Teck-Hua Ho Copyright © 2009 Teck-Hua Ho SMART Revenue Model Design Teck Ho UC, Berkeley
Teck-Hua HoCopyright © 2009 Teck-Hua Ho
Revenue Model Design
Examples of Revenue Model eBay Autodesk Bay Alarm
SMART Revenue Model Design
Teck-Hua HoCopyright © 2009 Teck-Hua Ho
eBay’s Original Revenue Model (up to 2005)
M = Total number of items listed per year
Feei = Insertion fee of item i
Comi = Final value fee of item i
Ii = 1 if item i is sold; 0 otherwise
M depends on number of people in the community
Comi x Ii increases with price or seller surplus
M
iii
M
ii IComFeevenue
11
Re
Revenue Levers
Teck-Hua HoCopyright © 2009 Teck-Hua Ho
Scalability Principle
A key feature of the revenue model:Revenues increase linearly with M but costs do not increase with M.
Teck-Hua Ho
Matching Appropriated Value to Value Creation
Who are eBay’s customers? (Bidders? Buyers? Sellers?)
What does it mean for eBay to do a better job?
Does eBay get paid more for doing a better job?
Copyright © 2009 Teck-Hua Ho
Teck-Hua HoCopyright © 2009 Teck-Hua Ho
SMART Principles
1. Scalability, so that revenues grow at least as fast as costs.
2. Matching value appropriation with value creation.
3. Accelerate diffusion, adoption, and upgrade purchases.
4. Relationship based (i.e., facilitate and build on repeated interaction with customers where possible).
5. Total appropriated value (i.e., focus on total customer value, including lifetime customer value and influencer value).
Teck-Hua HoCopyright © 2009 Teck-Hua Ho
eBay’s Original Revenue Model (up to 2005)
M = Total number of items listed per year
Feei = Insertion fee of item i
Comi = Final value fee of item i
Ii = 1 if item i is sold; 0 otherwise
M depends on number of people in the community
Comi x Ii increases with price or seller surplus
M
iii
M
ii IComFeevenue
11
Re
Revenue Levers
Teck-Hua HoCopyright © 2009 Teck-Hua Ho
Ways to Enhance eBay’s Revenue
Increase M Increase size of community, Enter new markets and product categories Increase turnover (e.g., reduce bidding duration, encourage setting of buyout
prices)
Increase Feei Encourage more pictures and promotion of items
Increase Comi Increase average number of bidders / auction (so as to increase seller surplus) Encourage high-priced items (e.g., electronics, cars)
Increase Ii Increase average number of bidders / auction so as to increase the probability
that the highest bid > reserve price Encourage a lower reserve price (e.g., the recent increase in insertion fee for
reserve price auction)
Teck-Hua HoCopyright © 2009 Teck-Hua Ho
Ways to Increase Auction-off Rate
Fees to list an item for regular auctions, fees is a function of starting price for vehicles, a function of type of vehicles for real estate, a function of types of properties and listing type
Picture Service Fees—first picture free, additional picture or bigger picture incurs feesListing upgrade fees: various options to promote items
Final value fees for regular auction, charged when reserve met, at a function of the closing bid For vehicles, charged when the first bid over the reserve price is placed (regardless
of whether sale is finally made) For real estate, a fixed fee for land/time share where there is successful high bid on
the item and no fees for other type of real estates
Reservation Price Fees—charged only if item not sold, a function of reserve price
M
iii
M
iii
M
ii IRIComFeevenue
111
)1(Re
Teck-Hua HoCopyright © 2009 Teck-Hua Ho
eBay’s Original Revenue Model (up to 2005)
M = Total number of items listed per year
Feei = Insertion fee of item i
Comi = Final value fee of item i
Ii = 1 if item i is sold; 0 otherwise
M depends on number of people in the community
Comi x Ii increases with price or seller surplus
M
iii
M
ii IComFeevenue
11
Re
Revenue Levers
Teck-Hua Ho
Acquisitions and Investments
In July, 1998, eBay acquired Cincinnati, OH based online auction site Up4Sale.com. In May, 1999, eBay acquired the online payment service Billpoint, which it shut down after
acquiring PayPal. In 1999, eBay acquired the auction house Butterfield & Butterfield, which it sold in 2002 to
Bonhams. In 1999, eBay acquired the auction house Alando for $43 million, which changed then to
eBay Germany. ebay aqcuired kruse auctions In June, 2000, eBay acquired Half.com for $318 million, which was later integrated with the
eBay Marketplace. In August, 2001, eBay acquired Mercado Libre, Lokau and iBazar, Latin American auction
sites. In July, 2002, eBay acquired PayPal, for $1.5 billion in stock. On January 31, 2003, eBay acquired CARad.com, an auction management service for car
dealers. On July 11, 2003 eBay Inc. acquired EachNet, a leading ecommerce company in China,
paying approximately $150 million in cash.
