nutrient Data

Licensing/sales

Product

Service

Dental ProductChannel Example

COST / PROFIT ANALYSIS

R&D Maintaining IP

End

user

Our revenue 4-8% revenues List price

Per unit cost and profit estimation

Licensing Revenue Model

Raw materials

Manufacturing &

Packaging

License fee Distribution

37

Univ.License

fee

End User

Health-Care Providers:Hospitals

PractitionersClinics

InsuranceAgencies

Customer segment: Large

corporationsJ&J, GSK, 3M

DMXR&D

ProductsProcedures

IPs

$$$

~$40

$$

University

4-8% royalty

2-4% license fee

Licensing of Technology Ecosystem

38

Medical Device Channel Example 2

IndividualDoctors

Purchasing Administrato

rs

High value medical products

(e.g. cardiovascular stents)

Commodity medical products

(e.g. latex gloves)

• Doctor education• Direct feedback from doctors• Very expensive

• No doctor education• No customer feedback• Inexpensive

Direct Sales

Distributors

MammOpticsChannel Strategies and Costs

Individual Doctors

Purchasing Administrato

rs

Channel Strategies and CostsMammOptics

5 dedicated sales people$150,000 each/year

Hire nurses or technicianswith establishedrelationships

Early adopter feedback

Continue with core group of sales people

Use women’s healthcare equipment distributor

Already established network of customers

Sales strategy 1 Sales strategy 2

Dental Product 2Channel Example

Private PracticeDentist

PurchasingDepartment

Big Distributors

InstitutionalDentist

Direct Sales

Channels



Big Distributors


Direct Sales

Channels

80% Market Share30% Margin



Big Distributors


Direct Sales

Channels

80% Market Share30% Margin

ContinuingEducationCourses

Magazines& Email

TradeShows

Online RentalChannel Example

47

Listings Provider

Tenants

Landlords

PropertyManagers

Service Providers

Potential Landlords

Realtors

Web Info

Show, Advise, Valuate

Sell, Advise

MaintenanceFurnishing

Listings,ChecksRent Payment

Moving

CraigslistPadmapper.com

Rent.comApartment.com

Forrent.com

Credit ChecksSafetenantcheck.c

Erenter.com

Payment FacilitatorRentpayment.com

Clearnow.comOnline Cheque

Listings, ChecksRent Payment

Maintenance FindingZoospi.com

Redbeacon.comTaskrabbit.com

Schedule Tools

Yelp.com

Angie’s List

Setster.com

Find information

Servicemagic.com

Zoospi.com

Rentpost.comRentjuice.com

Buildium.comRentingsmart.co

Propertyware.com

Rentjuice.comPropertyware.co

Rentingsmart.co

Buildium.com

propertymanagemnt360

Maintenance Ratings

Trulia.com

PM Tools

Dental Product 3Channel Example

COST / PROFIT ANALYSIS

Raw active ingredient

Manufacturing &Packaging

Profit + R&D + License fee Distributor

$40 *$27%32 cut

$6 ? ($5) ~$11 ~$13

End

user

Our revenue List pricePer unit cost and profit estimation

Direct Sales Revenue Model

49

* Competition• NuPro prophy paste (Novamin $50)• NuPro desensitizer (Novamin $93)• MI varnish (Recaldent $100)• Gluma desensitizer (Glutaraldehyde $130)• Health-Dent desensitizer (Fluoride $49)

End User

Customer Segments;

Health-Care Providers:- Hospitals

- Practitioners- Clinics

InsuranceAgencies

Product Sales &

Distribution

Formulations& Packaging

Raw MaterialsManufacturing

DMXR&D

ProductsProcedures

IPs

$$??$6/pk

$5/pk$$??

University

-32%($27)

$?

Direct Sales Ecosystem

R&D &Regulation

$40/pk

50

Channel Example

Distribution Food Chain

52

Precursor Synthesis

Finished product

Precursor in Cassette

Cassette (device)

I-Corps Final Presentation 12/14/11

Channel Example

Travel IndustryChannel Example

Travel Services:Impact of Changing Technology

The Advent of GDS Systems (1980 -1995)

Turning the Screen AroundOnline Travel (1995-2010)

The Lean LaunchPad

Lecture 5 Customer Relationships

Version 6/13/12

How Do You Get/Keep/Grow Customers?

Customer Relationships

How do you Get, Keep and Grow Customers?

© 2012 Steve Blank

Customer Relationships Physical & Web Mobile Are Different

© 2012 Steve Blank

Customer Relationships Physical Products – Get Customers

© 2012 Steve Blank

Customer Archetypes Drive Get/Keep/Grow

• What’s their role?– How this person is evaluated / promoted /

compensated?

• Who are they?– Buyer’s name– Position / title / age / sex

• How do they buy?– Discretionary budget (name of budget and

amount)

• What matters to them?– What motivates them?

• Who influences them?– What do they read/who do they listen to?

Lab Manager: Brian

Paid Demand Creation Activities“Paid” Media

• Public Relations• Advertising• Trade Shows• Webinars• Email marketing• On-line SEM • Biz Dev

Demand Creatio

n

Free Demand Creation Activities“Earned” Media

• Publications in journals• Conference speeches/papers• Educational seminars• Public relations• Blogging / Sharable content• Social Media• Communities

Demand Creation


© 2012 Steve Blank


© 2012 Steve Blank

CAC = Customer Acquisition Cost

Customer Acquisition Cost versus Sales Complexity

Rough Estimates of Cost of Customer Acquisition (CAC)

Source: David Skok Matrix Partners

Customer Relationships Physical Products – Keep Customers

© 2012 Steve Blank

Customer Relationships Physical Products – Keep Customers

© 2012 Steve Blank

Attrition/Churn

Customer Relationships Physical Products – Grow Customers

© 2012 Steve Blank

Customer Relationships Physical Products – Get/Keep/Grow

© 2012 Steve Blank

LTV = Customer Lifetime Value

Customer Relationships Web/Mobile Products– Get Customers

© 2012 Steve Blank

Web/Mobile Products– Get Customers

© 2012 Steve Blank

CPM = cost per thousand hits

Web/Mobile Products– Get Customers

© 2012 Steve Blank

CPA = Cost per Action

SaaS Products– Get Customers

© 2012 Steve Blank

Organic Traffic, SEM, Other Paid

Sources

Raw Leads

Registered Visitors

Qualified Leads

Inside SalesClosed Deal

Web/Mobile Products– Keep Customers

Our Example Marketing Funnel

Quick Marketing Calculation 50% amount of traffic that is organic versus paid

$1.50 cost per paid visitor (Google AdWords, etc.) $ 0.75 Cost per visitor (both paid and unpaid)

3% visitors convert to raw leads 20% number of raw leads that turn into qualified leads

1 qualified lead 5 raw leads required

167 visitors required $125 Cost of visitors (also = Cost per qualified lead)



Quick Marketing Calculation 50% amount of traffic that is organic versus paid

$1.50 cost per paid visitor (Google AdWords, etc.) $ 0.75 Cost per visitor (both paid and unpaid)

3% visitors convert to raw leads 20% number of raw leads that turn into qualified leads

1 qualified lead 5 raw leads required

167 Visitors required $125 Cost per qualified lead



Cost per Qualified Lead $125 Leads to closed deal 10Marketing Costs per closed deal $1,250


We Can Compute CAC and LTV

Lead Gen costs per deal $ 1,250 Excludes people costs (Cost per qualified lead x no of leads required per closed deal)

Selling costs per deal $ 1,620 Excludes cost of sales management

Total CAC $ 2,870 Excludes people costs in marketing, and sales management. (CAC= Cost to Acquire a Customer)

Total LTV $ 16,000 Calculated by dividing average monthly gross profit per customer (ARPU x Gross Margin ) by the churn rate

This excludes people costs in marketing, and sales management costs


Balancing CAC/LTV in a SaaS model

LTV CAC> 3x

Months to recover CAC < 12 months

Required for Capital Efficiency


What Investors are Looking For

Monetization(LTV)

Cost toAcquire aCustomer

(CAC)

A well balanced business model


The Balancing Act

Monetization(LifeTime Value LTV)

Cost to Acquire a Customer (CAC)

• Viral effects• Inbound Marketing• Free or Freemium• Open Source• Free Trials• Touchless conversion• Inside Sales• Channels• Strategic partnerships

• Scalable Pricing• Cross Sell/Upsell• Product line expansion• Lead Gen for 3rd parties


The Balancing Act

Monetization(LifeTime Value LTV)

