MGT 340 Chapter 9: Creating Revenue Models Study Guide PDF

Chapter 9: Creating Revenue Models Dr. Kipp A. Krukowski MGT 340 – Fundamentals of Entrepreneurship Business Model Canvas Revenue Models • Revenue – income gained from sales of goods or services • Revenue model - Key component of business model that identifies how company will earn income and...

Chapter 9: Creating Revenue Models Dr. Kipp A. Krukowski MGT 340 – Fundamentals of Entrepreneurship Business Model Canvas Revenue Models • Revenue – income gained from sales of goods or services • Revenue model - Key component of business model that identifies how company will earn income and make profits • Primary questions associated with revenue models – How much will my customers pay? – How many customers do I need? – If more than one revenue stream, how much does each contribute to total? Types of Revenue Models • • Unit Sales Revenue Model – ‘Traditional’ model of revenue – Revenue comes from goods sold by a company – Model further splits between physical and intangible (digital) goods – Razor-and-Razor-Blade Model (Gillette, printers, Keurig) Advertising Revenue Model – Revenue comes from advertisements sold – Newspapers and magazines – Google Ads (AdWords) has transformed model with Big Data • – CPC (cost per click) and CPA (cost per action - conversions) Promoted “Sponsored” or “Suggested” Content – Facebook, Amazon, Others Types of Revenue Models • • Data Revenue Model – Revenue generated by selling valuable, confidential information to other parties – Some ethical and privacy concerns from use of consumer data (Facebook) Intermediation Revenue Model – Third-parties act as brokers or “middlemen” – Charge a commission or fee for service • • Realtors, eBay, Airbnb, Uber Licensing Revenue Model – Dependent on the ownership of intellectual property (IP) – Sells permission of this IP to generate revenue (iPhone Apps) Types of Revenue Models • Franchising Revenue Model – Existing firm allows another to operate under the name for a fee • • • Franchisees pay franchise fees and royalties – Franchisees receive brand, marketing, training, purchasing power – Examples: Subway, Panera, Great Clips, Marriot, 7-Eleven, Ace Hardware, Papa John’s Subscription Revenue Model – Generates revenue by charging for access to a product or service – Examples: Blue Apron, SiriusXM Professional Revenue Model – Professional services on a “time and materials contract” – Emergence of Freelancing has expanded the use of this model – Examples: Consultants, lawyers, accountants, plumbers Types of Revenue Models • • • Utility and Usage Revenue Model – ‘Pay-as-you-go’ or charge based on how often goods or services used – Examples: Phone companies, hotels, rental cars Freemium Revenue Model – Allows for free access, generates revenue by charging for add-ons or premium feature – Encourages widespread adoption – Key to sustainability – earn enough money on premium part of business to support free side – Examples: LinkedIn, Spotify Other “Free” or “Discount” models – Airlines charge for airfare and add-ons like baggage – Online dating websites, job search websites, “Kids Eat Free” 4 Key Revenue Drivers • • • • Customers – Who are they? How many will come? – How much will they pay? Frequency – How often will customers come? – How can you keep them coming back? Selling Process – What kind of upselling can occur? Any cross-selling? – Refers to side services and products Price – What increases the value of your product? – What impacts will changes to price have? Costs Drivers and Income Statement Income (P&L) Statement Revenue COGS Gross Profit Operating Expenses Depreciation & Amortization Operating Profit Interest Expense Taxes Net Income $1,000,000 -$500,000 $500,000 -$250,000 -$50,000 $200,000 -$10,000 -$40,000 $150,000 Pricing Strategies • Must decide on proper pricing for your product and situation – Low Prices will reduce profits, high prices will drive away customers – Consider your resources as well such as labor and capacity • Competition needs to be considered in tandem with customers • Having customers return is always preferable (less expensive) • In one-time transactions, word-of-mouth and positive reviews are vital Pricing Strategies • Competition-Led Pricing – • • • Pricing dependent on other businesses in the industry Customer-Led Pricing – Customers make offers on price, which firm can accept/deny – Example: Priceline Loss-Leader – Loss on discounted merchandise recovered on price of nondiscounted merchandise – Examples: Printers, Black Friday deals Introductory Offer – Offers product at a discount or for free – Examples: Heavy discount to encourage customers to try product Pricing Strategies • Skimming – • • A new product is sold for a high price for high profits since little/no competition Psychological Pricing – Encourages purchase by playing on the belief a good is cheaper than it actually is – Examples: Flash sales, BOGO Bundled Pricing – Package a set of goods or services together for lower price than amount sold separately – Example: Fast food, cable TV / internet Calculating Price • Cost-Led Pricing – • Target-Return Pricing – • Tallies the cost of manufacturing and other expenses, then predicts sales volume to calculate an appropriate price Setting the price on the amount of investment and the desired return Value-Based Pricing – Takes the value brought to the consumer into account when generating price Pricing Strategy Example • • If you design and manufacture dress shirts and sell them via wholesale and retail, here is a possible breakdown: – Cost of Goods Sold (COGS): $15 to make one dress shirt – Wholesale Price: $30 price sell to retailer – Suggested Retail Price (SRP): $75 price to customer – Wholesale margin: 50% Wholesale Margin = ($30 Wholesale - $15 COGS) / $30 Wholesale – The retailer’s margin when they use your SRP: 60% Retail Margin = ($75 Retail - $30 Wholesale) / $75 Retail – Your retail margin when you sell direct-to-consumer (D2C): 80% Retail Margin = ($75 Retail - $15 COGS) / $75 Retail With the above wholesale and retail pricing strategy, you’re making a gross profit margin of 50% on your wholesale orders and 80% on D2C orders. 3 Key Points • There are numerous ways that you can make money from your customer. Evaluate the pros and cons of the various revenue models looking at it from both your business and the customer perspectives. • Fully understand what drives revenue and what drives cost. The numbers must work out for you to have a sustainable business. • First figure out the ideal revenue model for your type of business and then develop your pricing strategy. Realize that it is a competitive marketplace…when developing your pricing strategy, you must evaluate your competition’s current pricing strategy as well as consider how they may react to your strategy. Questions? Dr. Kipp A. Krukowski MGT 340 – Fundamentals of Entrepreneurship