Copyright © 2009 Teck-Hua Ho
Teck-Hua Ho
Acquisitions and Investments
On June 22, 2004, eBay acquired all outstanding shares of Baazee.com, an Indian auction site for approximately US $50 million in cash, plus acquisition costs.
On August 13, 2004, eBay took a 25% stake in Craigslist by buying out an existing shareholder who was once a Craigslist employee.
In September 2004, eBay moved forward on its acquisition of Korean rival Internet Auction Co. (IAC), buying nearly 3 million shares of the Korean online trading company for 125,000 Korean won (about US$109) per share.
In November 2004, eBay acquired Marktplaats.nl for €225 million. This was a Dutch competitor which had an 80% market share in the Netherlands, by concentrating more on small ads than actual auctions.
On December 16, 2004, eBay acquired Rent.com for $415 million in cash (original deal was for $385 million of the amount in eBay stock plus $30 million in cash).
In May 2005, eBay acquired Gumtree, a network of UK local city classifieds sites. On May 18, 2005, eBay acquired the Spanish classifieds site Loquo. In June 2005, eBay acquired Shopping.com, an online comparison site for $635 million. At the end of June 2005, eBay acquired the German language classifieds site Opus Forum. In September 2005, eBay bought Skype, a VoIP company, for $2.6 billion in stock and cash.
http://news.bbc.co.uk/2/hi/technology/4238258.stm
Copyright © 2009 Teck-Hua Ho
Teck-Hua HoCopyright © 2009 Teck-Hua Ho
eBay’s Revenue Model after 2005
M = Total number of items listed per year
Feei = Insertion fee of item i
Comi = Final value fee of item i
Ii = 1 if item i is sold; 0 otherwise
Ri = Reserve price fee for item i
Sj = Monthly subscription fee of storefront jN = Total number of storefronts
N
jj
M
iii
M
iii
M
ii SIRIComFeevenue
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Revenue Levers
Teck-Hua Ho
Move from Transaction to Relationship-based Revenue
Encourage frequent sellers to open a storefront increases customer loyalty Increases number of items listed (especially more
expensive items) on eBay
Encourage sellers to switch from another auction platform (amazon.com) to eBay
Encourage existing storefronts to migrate to a more expensive storefront
Copyright © 2009 Teck-Hua Ho
Teck-Hua HoCopyright © 2009 Teck-Hua Ho
SMART Principles
1. Scalability, so that revenues grow at least as fast as costs.
2. Matching value appropriation with value creation.
3. Accelerate diffusion, adoption, and upgrade purchases.
4. Relationship based (i.e., facilitate and build on repeated interaction with customers where possible).
5. Total appropriated value (i.e., focus on total customer value, including lifetime customer value and influencer value).
Teck-Hua HoCopyright © 2009 Teck-Hua Ho
Autodesk’s Revenue Model (up to 2003)
N = Total number of customersP = Total number of products
nij = Number of users in Customer i for Product j
Pj,new = Purchase price of Product j
Pj,Upgrade = Upgrade price of Product j
Iij, Upgrade = 1 if Customer i adopts the upgrade of Product j
1
1i
P
1j,,
1i
P
1j,
t
t
N
UpgradejijUpgradeij
N
Newjij
PnI
Pn
Revenue Levers
New Customers
Existing Customers
Teck-Hua Ho
Challenges
Transaction-based rather than relationship-based
Probability of upgrade less than 1/3 and the investment in software upgrade is huge
High variability in revenue flow
Copyright © 2009 Teck-Hua Ho
Teck-Hua HoCopyright © 2009 Teck-Hua Ho
Autodesk’s Revenue Model (after 2003)
2
11
1i
P
1jRenewal,Sub,Renewal,
1i
P
1jUpgrade,Upgrade,Sub,
1i
P
1jSub,Sub,
1i
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t
tt
t
N
jijijij
N
jijijij
N
jijij
N
jij
PnII
PnIIPnI
PnNew Customers
Existing Customers
Existing Customers
Teck-Hua HoCopyright © 2009 Teck-Hua Ho
New Revenue Levers
Iij, Sub = 1 if Customer i subscribes to Product j
Iij, Renewal = 1 if Customer i renews the subscription for Product j
Pj,Sub = Subscription fee of Product j
Pj,Renewal = Renewal fee of Product j
Teck-Hua HoCopyright © 2009 Teck-Hua Ho
SMART Principles
1. Scalability, so that revenues grow at least as fast as costs.
2. Matching value appropriation with value creation.
3. Accelerate diffusion, adoption, and upgrade purchases.
4. Relationship based (i.e., facilitate and build on repeated interaction with customers where possible).
5. Total appropriated value (i.e., focus on total customer value, including lifetime customer value and influencer value).