Cost to Acquire a Customer (CAC)

• Viral effects• Inbound Marketing• Free or Freemium• Open Source• Free Trials• Touchless conversion• Inside Sales• Channels• Strategic partnerships

• Field Sales• Outbound

Marketing

• Scalable Pricing• Cross Sell/Upsell• Product line expansion• Lead Gen for 3rd parties

• High Churn Rates• Low customer

satisfaction


Customer Relationships Web/Mobile Products– Keep Customers

© 2012 Steve Blank

How Churn affects LTV

• Average customer lifetime in months =

1 / Monthly Churn


How Churn affects Lifetime

1% 2% 5%0

20

40

60

80

100

120

100

50

20

Lifetime vs Churn RateMonths

Monthly Churn


How Churn affects LTV

Lifetime Value

Monthly Churn


Impact of lowering Churn

Month 1

Month 3

Month 5

Month 7

Month 9

Month 11

Month 13

Month 15

Month 17

Month 19

Month 21

Month 23

Month 25

Month 27

Month 29

Month 31

Month 33

Month 35

$(400,000)

$(200,000)

$-

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

Net Profit

Churn 1.25% Churn 2.5%

Month 1

Month 3

Month 5

Month 7

Month 9

Month 11

Month 13

Month 15

Month 17

Month 19

Month 21

Month 23

Month 25

Month 27

Month 29

Month 31

Month 33

Month 35

$(4,000,000)

$(2,000,000)

$-

$2,000,000

$4,000,000

$6,000,000

$8,000,000

Cumulative Net Profit

Churn 1.25% Churn 2.5%

• Impact of lowering the churn rate is felt more heavily in the later years, as expected• It has a significant impact on the long term profitability of the business


Churn

• 1% to 2.5% churn per month is acceptable • Higher than that, you are filling a leaky bucket

– Need to understand why you have low customer satisfaction and address the problem


Customer Relationships Web/Mobile Products– Grow Customers

© 2012 Steve Blank

Customer Relationships Web/Mobile Products Get/Keep/Grow

© 2012 Steve Blank

Ag Robot Customer Relationships Example

Demand generation plan and budget

• Word of mouth generation – 2 systems for “Demo day events”– 2 systems for customer demos– 4 x 30K each = $120,000

• World Ag Expo Booth – 1 x 40x40 corner booth with demo – Hold press event breakfast – $ 15 K (booth, banners, hotels)

• Magazine campaign – 3 ads in 2 magazines – Goal – get 2 articles on us– 2 x $ 10K + Ad agency = 30K

• Total $165 K“You prove that it works and everything else is easy. Distribution is not that complicated in farming.” – Wyatt Duncan, Integrated Crop Pest Control

Medical Device Customer Relationships Example

MammOpticsMarketing

Access to ACOG by former member

Strong influence on doctors via ACOG Standard of Care

Strongly influenced by

KOLs

MammOpticsMarketing

Researchers conducting

important clinical trials

Researchers with numerous

publications

Outsourced survey research

Researchers with strong peer

recommendations

MammOpticsMarketing

Focus on prominent journals Need two big

publications

Choose KOL as Principal Investigators

(PI)

MammOpticsMarketing

Effective method for educating

doctors

Doctors required to attend

workshops

Workshop must be approved by ACOG

Taught by objective medical

experts

MammOpticsMarketing

ACOG Annual Clinical

Meeting

Miami Breast Cancer Conference

Opportunity for feedback from

doctors

MammOpticsMarketing

Trusted information source for patients

Critical opinion leader for

technology adoption

Access to media outlets

MammOpticsMarketing

MammOpticsCustomer Acquisition Cost

Direct sales

Marketing

Device

Head sales5 reps

BonusesExpenses

MarketeerCoordinator

2 conferences

Processing unitRF Circuitry

LasersPackaging

$120,000

$60,000/e

$30,000$20,000$100,000$60,000

$25,000/e

$200$500

$1,500$2,000

Assume 200 sales per year at a $25,000 giving a profit of $3.2M

CAC $4,500

COGS $4,200

Housing AppCustomer Relationship Example

107

• We ran a Facebook ad to test actual willingness to pay for this service

2

108

• To test willingness to pay we used threeidentical ads with three different landing pages

2

109

• To test willingness to pay we used threeidentical ads with three different landing pages

2

Ad Sign-ups Clicks Ad spend

Free 0 23 $25

$1/household 0 25 $25

$1/user 0 24 $25

• Unfortunately, test results only proved users did not trust our site for payments

• Facebook traffic on this campaign was on our page for 4 seconds on average

• Roommate campaign had a 1:37 site time average• Outstanding question: can we win trust in other ways and then engage

users to pay rent through us?

110

• Customer archetype: Sara

How she searches Wants to be efficient (will use a broker if doing a

search on her own is too painful) Asks friends for recommendations

What Matters to Sara Wants to live in a fun place that is safe Doesn’t want to overpay Doesn’t have much time to hunt for a place Live with someone she trusts (moving to DC)

Influences Where friends go out/live Work location

Online DatingCustomer Relationships Example

What We Did: Landing Page + Web App

4 day progress report

What We Found: High referral traffic

Overall Signup progress

31 filled 5-min survey

1258

136

10.8%

Hypothesis: Women-in-relationships are likelier to click through, irrespective of distance status

Tested for $30 Facebook click through & conversion from FB impressions

Demand generation testWhat we did: Targeted women, all couples

Ad-1

Ad-4

Ad-3

Ad-2

What we found: women click more ...................................but not clear who will pay!

II Women likelier to click through irrespective of distance status

Couples will pay subscription if they find more sharing during free trial valuable

Subscription model test

LDRs

SLRs 4

6

Good if free

1

Paid

1

Takeaway: “More sharing” without convenience will have to be free.

LOCATION Impressions Men Women Women-in-rel

87140

Click Through rates

Demand generation test

Funnel: “Couples” campaign

Demand generation testWhat we found: Clicks, no web app usage

$ 29.7 this week

304,286 impressions

122 uniques85 new

30 sign-up clicks

0.01 c

0.35 c/new

0.99 c24.6% conversion

but one used web app

Online SalesCustomer Relationships Example

Referenced to our web site

Fill out savings calculator

Send request to sales

Reconnection with viable customer

Visit to site

Close sale

50%

20%

30%

80%

10%

Year 1 Year 5

70%

30%

30%

80%

20%

Total Revenue Total Revenue

1.44 million 18.14 million

100 000 hits 300 000 hits

Web funnel

Mobile App Customer Relationships Example

Success Depends on Virality > Churn

Ratio of early stage virality rate to churn rate = 2.00x





Demand creation via website

“Not a landing page”No Indonesian version

1 32

Doesn’t show the product

Demand creation via website - results

1 2 30

20406080

22

68 74Clicks

1 2 30.00%0.50%1.00%1.50%2.00%

0.59%

1.25%1.56%

CTR

1 2 30

0.5

1

1.5 1.34

0.54 0.62

CPC

1 2 30.00%1.00%2.00%3.00%4.00%5.00%

0.00%

2.94%4.05%

Conversions per click

People need to use the product for us to maximize learning

Software Reference Tool Customer Relationships Example

AdWords Testing

AB Testing Results

0% conversion 42% conversion 75% conversion 32% conversion

• Original Peaya website has 66% conversion rate• Conversion defined as people clicking the download button on the landing page• Experiment still underway; too few data points for drawing conclusions

Google & Facebook campaigns

• Keywords: free endnote, reference manager, pdf manager, Itunes for digital content, I tunes, manage pdf, organize paper, paper manager, citation manager, paper citation, cite pdfs

• 24 impressions, 2 clicks on google adwords• Clicks on free endnote and organize paper• No Facebook response• 1 Post on ResearchGate drew 7 visitors

We’re “a little” viral

12% of sign-ups from referrals14 of 117 new registrations came from referrals by 3 people from Jan 1 to Feb 1.

Referral bonus promoted in tutorial

Collaboration doesn’t “pop”…. yet

“Rate & Discuss” is least interesting tutorial screen so far

However:1) we can test different messages (ie

“collaborate”) 2) experiment is slightly biased in

ordering, we need further testing

Customer Relationships Example

Search Keywords

Lesson Learned:Very little search traffic -> a “missionary” sales effort

Highly Competitive Keywords

Lesson Learned:AdWords (paid SEM) is not going to be an efficient channel with these keywords

Medical Device Customer Relationships Example

Channel Incentives

Hospitals

Pain Clinics

Per Diem Revenue Model

Per Service Revenue Model

In-patient care/ hospitalization

Out-patient care/ home setting

Private Hospitals, specialty clinics

HMO, ACO, Non-profit, University Hospitals

All Institutions

VP

High Value Therapies

Pharmacoeconomics

Dosing flexibility

Efficient patientmanagement

Demand Creation

Budget ~ $300 k/year

NSF I-CorpsThe Lean LaunchPad

Lecture 6: Revenue Streams

How Do You Make Money?

