PAFI May 29 Revenue Models: Le

8/12/2019 PAFI May 29 Revenue Models: Le

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Revenue ModelsFounders Institute – May 2014

Linh Le



Where are we…?

So you have a product that creates value…

(i.e. it solves a real customer problem)

…and now you‟re entitled to “capture” some of that value.

A revenue model: how you capture that value



Entrepreneurs…

create value first

then capture value



Thieves…

capture value first

wi thout creating value



Agenda

1. Marketing 101 – Pricing

2. Multi-Sided Platforms – Pricing Considerations

3. Lessons Learned



Marketing 101: Pricing

• Price: a way to capture value (i.e. monetise)

… but can also create value in itself, for example: – encourage trialability

– attract the “right” customers – helps people to value your product



Marketing 101: Pricing

• Two methods to thinking the dollar price:

1. “Cost-Plus” pricing (easy, but dumb)

2. “Value-Pricing” approach (harder, but more accurate)



“Cost-Plus” Pricing

• Remains one of the most common pricing strategies – Belief that pricing is „determined‟ by the marketplace‟ or it‟s „something

beyond your control‟

• Determine marginal cost / COGS

• Add an arbitrary „reasonable‟ % margin

• How do you know that this is the „right‟ price?



“Value-Pricing” Approach

• Example: – You have a product that has a marginal cost of $10

– Your product provides cost-savings to your customers (e.g. improvedproductivity, reduced headcount)

– The value of savings the savings to the customer is determined to be$1,000

– Where should you price your product?

• Answer: Somewhere between $10 and $1,000 – How do you want to “share” the value created with the customer?



“Value-Pricing” Approach

WILLINGNESS TO PAY

Source: Harvard Business School





Price: In reality

• Ask the customer

• Cover your costs

• Look at competing/similar offerings as a benchmark

• Better to not compete on price – compete on benefits /value created

• Experiment – e.g. via promotions

• Other things to think about:

• When to charge• Frequency of charging

• How do you actually make your revenue model work (particularly“commission”-based revenue models… in Australia)



Multi-Sided Platforms (MSPs)

• What is a multi-sided platform?

Businesses that connect two or more groups of customers,such that the demand by one group increases demand bythe other group(s) and vice versa (network effects).

• Otherwise known as businesses with the “chicken-and-egg”problem

• Examples: Facebook, eBay, eHarmony, Windows, Google

• as well as: bars/nightclubs, shopping centres



MSPs: Pricing Models

• In theory, many potential sources of revenue & profits

• In reality, most MSPs have found they have to offers services toone side for free – or at a loss.

• If you have more than one side: who should pay, sho should besubsidized?

Source: Harvard Business School





Lessons Learned (or Re-Learned)

1. Find a co-founder (1, at most 2) with whom you have“chemistry”.

2. Never do business with friends and family

• If you must: be very clear what you‟re going to take a „haircut‟ on – therelationship or the business

3. Never split equity equally.

4. Co-founders with overlapping skill-sets = recipe fordisaster.

5. Always vest equity with co-founders and employees.



Lessons Learned (or Re-Learned)

6. If you‟re not selling the product or building theproduct, WTF are you doing?

7. Don‟t cut (too many) corners on UI/UX – cut the

corners on the coding, if you have to.8. Done is better than perfect.

9. Be clear on your exit strategy – if things go well…and if things don‟t go so well

• How long are you willing to persist?

10.Finally… remember you‟re building a business in the“context of life”.

PAFI May 29 Revenue Models: Le

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