Teck-Hua HoCopyright © 2009 Teck-Hua Ho
Bay Alarm Revenue Model
N = Total number of customers
ICi = Installation charge for customer i
Ci = Cost of installation for customer i
RMRi = Recurring monthly revenue for customer i
Ti = Life time of customer i
])[(111
it
T
ti
N
iii
N
i
RMRCIC LTV i
Revenue Levers
Customer Life-time Value
Teck-Hua Ho
Optimizing Life-time Value
Analyze how customer i’s life-time varies with demographics, chosen products, and payment methods
Tradeoff between IC and RMR
Focus on customer pyramid and migration
Buy and sell customers based on expected life-time value
Copyright © 2009 Teck-Hua Ho
Teck-Hua HoCopyright © 2009 Teck-Hua Ho
Security Alarm Company (Commercial)
The Rest of the World
Suspects
Prospects
Inactive Customers
“Top”> $500
“Big” $150 - $500
“Medium”$50 - $150
“Small”< $50
Rec
urrin
g M
onth
ly
Rev
enue
Teck-Hua HoCopyright © 2009 Teck-Hua Ho
Security Alarm Company
2005 Sample Size
2006Sample Size
RMR – Average($)
RMR – Maximum($)
2122 2238 125 2065
Teck-Hua HoCopyright © 2009 Teck-Hua Ho
Customer Migration Matrix
Customers in 2005 Top Big Medium Small Inactive
Top 74 64 2 1 0 7
Big 251 16 197 4 0 34
Medium 517 0 32 401 3 81
Small 1280 0 2 65 1073 140
New Customers in 2006 478 7 14 170 287 0
Total Customers in 2006 87 247 641 1363 262
Teck-Hua HoCopyright © 2009 Teck-Hua Ho
Customer Migration Matrix
Customers in 2005 Top Big Medium Small Inactive
Top 74 86.5% 2.7% 1.4% 0 9.5%
Big 251 6.4% 78.5% 1.6% 0 13.5%
Medium 517 0 6.2% 77.6% 0.6% 15.7%
Small 1280 0 0.2% 5.1% 83.8% 10.9%
New Customers in 2006 478 1.5% 2.9% 35.6% 60.0%
Total Customers in 2006 87 247 641 1363 262
Teck-Hua HoCopyright © 2009 Teck-Hua Ho
Average RMR by Segment
Top(>$500)
Big($200-$500)
Medium($80-$199)
Small(<$80)
$801 $304 $126 $48
Teck-Hua HoCopyright © 2009 Teck-Hua Ho
Loss in Revenue due to Retention
Transition Number of Transitions Loss in RMR / Transition($)
Total Loss in RMR($)
Top to Big 2 497 994
Top to Medium 1 675 675
Top to Small 0 753 0
Top to Inactive 7 801 5607
Big to Medium 4 178 712
Big to Small 0 256 0
Big to Inactive 34 304 10336
Medium to Small 3 78 234
Medium to Inactive 81 126 10206
Small to Inactive 140 48 6720
TOTAL 272 35484
Total Loss in Customer Life-time Value = 50 months (average life-time) x $35,484 =$1.78m
Teck-Hua HoCopyright © 2009 Teck-Hua Ho
SMART Principles
1. Scalability, so that revenues grow at least as fast as costs.
2. Matching value appropriation with value creation.
3. Accelerate diffusion, adoption, and upgrade purchases.
4. Relationship based (i.e., facilitate and build on repeated interaction with customers where possible).
5. Total appropriated value (i.e., focus on total customer value, including lifetime customer value and influencer value).
Teck-Hua HoCopyright © 2009 Teck-Hua Ho
Customer Life-time Value Equation
Customer Life-time Value =
Customer Purchase Value + Customer Influence Value
Teck-Hua Ho
Customer Purchase Value
t time
Self-motivated:
Consider Bob:
=
Influenced by others: Bob’s purchase value =
credit back
is credited back to the person influenced him
Bob’s purchase value
Copyright © 2009 Teck-Hua Ho
V
V
V
Teck-Hua Ho
Customer Influence Value
t time
Consider Bob:
credit back
s1 s2 s3
each credit back
credit back
Bob’s influential value = I1 + I2 + I3
Copyright © 2009 Teck-Hua Ho
V
V
V
Teck-Hua Ho
Purchase Acceleration
No Purchase Acceleration
PurchaseAcceleration
Increase%
Size of “Targeted Sample”
0 4.2% -
Total Life-time Customer Value
100 115.5 15.5%
Copyright © 2009 Teck-Hua Ho
Teck-Hua HoCopyright © 2009 Teck-Hua Ho
SMART Principles
1. Scalability, so that revenues grow at least as fast as costs.
2. Matching value appropriation with value creation.
3. Accelerate diffusion, adoption, and upgrade purchases.
4. Relationship based (i.e., facilitate and build on repeated interaction with customers where possible).
5. Total appropriated value (i.e., focus on total customer value, including lifetime customer value and influencer value).