Version 6/22/12

Revenue Streams

How do you Make Money?

© 2012 Steve Blank

The Two Key Questions• What’s my revenue model?• Within the revenue model – how do I

price the product?

Revenue Model =

the strategy the company uses to generate cash from each customer

segment

Revenue Streams

1.How many will we sell?2.Where/who is the money coming from?3.How do we price the product?4.Does this add up to a

business worth doing?

How Many Will You Sell?

• What’s the Market Size & estimate of Market Share?

• How many can your channel sell?• How much will the channel cost?• How many customer activations?

• Revenue? Churn/Attrition rate? customers/?

• How much will it cost to acquire a customer?• How many units will they buy from each of these efforts?

Top down: 10% of a million-person market=100,000 customersBottom up: 1,000 customers/month 1st year => 3,000/month 3rd year

Where is the money coming from?Revenue Model Choices

Bits

Physical

Product

Web Physical

Channel

Direct Sales Products License Subscription Upsell/Next Sell

Ancillary Sales:• Referral revenue • Affiliate revenue• E-mail list rentals• Back-end offers

Direct Sales Products Service Upsell/Next Sell

Referrals Leasing

Direct Sales Products Subscription Add-on services Upsell/Next Sell

Referrals

Key Revenue Model Questions• What are my customers paying for?• What capacity do my customers have to

pay?• How will you package your product ?• How will you price the offerings?

Pricing Model =

the tactics you use to set the price in each customer segment

How to price the product?

• Cost plus• Competitive pricing• Volume pricing• Value pricing• Portfolio pricing

• “Razor/razor blade” model• Subscription• Time/Hourly Billing• Leasing

Pricing Models - Physical

Common approaches to pricing Cost + markup Typically not a strategic way to price Driven by internal economics and not

customer insight

Cost based

Value based

Based on buyer’s perception of value (e.g. time saved, new efficiency created, etc.)

Customers don’t necessarily feel that they want to pay this way

Additional components of pricing

• Exclusive vs. non-exclusive• What do you price? What do you give away

for free?• How does cost vary at different production

levels?

Competition as an influence

• Pure competition• Oligopoly• Monopoly

Nature of Market

How they will react?

What is their product? What are their costs and prices? “What pricing will make them feel

the worst?”

Payment Flow

Leasing company

Tennant

Property Ownersinstall meter

send monthlywater bill

$9/month(2yrs)

$200 one time

water billplus $2/month

$2/month

activities

payments

• Draw the diagram• Put in numbers

Single versus Multi-sided Markets

Single/Multi-side Markets

• Single-sided markets care about revenues

• Multi-sided markets may care about users first, revenues second– Often Web-based

“Users First” Companies

If you say your business is advertising based:

• How do you get to 10M monthly users?• How do you become one of the top 5 websites

visited?• How much do the “payers” actually pay?

“Revenue First” Companies

• Time to doublings for monthly revenues• Key questions:• When will I get to $100k/month in revenues?• When will I get to $1M/month in revenues?• What assumptions about my business am I

making when I reach these milestones?

Market Type and Revenue

Other Issues

• Distribution channel affects revenue streams

• Market type affects revenue streams• Demand curve affects revenue streams• Consider lifetime value

New Market Revenue Forecast

New Market Sales Curve

Existing Market Revenue Forecast

Existing Market

Resegmented Market Revenue Forecast

Common categories of Web/Mobile revenue models

“Direct” revenue models

• Sales: Product, app, or service sales

• Subscriptions: SAAS, games, monthly subscription

• Freemium: use the product for free: upsell/conversion

• Pay-per-use: revenue on a “per use” basis

• Virtual goods: selling virtual goods

• Advertising sales: unique and/or large audience

“Ancillary” revenue models

• Referral revenue: pay for referring traffic/customers to other web or mobile sites or products.

• Affiliate revenue: finder’s fees/commissions from other sites for directing customers to make purchases at the affiliated site

• E-mail list rentals: rent your customer email lists to advertiser partners

• Back-end offers: add-on sales items from other companies as part of their registration or purchase confirmation processes, or “sell” their existing traffic to a company that strives to monetize it and share the resulting revenu3

Asset Sale• Sale of ownership right to a physical

product

Usage Fee• Usage of service. Fee is proportional to

the usage of the service.

Subscription Fee

• Fee for continuous access to a service

Renting

• Fee for temporary access to a good or service

Licensing

• Fee for use of some IP (including software)

Intermediation Fee

• Often found in marketplaces of various types, a fee for bringing together two or more parties involved in a transaction

Advertising

• Fee paid by brands and companies to get in front of potential customers

Revenue Model Summary

Example AnalysisTarget marketUSA market – 1.5 M patientsEurope – 2 M patientsPackageReusable wrist watchDisposable sensors / patchAccess to patients dataProduct development4 people in the beginning$2 million1.5 years to develop

SalesStart in EU middle of year 3Start in USA end of year 4Personnel Average salary $120 KLoad factor 1.5Headcount from 4 to 174 in year 8Financing Series A – $3 MSeries B – $10 M

Price per package: $150

COGS Profit$60 per unit $90 per unit

Operating Expenses

Does it add up?

1. Is revenue adequate to cover costs in the short term?

2.Are you confident revenue will grow materially if not dramatically over time?

3.Does profitability improve as the revenues get bigger?

Thought experiment

• Time to doublings for monthly revenues• Key questions:

– When will I get to $100k/month in revenues?

– When will I get to $1M/month in revenues?– What assumptions about my business am I


Optical Equipment Revenue Model Example

Phi OpticsComponent vendors

University Business Services

Researcher Grant AgenciesIndustry Contracts

applies for grants/contracts

funds grant/contractrequest for equipment

QPI info & price

activity

payment

Academia Payment Flow

Buys QPI device


Purchasing Dept.Researcher CTO

VP for R&D

Justifies need for equipment

Includes equipment in the budget

QPI specs + price

activity

payment

Bio-Pharma Payment Flow

Buys QPI device

Phi OpticsEquipment suppliers

Accounting Dept.

Product Dev Engineers +

Business Dev ($) + Legal Dept (royalties)

CTOVP for R&D

Justifies QPI integration in OEM systemSuggests co-development deal

Allocates funds in the budget

QPI specs + price+ SOW

activity

payment

OEM Payment Flow

Funds SOWPays royalties/sub-licensing/other recurring fees

Nitrate SensorRevenue Model Example

OEM

Large farm

USDA/EPA

Small farm

Product

Money

Water Data only

OEM

Us

Large farm

USDA/EPA

Small farm

Product

Money

Nutrient Data

Product sales

OEM

Us

Large farm

USDA/EPA

Small farm

Product

Money

Nutrient Data

Licensing/sales

OEM

Us

Large farm

USDA/EPA

Small farm

Product

Money

Nutrient Data

Independent of licensing decision

Us

USDA/EPA

Small farm

400 acres, 4 soil types: 8 sensors

Install sensors

$1K/sensor less incentive = $4140

Using $1000 per sensor (2x cost) puts us ~$350 more expensive than current commercial nitrate sensors. We’re including pH, moisture, and conductivity, though.

Incentives: Best case scenario $45.89/acreWorst case: $9.65/acre or state dependent

25% cost coverage

$3860 for 400 acre nutrient management

Us

USDA/EPA

Small farm


Install sensors




25% cost coverage


Average $10.40 in N-fertilizer lost to groundwater per acre: Repaid in 1 year

Bio-Based Chemical IntermediatesRevenue Model Example

Here’s what we hypothesized…

Distributor

Monomer manufacturer

Surfactant formulator

Surfactant user

Consumer facingcompany

Consumer Market Pull(Sustainability agenda)

Revenue model: Hypothesis

Biomass supplier Biomass 15 c/lbBiomass Range 5-20c/lb

Monomer ?Detergent alcohols 80c/lb

Formulation ?Formulated Surfactant

90c/lb

Surfactant 100 c/lbFormulated Detergent

100c/lb

Detergent 200 c/lb10% Surfactant in

Detergent

Product

Decision Makers

Here’s what we did…

Techno-commercial analysis expert

Revenue Model: Experiment 1

Life Cycle Assessment Expert Economic analysis expert

DirectorDirector

Production Economics Experts

Business Manager

Economic analysis expert

Financial metrics

Ethanol DMF Lactic Bi-functional fatty acid

Scale (T/day) 500,0001b/day

600,000 lb/day

300,000 lb/day

Feedstock 15 c/lb 19 c/lb 16 c/lb

Processing 2 c/lb 26 c/lb 25 c/lb

Capital 1 c/lb 2 c/lb 41 c/lb

Other 3 c/lb 15 c/lb 39 c/lb

MSP (c/lb) 21 c/lb 62 c/lb 120 c/lb

Revenue model: Result 1

Financial metrics



600,000 lb/day

300,000 lb/day







Financial metrics



600,000 lb/day

300,000 lb/day







Financial metrics



600,000 lb/day

300,000 lb/day

?

Feedstock 15 c/lb 19 c/lb 16 c/lb 15 c/lb

Processing 2 c/lb 26 c/lb 25 c/lb ?

Capital 1 c/lb 2 c/lb 41 c/lb ?

Other 3 c/lb 15 c/lb 39 c/lb ?

MSP (c/lb) 21 c/lb 62 c/lb 120 c/lb < 100 c/lb


Less than 100 c/lb is achievable when:1. Large reactor with 500,000 lb/day capacity2. Optimized fermentation and processing costs

Payment Flow

Distributor



Surfactant user





Monomer 80 c/lbDetergent alcohols 80c/lb

Formulation 90 c/lbFormulated Surfactant

90c/lb


100c/lb


Detergent

Product

Decision Makers

Disposal WasteRegulations

Payment Flows Example

CanScan Payment Flows

Class 6 - Update 3.5.2012

CanScan

Hospital / Clinic

Oncologist

Private payer/MAC

Pathologist/ billing

Sales/orderPaymentService

Services rendered

$$

$$

Clinical Diagnostic Services

CanScan

Pharmaceutical Company

Researchers


$$

Pharmaceutical Products

Instr. /Kits

Medical DevicePricing Example

MammOpticsPricing Strategy

Equipment Lease model

Per-use model

Consumable

Cost of the device

Service per year

Per-use fee

Consumable

$50,000

$3,000

0

0

$5,000

$10,000

0

0

$5,000

0

$50

0

$25,000

0

0

$20



Per-use model

Consumable

Cost of the device

Service per year

Per-use fee

Consumable

$50,000

$3,000

0

0

$5,000

$10,000

0

0

$5,000

0

$50

0

$25,000

0

0

$20

Approved by

customers and

investors

GrapheneRevenue Model Example

Distributors

Researchers

Graphene Frontiers

Current TEM grid provider

More workAdd value

Material supplier

Payment flow

Distributors

Graphene Frontiers

Material supplier

Flexible display manufacturer

Electronic User

Research, cost

E-reader manufacturer Parts suppliers

Parts suppliers

Payment flow

Direct Cost Estimates: Scale Matters• Cost per in2 – 1” Furnace = $.80

• Cost per in2 – 2” Furnace = $.45


If we can move to N (replacing Ar, key direct cost driver)




“Holy Grail”: 4” or larger continuous production w/Nitrogen

Cost per in2 – 4” Furnace, Batch/Continuous = … $.05

SensorPricing Tactics Example

Technology Supplier

Industrial Plants

Plant #1

Plant #2

Plant #3

Understand Economics of Plant + Sensors

Understand Economics of Technology Supplier

Value pricingWho does this?

205Diaphragm Membrane

$240/MT Cl2

Cost of damages + downtime per incident per year

Operational conditions Capital cost per incident Downtime per incident # of cells protected Time between incidents Number of cells, US and worldwide

Diaphragm Membrane Membrane Header

$2,500 $270 $10,600

Value per unit per year

206

Soft product launch projected for Q1-Q2 2012General launch projected for Q4 2012

Year Type % Revenue [/year]1 Innovators (US) 2.5 $271,500

Operating costs for 1st year projected to be $350,000

2 Early Adopters 16 $15,040,000

3 Early Majority 50 $47,000,000

4 Late Majority 84 $78,960,000

Full Penetration 100 $94,000,000


$2,500 $270 $10,600

Medical DeviceRevenue Model Example

What we make

DentistDentalOptics

~$2000

Device cost (one time)

~$2.50 per patient

Disposables

What the dentist normally makes

Dentist Patient

Insurance

Co-pay

Membership

$250

$250

Equipment / Variable Costs

Note: Assumes 50/50 copay-insurance split

What we’d add for the dentist

Dentist PatientDentalOptics

Insurance

Co-pay

Membership

~$2000

$250


$250

~$2.50 per patient

Disposables


Device creates

additional periodontal procedures


Farm Nitrate SensorRevenue Model Example

Us

USDA/EPA

Small farm


Install sensors, provide service

$1K/sensor less incentive = $4140 to recover in contract

Incentives: Best case scenario $45.89/acreWorst case: $9.65/acre or state dependent 25% cost coverage


Average $10.40 in N-fertilizer lost to groundwater per acre

Pay for 2-3 year contract service monthly

Economics of TSP Operation

Us

USDA/EPA

Small farm






Onion Case Study (44K acres): Cost: DAP - $700/ton + $25/aRate: 280lb/a for 400a farm

= $39K

30% Improvement: $13K savedCharge: $6K/season

= $660K/yr contract revenue



Biofactories for TherapeuticsRevenue Model Example

Revenue Model

= money= information

= relationship

Large Pharma

INFLUENCER

Hospital/Clinic

Physicians

Patient

Employer

Government

Taxpayer

Government Payor

Private Payor

Pulmonary Function Lab

Wholesalers

= AAT

Optics Design CompanyRevenue Model Example

Quantity purchase of components for prototype &

mass production .

Revenue Model & Payment Flows

217

LighTip™ Advanced Illumination Engineering

™

Reflector

Desired target

Light source

Customer:LED company

Key Partner:Optical Manufacturer

Customer’s final product

Our deliverabl

ePrototype & High Volume Production (0.25%-8% commission)

Engineering contract ($150-300/hour)

5/23/2012

Complex Sensor NetworksRevenue Model Example

Revenue Model and Customer Acquisition

Year 1:(3 Customers)

1K nodes


30K nodes


200K nodes

SET’s price $400

$400K $12M $80M


400K nodes

$160M

Middleware and Reusable Software

Subsystems

SET Sensor Node Product

OEM HW components ($100 COGS)


5K nodes

$2M

First target customers

Leverage our partners’ existing customers

Healthcare SoftwareRevenue Model Example

Revenue Model

Healthcare Providers

Health Information Exchanges

Patient

Patient Data

Patient Data

Portal $$$Tailored Messagingfor + Patient Outcomes

Patient Analytics $$$

Health Insights

Resources/Tools Patient Profile

The Lean LaunchPad

Lecture 6: Revenue Streams

How Do You Make Money?

Version 6/22/12

Revenue Streams

How do you Make Money?

© 2012 Steve Blank

The Two Key Questions• What’s my revenue model?• Within the revenue model – how do I

price the product?

Revenue Model =

the strategy the company uses to generate cash from each customer

segment

Revenue Streams

1.How many will we sell?2.Where/who is the money coming from?3.How do we price the product?4.Does this add up to a

business worth doing?

How Many Will You Sell?

• What’s the Market Size & estimate of Market Share?

• How many can your channel sell?• How much will the channel cost?• How many customer activations?

• Revenue? Churn/Attrition rate? customers/?

• How much will it cost to acquire a customer?• How many units will they buy from each of these efforts?

Top down: 10% of a million-person market=100,000 customersBottom up: 1,000 customers/month 1st year => 3,000/month 3rd year

Where is the money coming from?Revenue Model Choices

Bits

Physical

Product

Web Physical

Channel

Direct Sales Products License Subscription Upsell/Next Sell

Ancillary Sales:• Referral revenue • Affiliate revenue• E-mail list rentals• Back-end offers

Direct Sales Products Service Upsell/Next Sell

Referrals Leasing

Direct Sales Products Subscription Add-on services Upsell/Next Sell

Referrals

Key Revenue Model Questions• What are my customers paying for?• What capacity do my customers have to

pay?• How will you package your product ?• How will you price the offerings?

Pricing Model =

the tactics you use to set the price in each customer segment

How to price the product?

• Cost plus• Competitive pricing• Volume pricing• Value pricing• Portfolio pricing

• “Razor/razor blade” model• Subscription• Time/Hourly Billing• Leasing

Pricing Models - Physical

Common approaches to pricing Cost + markup Typically not a strategic way to price Driven by internal economics and not

customer insight

Cost based

Value based

Based on buyer’s perception of value (e.g. time saved, new efficiency created, etc.)

Customers don’t necessarily feel that they want to pay this way

Additional components of pricing

• Exclusive vs. non-exclusive• What do you price? What do you give away

for free?• How does cost vary at different production

levels?

Competition as an influence

• Pure competition• Oligopoly• Monopoly

Nature of Market

How they will react?

What is their product? What are their costs and prices? “What pricing will make them feel

the worst?”

Payment Flow

Leasing company

Tennant

Property Ownersinstall meter

send monthlywater bill

$9/month(2yrs)

$200 one time

water billplus $2/month

$2/month

activities

payments

• Draw the diagram• Put in numbers

Single versus Multi-sided Markets

Single/Multi-side Markets

• Single-sided markets care about revenues

• Multi-sided markets may care about users first, revenues second– Often Web-based

“Users First” Companies

If you say your business is advertising based:

• How do you get to 10M monthly users?• How do you become one of the top 5 websites

visited?• How much do the “payers” actually pay?

“Revenue First” Companies

• Time to doublings for monthly revenues• Key questions:• When will I get to $100k/month in revenues?• When will I get to $1M/month in revenues?• What assumptions about my business am I


Market Type and Revenue

Other Issues

• Distribution channel affects revenue streams

• Market type affects revenue streams• Demand curve affects revenue streams• Consider lifetime value

New Market Revenue Forecast

New Market Sales Curve

Existing Market Revenue Forecast

Existing Market

Resegmented Market Revenue Forecast

Common categories of Web/Mobile revenue models

“Direct” revenue models

• Sales: Product, app, or service sales

• Subscriptions: SAAS, games, monthly subscription

• Freemium: use the product for free: upsell/conversion

• Pay-per-use: revenue on a “per use” basis

• Virtual goods: selling virtual goods

• Advertising sales: unique and/or large audience

“Ancillary” revenue models

• Referral revenue: pay for referring traffic/customers to other web or mobile sites or products.

• Affiliate revenue: finder’s fees/commissions from other sites for directing customers to make purchases at the affiliated site

• E-mail list rentals: rent your customer email lists to advertiser partners

• Back-end offers: add-on sales items from other companies as part of their registration or purchase confirmation processes, or “sell” their existing traffic to a company that strives to monetize it and share the resulting revenu3

Asset Sale• Sale of ownership right to a physical

product

Usage Fee• Usage of service. Fee is proportional to

the usage of the service.

Subscription Fee

• Fee for continuous access to a service

Renting

• Fee for temporary access to a good or service

Licensing

• Fee for use of some IP (including software)

Intermediation Fee

• Often found in marketplaces of various types, a fee for bringing together two or more parties involved in a transaction

Advertising

• Fee paid by brands and companies to get in front of potential customers

Revenue Model Summary

Example AnalysisTarget marketUSA market – 1.5 M patientsEurope – 2 M patientsPackageReusable wrist watchDisposable sensors / patchAccess to patients dataProduct development4 people in the beginning$2 million1.5 years to develop

SalesStart in EU middle of year 3Start in USA end of year 4Personnel Average salary $120 KLoad factor 1.5Headcount from 4 to 174 in year 8Financing Series A – $3 MSeries B – $10 M

Price per package: $150

COGS Profit$60 per unit $90 per unit

Operating Expenses

Does it add up?

1. Is revenue adequate to cover costs in the short term?

2.Are you confident revenue will grow materially if not dramatically over time?

3.Does profitability improve as the revenues get bigger?

Thought experiment

• Time to doublings for monthly revenues• Key questions:

– When will I get to $100k/month in revenues?

– When will I get to $1M/month in revenues?– What assumptions about my business am I


Optical Equipment Revenue Model Example


University Business Services

Researcher Grant AgenciesIndustry Contracts

applies for grants/contracts

funds grant/contractrequest for equipment

QPI info & price

activity

payment

Academia Payment Flow

Buys QPI device


Purchasing Dept.Researcher CTO

VP for R&D

Justifies need for equipment

Includes equipment in the budget

QPI specs + price

activity

payment

Bio-Pharma Payment Flow

Buys QPI device

Phi OpticsEquipment suppliers

Accounting Dept.

Product Dev Engineers +

Business Dev ($) + Legal Dept (royalties)

CTOVP for R&D

Justifies QPI integration in OEM systemSuggests co-development deal

Allocates funds in the budget

QPI specs + price+ SOW

activity

payment

OEM Payment Flow

Funds SOWPays royalties/sub-licensing/other recurring fees

Nitrate SensorRevenue Model Example

OEM

Large farm

USDA/EPA

Small farm

Product

Money

Water Data only

OEM

Us

Large farm

USDA/EPA

Small farm

Product

Money

Nutrient Data

Product sales

OEM

Us

Large farm

USDA/EPA

Small farm

Product

Money

Nutrient Data

Licensing/sales

OEM

Us

Large farm

USDA/EPA

Small farm

Product

Money

Nutrient Data

Independent of licensing decision

Us

USDA/EPA

Small farm


Install sensors




25% cost coverage


Us

USDA/EPA

Small farm


Install sensors




25% cost coverage


Average $10.40 in N-fertilizer lost to groundwater per acre: Repaid in 1 year

Bio-Based Chemical IntermediatesRevenue Model Example

Here’s what we hypothesized…

Distributor



Surfactant user



Revenue model: Hypothesis


Monomer ?Detergent alcohols 80c/lb

Formulation ?Formulated Surfactant

90c/lb


100c/lb


Detergent

Product

Decision Makers

Here’s what we did…

Techno-commercial analysis expert

Revenue Model: Experiment 1

Life Cycle Assessment Expert Economic analysis expert

DirectorDirector

Production Economics Experts

Business Manager

Economic analysis expert

Financial metrics



600,000 lb/day

300,000 lb/day







Financial metrics



600,000 lb/day

300,000 lb/day







Financial metrics



600,000 lb/day

300,000 lb/day







Financial metrics



600,000 lb/day

300,000 lb/day

?

Feedstock 15 c/lb 19 c/lb 16 c/lb 15 c/lb

Processing 2 c/lb 26 c/lb 25 c/lb ?

Capital 1 c/lb 2 c/lb 41 c/lb ?

Other 3 c/lb 15 c/lb 39 c/lb ?

MSP (c/lb) 21 c/lb 62 c/lb 120 c/lb < 100 c/lb


Less than 100 c/lb is achievable when:1. Large reactor with 500,000 lb/day capacity2. Optimized fermentation and processing costs

Payment Flow

Distributor



Surfactant user





Monomer 80 c/lbDetergent alcohols 80c/lb

Formulation 90 c/lbFormulated Surfactant

90c/lb


100c/lb


Detergent

Product

Decision Makers

Disposal WasteRegulations

Payment Flows Example

CanScan Payment Flows


CanScan

Hospital / Clinic

Oncologist

Private payer/MAC

Pathologist/ billing


Services rendered

$$

$$

Clinical Diagnostic Services

CanScan

Pharmaceutical Company

Researchers


$$

Pharmaceutical Products

Instr. /Kits

Medical DevicePricing Example



Per-use model

Consumable

Cost of the device

Service per year

Per-use fee

Consumable

$50,000

$3,000

0

0

$5,000

$10,000

0

0

$5,000

0

$50

0

$25,000

0

0

$20



Per-use model

Consumable

Cost of the device

Service per year

Per-use fee

Consumable

$50,000

$3,000

0

0

$5,000

$10,000

0

0

$5,000

0

$50

0

$25,000

0

0

$20

Approved by

customers and

investors

GrapheneRevenue Model Example

Distributors

Researchers

Graphene Frontiers

Current TEM grid provider

More workAdd value

Material supplier

Payment flow

Distributors

Graphene Frontiers

Material supplier

Flexible display manufacturer

Electronic User

Research, cost

E-reader manufacturer Parts suppliers

Parts suppliers

Payment flow

Direct Cost Estimates: Scale Matters• Cost per in2 – 1” Furnace = $.80



If we can move to N (replacing Ar, key direct cost driver)




“Holy Grail”: 4” or larger continuous production w/Nitrogen

Cost per in2 – 4” Furnace, Batch/Continuous = … $.05

SensorPricing Tactics Example

Technology Supplier

Industrial Plants

Plant #1

Plant #2

Plant #3

Understand Economics of Plant + Sensors

Understand Economics of Technology Supplier

Value pricingWho does this?

290Diaphragm Membrane

$240/MT Cl2

Cost of damages + downtime per incident per year

Operational conditions Capital cost per incident Downtime per incident # of cells protected Time between incidents Number of cells, US and worldwide


$2,500 $270 $10,600

Value per unit per year

291

Soft product launch projected for Q1-Q2 2012General launch projected for Q4 2012

Year Type % Revenue [/year]1 Innovators (US) 2.5 $271,500

Operating costs for 1st year projected to be $350,000

2 Early Adopters 16 $15,040,000

3 Early Majority 50 $47,000,000

4 Late Majority 84 $78,960,000

Full Penetration 100 $94,000,000


$2,500 $270 $10,600

Medical DeviceRevenue Model Example

What we make

DentistDentalOptics

~$2000


~$2.50 per patient

Disposables

What the dentist normally makes

Dentist Patient

Insurance

Co-pay

Membership

$250

$250



What we’d add for the dentist

Dentist PatientDentalOptics

Insurance

Co-pay

Membership

~$2000

$250


$250

~$2.50 per patient

Disposables


Device creates

additional periodontal procedures


Farm Nitrate SensorRevenue Model Example

Us

USDA/EPA

Small farm






Average $10.40 in N-fertilizer lost to groundwater per acre



Us

USDA/EPA

Small farm






Onion Case Study (44K acres): Cost: DAP - $700/ton + $25/aRate: 280lb/a for 400a farm

= $39K

30% Improvement: $13K savedCharge: $6K/season

= $660K/yr contract revenue



Biofactories for TherapeuticsRevenue Model Example

Revenue Model

= money= information

= relationship

Large Pharma

INFLUENCER

Hospital/Clinic

Physicians

Patient

Employer

Government

Taxpayer

Government Payor

Private Payor

Pulmonary Function Lab

Wholesalers

= AAT

Optics Design CompanyRevenue Model Example

Quantity purchase of components for prototype &

mass production .

Revenue Model & Payment Flows

302

LighTip™ Advanced Illumination Engineering

™

Reflector

Desired target

Light source

Customer:LED company

Key Partner:Optical Manufacturer

Customer’s final product

Our deliverabl

ePrototype & High Volume Production (0.25%-8% commission)

Engineering contract ($150-300/hour)

5/23/2012

Complex Sensor NetworksRevenue Model Example

Revenue Model and Customer Acquisition


1K nodes


30K nodes


200K nodes

SET’s price $400

$400K $12M $80M


400K nodes

$160M

Middleware and Reusable Software

Subsystems

SET Sensor Node Product

OEM HW components ($100 COGS)


5K nodes

$2M

First target customers

Leverage our partners’ existing customers

Healthcare SoftwareRevenue Model Example

Revenue Model

Healthcare Providers

Health Information Exchanges

Patient

Patient Data

Patient Data

Portal $$$Tailored Messagingfor + Patient Outcomes

Patient Analytics $$$

Health Insights

Resources/Tools Patient Profile

The Lean LaunchPad

Lecture 7: Partners

Version 6/13/12

Who are your Partners and Suppliers?

Key Partners

Who are your Partners and Suppliers?

© 2012 Steve Blank

What defines a “Partner?”

• Shared economics

• Mutual success / failure

• Co-development/invention

• Common customer

But remember - you’re a startup

Why Have Partners?

311

● Faster time to market

● Broader product offering

● More efficient use of capital

● Unique customer knowledge or expertise

● Access to new markets

312

Types of Partners

Partners – Strategic Alliances

313

• Reduce the list of things your startup needs to build or provide to offer a complete product or service.

• Use partners to build the “whole product”

• using 3rd parties to provide a customer with a complete solution

• complement your core product with other products or services

• Training, installation, service, etc

Example: In 1996, Starbucks partnered with Pepsico to bottle, distribute and sell the popular coffee-based drink, Frappacino

Partners – Joint Business Development

• Joint promotion of complementary products• Share advertising, marketing, and sales programs

• One may be the dominant player

Example: Intel offered advertising fees to PC Vendors

315

Startup mistakeStrategic alliances and joint partnerships

Not needed for EarlyvangelistsAre needed for Mainstream customers

Usually fail

Partners – Coopetition

316

• Joint promotion of competitive products

• Competitors might join together in programs to grow awareness of their industry

• Tradeshows

• Industry Associations

Example: Automotive Suppliers form the Automotive Industry Action Group (AIAG) - 900 members

Partners – Key Suppliers

317

• Outsource suppliers• Backoffice, supply chain, manufacturing

• Direct suppliers• Components, raw materials, etc.

Example: Apple builds the iPhone from multiple suppliers

Traffic Partners – Virtual Channels

318

• Long-term agreements with other companies • deliver long-term, predictable levels of customers • “Cross referral” or swapping basis• Paid on a per-referral basis• Partners drive traffic using text-links, with onsite promotions, and with

ads on the referring site• Partners sometimes exchange email lists

http://medical-tools.com/dental/

319

Partner Risks

Partnership Disaster: Boeing

320

CollaborativeLooked great on paper.

Worst business decision of the 21st century

Managing partners - Risks

• Impendence mismatch• Longest of partners schedule becomes your longest item• No clear ownership of customer• Products lack vision – shared product design• Different underlying objectives in relationship• Churn in partners strategy or personnel• IP issues • Difficult to unwind or end

Should I take an investment from a Large Company?

• They are interested in their bottom line, not yours• Their objectives are not to make you a large company• Who’s the sponsor? What’s the motivation?

• Needs to come from the business side• Not the venture side

• Try to get sales deals not investment• Or try to offer warrants based on sales success

Startup Partner Strategies

323

• Don’t confuse partners for Earlyvangelists vs. mainstream• Don’t confuse big company partnering with startup strategy• Find the one that gives you an unfair advantage• Recognize you don’t matter to a large partner

324

CatalystsPartner Examples

Partners:Hypothesis and Experiments

T3

Thru-Pore Technologies

Research Catalysts, Inc.

326

Materials CoatingPartner Examples

331

Molecular DiagnosticsPartner Examples

Chip Manufacturers

Partners

LiquiLume

Hospitals

OEMs

Packaging

Reagents (IDT, Fisher)

Sample Prep (not for RUO)

Shippers (UPS, FedEx)

Distributors (Fisher)

Doctors

Clinical Labs

Dx Test Company

Research Labs

Back End Front End

Back-End Partners

Type Examples Benefit Risk / Need

Chip manufacturer

HTE Labs Make optofluidic chips (key element of technology)

High / Critical

Packaging ? Keep device costs low Low / Essential

OEMs Laser or detector manufacturers

Parts needed to build complete instrument

Low, Med / Essential

Reagents Supplier

IDT, Fisher Provide custom probes and control targets.

Med / Essential

Sample Prep. Instrument

Qiagen Partner for validation of input target samples

Low / Nice

Front-End Partners

Type Examples Benefit Risk / Need

Distributor Fisher Sell chips, reagents Low / Not critical for RUO

Research labs UCSF oncologists, Stanford MDx Lab, UCSF Micro. Lab

Will validate technology; publish; develop assays

Low / Critical during phase I

Dx test company

Genentech;Companion Dx w

pharma and biotechs;Specialty Dx test cos.

Possibly unique test on unique platform, partner

develops assayStrategic alliance

Low / Synergistic

Clinical labs Quest, LabCorp Help develop CLIA-waived application; 510(k); clinical

trials

Med / Crucial during phase II

335

Complex Sensor NetworksPartner Examples

Universe of PartnersSensor device/network co’s Embedded platform makers

Application specialists

SET

Potential Partnerships

SET

Sensor device/network co’s Embedded platform makers

Application specialists

Medical DevicePartner Examples

Partnerships: DistributionMammOptics

Jed HwangSales

RepresentativeCardiovascular

industry

Value Proposition

Efficacy is easier to sell than safety

Good data convinces customers

PricingLazik

surgery as proxy

Per use fee opens up

sales

Per use fee presents risk

of competition

Partnerships

Who are national and regional KOLs

PublishingColleaguesImportant

trials

CONFIRMED

CONFIRMED

Market research$300/dr/hr

Min $5015-20% acceptanceOutsourcing cost

Partnerships: Clinical TrialsMammOptics

Noah SimonGraduate Student

Statistics, Stanford

Method to estimate number of patients based on desired efficacyKey parameters: specificity and sensitivity

Overview of more accurate statistical analysis of interim studiesNeed to hire professional statistician

Provide contacts for hiring appropriate statisticians

Partnerships: ReimbursementsMammOptics

Shannon BergstedtCardioDX

Reimbursement Office

Doctor Patient

Insurance

Provides service

Pays membership

Pays for procedure

Startup

Notifies of procedure

Reimbursement officer

“The reimbursement environment is complex,

somewhat hazy, and can be hostile”1) Codes

2) Coverage3) Payment

Partnerships: ManufacturingMammOptics

Don Archambault, Director of Business Development, Omnica Corporation: specialized in MEDICAL DEVICE DESIGN, product engineering and product development.

Scanning Device, 75% Gross margin- Initial Discounts to gain adoption

9 Inches

~5 lbs

COGS$4-5k per

unit

Gross Profit12-15k per unit

Gross Profit

Discounts for Initial Market

COGS$4-5k per

unit

DSP

RFIC

Photo probe

Disposable head

The Lean LaunchPad

Lecture 8: Resources, Activities & Costs

Version 6/22/12

Key Activities

What’s Most Important for the Business?

© 2012 Steve Blank

Key Resources

What’s Are Your Most Important Assets?

Cost Structure

What are the Costs and Expenses

© 2012 Steve Blank

How You Make Money

<

Key Resources

Four Critical Resources

• Physical• Financial• Human• Intellectual

Physical Resources

• company facilities– office space, company location

• product/services – supply of silicon wafers or iron ore, or

thousands of feet of warehouse space?

• Many physical goods are capital intensive

Financial Resources

• Friends and Family• Crowdfunding• Angels• Venture Capital• Corporate partners • Others: SBA or SBIR grants• Lease-lines• Factoring• Vendor-financing

Human Resources

• qualified employees• mentors, teachers, coaches, advisors

Mentors, Teachers, Coaches

• Mentors, teachers, coaches advance your personal career– If you want to learn a specific subject find a teacher– If you want to hone specific skills or reach an exact

goal hire a coach – If you want to get smarter and better over your career

find someone who cares about you enough to be a mentor

Advisors

• Advisors are people you need to help advance your company’s success– Founders fail when they believe their visions are facts– Listening to experienced advice can help you sort

through whether your vision is a hallucination– Getting an advisory board (by expanding your circle of

accumulated wisdom past their investors) is so important that it’s an explicit step in the Customer Development process

Qualified Employees/Culture

• Are the difference between a good idea that never went anywhere and a billion dollar firm

360

MBA295F Customer Development

in the High-Tech Enterprise Spring

2007

Executive Traits by Stage

Entrepreneurial- Driven Learning and Discovery

Mission-Oriented Management

Process-Managed Execution and Growth

Personal Contribution

Superstar Leader Manager of plans, goals, process, and personnel

Time Commitment 24/7 As needed Long term 9 to 5

Planning Opportunistic and agile

Mission- and goal-driven

Process-, and goal-driven

Process Hates and eliminates As needed, driven by mission

Implements and uses

Management Style Autocratic, star system

Distributed to departments

May be bureaucratic

Span of Control Hands-on Mission-driven, synchronized

Distributed down the organization

Focus High and passionate vision

Mission Execution

Uncertainty/Chaos Brings order out of chaos

Focuses on fast response

Focuses on repeatability




Intellectual Property

Trademark protects branding & marks

• Trademark gives you the right to prevent others from using “confusingly similar” marks and logos

• Trademark protection lasts as long as you use the mark• The more you use the mark, the stronger your protection• Trademark registration is optional, but has significant

advantages if approved • Country by country

Copyright protects creative works of authorship

• Copyright gives right to prevent others from copying, distributing or making derivatives of your work

– Protects “expressions” of ideas but does not protect the underlying ideas

• (Way) more than just technology: – songs, books, movies, photos, etc.

• Copyright protection lasts practically forever• Copyright does not prevent independent development• Registration is optional, but is required to sue for

infringement

Trade Secrets

• Information that is kept secret and has economic value to the business

• Coke recipe, customer lists, product road maps.• No registration required• Can last for as long as you take reasonable

steps to keep confidential

Contract

• Protection agreed to by contract

• No registration process

• You have whatever protection is defined in the contract (e.g., NDA gives you certain rights to protection of your confidential information)

• The protection lasts for the time period defined in the contract

Patents• A government granted monopoly

– prevents others from making, using or selling your invention– Even if the other’s infringement was innocent or accidental

• Invention must be non-obvious• Protection lasts typically for 15-20 years• Application and examination is required

– Typical cost for application and exam is $10-30k– Typical time for application and exam is 1-4 years

• Must file in U.S. within one year of sale, offer for sale, public disclosure or public use

• Provisional application alternative

What Can be Patented?

• Just about anything . . .– Circuits, hardware– Software, applied algorithms– Formulas, designs– User interfaces– Applications, systems– Business processes (sometimes)

• But not these . . . – Scientific principles– Pure mathematical algorithms

• And, pending Supreme Court Case raises concerns regarding patentability of “methods” inventions

CostsMetrics that Matter

Search vs. Execution Metrics

• Existing companies execute plans

• Startups search for them

• Income Statement, Balance Sheet, etc are execution documents

• You first need to derive the metrics that matter

Metrics That Matter

• Value proposition: product cost, mkt size/share, competition?

• Customer Relationships: customer acquisition costs, conversion rates, lifetime value?

• Market Type: revenue curves

• Operating Costs: basic operating costs of the business?

• Channel: Channel margin, promotion, shelf-space charges?

• Revenue Streams: average selling price, # of customers/year, achievable revenue?

• Burn Rate: per month? When will the company run out of cash?

Life Science Intellectual Property Example

CanScan Intellectual Property

Does Harvard own it?

Does Harvard want it?

Does Berkeley want it?

Does Berkeley own it?

Will they license it

to us?

Will they license it

to us?

Proceed with patent filing

and pre-clinical trials

Extreme Pivot

Y

N

Y

N N

N

Y

Y

N N

Y Y


Meeting with Berkeley Technology Transfer at LBNL (This Week)Meeting with Harvard Technology Office (Next Week)

Robotic AgricultureResource, Activities Example

We’ve hit our first milestones

Jun 2011 Dec 2011 Jun 2012Mar 2013First unit

Seed Round

Confidential

Technology Track

Customer Discovery Track

Finance Track

Post-processed Image recognition

Prototype First unit

Series A

Customer trial and customer order

Real-time image recognition

Select 1st target crop

Friends and family round

Applied for grants

Testing agreement with top producer

$125 KF&F

$800 KSeed

$3-5 MSeries A

Medical DeviceResource, Activities & Cost Example

$10M

$15M

2012

Series A $3.5 MM

Cash

Rese

rve

Clin

ical

Mile

stones

$5M

Initialize

Desi

gn

Mile

stones

Reg

ula

tory

/ IP

M

ilest

ones

Q1 Q2 Q3 Q4

2013Q1 Q2 Q3 Q4

2014Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2015 2016

Series B $9 MM

System

2017Q1 Q2Q1 Q2 Q3 Q4

2018Q3

Launch

Series C $30.5 MM

$30M

$20M

Regulatory / Clinical

Series D $35

MM

M&A / IPO $50 MM

$40M

380 12/4/2009

Proof of Concep

t

Pilot Studie

s

IC and Processing Patents

Marketable Product

Provisional Patent

Beta-Versio

n Testin

g

Application and

System Patents

IRB / IDE

Clinical Results

Second Release

Initial Product Launch

Specific Codes (Cat. I CPT / APC)

Non-Specific Codes

1st Release

Test

2nd Release Test

Publication

Post-Market Clinical Studies

Beta Prototype

US Interim Trials

FDA – Class II – 510 (k) with Clinical Trials

Publication

Financial / Operations Timeline

Cat III

CPT

US Pivotal Clinical Trials

Laboratory

Prototype

Technology

Licensing

MammOpticsMammOptics

Financial timeline

$10M

$15M

2012

Cash

Rese

rve

Clin

ical

Mile

stones

$5M

Initialize

Desi

gn

Mile

stones

Reg

ula

tory

/ IP

M

ilest

ones

Q1 Q2 Q3 Q4

2013Q1 Q2 Q3 Q4

2014Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2015 2016 2017Q1 Q2Q1 Q2 Q3 Q4

2018Q3

$30M

$20M

$40M

381 12/4/2009

Proof of Concep

t

Provisional Patent


Technology

Licensing


$10M

$15M

2012

Series A $3.5 MM

Cash

Rese

rve

Clin

ical

Mile

stones

$5M

Initialize

Desi

gn

Mile

stones

Reg

ula

tory

/ IP

M

ilest

ones

Q1 Q2 Q3 Q4

2013Q1 Q2 Q3 Q4

2014Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2015 2016

System

2017Q1 Q2Q1 Q2 Q3 Q4

2018Q3

$30M

$20M

$40M

382 12/4/2009

Proof of Concep

t

Provisional Patent

Beta-Versio

n Testin

g

Laboratory

Prototype

Beta Prototype

Technology

Licensing


Pilot Studie

s


$10M

$15M

2012

Series A $3.5 MM

Cash

Rese

rve

Clin

ical

Mile

stones

$5M

Desi

gn

Mile

stones

Reg

ula

tory

/ IP

M

ilest

ones

Q1 Q2 Q3 Q4

2013Q1 Q2 Q3 Q4

2014Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2015 2016

Series B $9 MM

System

2017Q1 Q2Q1 Q2 Q3 Q4

2018Q3

$30M

$20M

$40M

383 12/4/2009


Marketable Product

Beta-Versio

n Testin

g

Application and

System Patents

IRB / IDE

Beta Prototype


Pilot Studie

s


Laboratory

Prototype


$10M

$15M

2012

Cash

Rese

rve

Clin

ical

Mile

stones

$5M

Desi

gn

Mile

stones

Reg

ula

tory

/ IP

M

ilest

ones

Q1 Q2 Q3 Q4

2013Q1 Q2 Q3 Q4

2014Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2015 2016

Series B $9 MM

System

2017Q1 Q2Q1 Q2 Q3 Q4

2018Q3

Series C $30.5 MM

$30M

$20M


$40M

384


Application and

System Patents

IRB / IDE

Cat III

CPT

Second Release

1st Release

Test

US Interim Trials US Pivotal Clinical Trials

Publication


Pilot Studie

s


$10M

$15M

2012

Cash

Rese

rve

Clin

ical

Mile

stones

$5M

Desi

gn

Mile

stones

Reg

ula

tory

/ IP

M

ilest

ones

Q1 Q2 Q3 Q4

2013Q1 Q2 Q3 Q4

2014Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2015 2016 2017Q1 Q2Q1 Q2 Q3 Q4

2018Q3

Launch

Series C $30.5 MM

$30M

$20M


Series D $35

MM

$40M

385 12/4/2009

Clinical Results

Second Release


Non-Specific Codes

2nd Release Test

Publication

US Interim Trials


Publication




$10M

$15M

2012

Cash

Rese

rve

Clin

ical

Mile

stones

$5M

Desi

gn

Mile

stones

Reg

ula

tory

/ IP

M

ilest

ones

Q1 Q2 Q3 Q4

2013Q1 Q2 Q3 Q4

2014Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2015 2016 2017Q1 Q2Q1 Q2 Q3 Q4

2018Q3

Launch

$30M

$20M


Series D $35

MM

M&A / IPO $50 MM

$40M

12/4/2009

Clinical Results



Non-Specific Codes

Publication



Financial / Operations TimelineMammOpticsMammOptics

$10M

$15M

2012

Series A $3.5 MM

Cash

Rese

rve

Clin

ical

Mile

stones

$5M

Initialize

Desi

gn

Mile

stones

Reg

ula

tory

/ IP

M

ilest

ones

Q1 Q2 Q3 Q4

2013Q1 Q2 Q3 Q4

2014Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2015 2016

Series B $9 MM

System

2017Q1 Q2Q1 Q2 Q3 Q4

2018Q3

Launch

Series C $30.5 MM

$30M

$20M


Series D $35

MM

M&A / IPO $50 MM

$40M

387 12/4/2009

Proof of Concep

t

Pilot Studie

s


Marketable Product

Provisional Patent

Beta-Versio

n Testin

g

Application and

System Patents

IRB / IDE

Clinical Results

Second Release



Non-Specific Codes

1st Release

Test

2nd Release Test

Publication


Beta Prototype

US Interim Trials


Publication


Cat III

CPT


Laboratory

Prototype

Technology

Licensing


AppleResource, Activities & Cost Example

KEYRESOURCES

VALUEPROPOSITON

DISTRIBUTION CHANNELS

CUSTOMER RELATIONSHIPS

CUSTOMERSEGMENTS

REVENUE STREAMSCOST STRUCTURE

KEYACTIVITIES

PARTNERNETWORK

Product User Digital Hub Digital Lifestyle Digital Platform

Invest in R&D

solutions for differentiated customers -

professional & consumer

High-end mass market

software developers

online store

brand - Apple,

PowerMac, iMac

component makers, shipping

& logistic suppliers

build whole devices both

h/w & s/w

differentiated markets

Computers, software & services

audio-visual content

producers & record labels

iPod, iTunes software &

content agreements

purchase & mgmt of digital music,

audio, video

increase switching costs

iTunes store

control the supply chain

increased investment

in R&D

iPod, music & related products

Integrated phone, games &

apps across devices

reduce cost of sales

increase switching costs -

integrationoptimize supply chain

content agreements - games & apps

iTunes through wi-fi

access

app & game developers &

cellular operators

app & game developers

iPhone, apps & related services

book publishers & developers of digital content

content agreements with book publishers

all digital devices linked through

software platform

increased switching costs -

shared information

iTunes bookstore

iPad, apps, books & related services


KEYRESOURCES

VALUEPROPOSITON



CUSTOMERSEGMENTS


KEYACTIVITIES

PARTNERNETWORK

Product User Digital Hub Digital Lifestyle Digital Platform

Invest in R&D




software developers

online store

brand - Apple,

PowerMac, iMac

component makers, shipping

& logistic suppliers


h/w & s/w




producers & record labels


content agreements

purchase & mgmt of digital music,

audio, video

increase switching costs

iTunes store



in R&D


Integrated phone, games &

apps across devices



integrationoptimize supply chain

content agreements - games & apps


access

app & game developers &

cellular operators






software platform


shared information

iTunes bookstore



KEYRESOURCES

VALUEPROPOSITON



CUSTOMERSEGMENTS


KEYACTIVITIES

PARTNERNETWORK




software developers

Wholesalers, retailers, re-

sellers

online store

brand - Apple,

PowerMac, iMac

innovative designers

IP & patents & agreement

s

component makers

Shipping & logistic

suppliers


h/w & s/w

software developers


Invest in R&D


Product User

KEYRESOURCES

VALUEPROPOSITON



CUSTOMERSEGMENTS


KEYACTIVITIES

PARTNERNETWORK


producers

recordlabels


content agreements

retail stores

purchase & mgmt of digital music, audio,

video

integration of information

across devices

control buying

experience

increase switching

costs

iTunes store

chain of owned stores



in R&D


Product User Digital Hub

KEYRESOURCES

VALUEPROPOSITON



CUSTOMERSEGMENTS


KEYACTIVITIES

PARTNERNETWORK

games & apps across devices

easy access & purchase

through iTunes



integration

specialized services in retail stores

optimize supply chain

integrated phone

iPhone

content agreements extended to

games & apps


access



cellular network

operators


Product User Digital Hub Digital Lifestyle

KEYRESOURCES

VALUEPROPOSITON



CUSTOMERSEGMENTS


KEYACTIVITIES

PARTNERNETWORK

Product User Digital Hub Digital Lifestyle


Digital Platform


software platform

Premium re-sellers

book publishers

3rd party developers of

digital content

developers of

digital content

book publishers

premium resellers

control customer

experience in resellers’ stores


shared information

iPad & related services

iTunes bookstore


The Customer Development Manifesto

15 Rules to Live By

A Startup is:A temporary organization

designed to search for a repeatable and scalable business model

1. There are No Facts Inside Your Building

2. Pair Customer Development with Agile Development

3. Failure is an Integral Part of Search

4. Continuous Iteration and Pivots

5. No Business Plan Survives First Contact with Customers

6. Validate Hypotheses with Experiments

7. Market Type Changes Everything

8. Startup Metrics are Different

9. Fast and Fearless Decision-Making

9. Cycle Time, Speed and Tempo

10. Startup Job Titles Are Very Different from a Large Company’s

11. Preserve Cash While Searching

12. Spend When It’s a Repeatable Model

13. Communicate and Share Learning

14. Startups demand Comfort with Chaos, Uncertainty and Change

15. It’s Not A Job, It’s All About Passion