ENG 491 Technology Entrepreneurship Building a Lean Scalable

ENG 491 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2011 – Fall 2012 Emre Oto www. eng 491 bu. org Follow on Twitter: @eng 491

Channels ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» How does each customer segment want to be reached? Through which interaction points?

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» Test Hypotheses: Channel

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» Two Critical Questions about Channels 1 First one is obvious: How do you want to sell your product? 2 Second one is subtle, but more important than the first: How does your customer want to buy your product?

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» How Do You Want to Sell Your Product? ü ü ü Yourself Through someone else Retail Wholesale Bundled with other goods or services

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» How Does Your Customer Want to Buy Your Product? ü ü ü Same day Delivered and installed Downloaded Bundled products As … with other a service

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» Nature of Product Impacts Channel: Atoms or Bits? Access to customers changes dramatically Logistics related to product complexity People as products

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» The Sales “Channel” Web Your Company System Integrators Direct Sales Force Value-Added Resellers (VARs) Dealers Distributors Retail/Mass Merchants Your Customers

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» Types of Channels Direct Indirect OEM VAR Reseller Distributor Licensing

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» The Channel as a Customer Some products are embedded in others (OEM) Some products are resold by others (VARs) Some products are distributed by others Who’s the customer?

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» Distribution Complexity Global Systems Integrators Evangelists Marketing Complexity WANs Mainframes e m Direct Sales lu o Minis r. V e LANs gh i H VARs PC Servers Desktop PCs Retail Printers Keyboards ed d d A e u l Va r e h g Hi Service Technicians Web, Telesales Toner Solution Complexity

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» How Are Channels Compensated? Commission Percentage of sales price Discounted pre-purchase

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» How Are Channels Motivated or Incented? Money! – what makes them the most? Training Marketing to the channel SPIF

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» Channel Economics: “Direct” Sales Source: Mark Leslie, Stanford GSB Profit + SG&A + R&D End Consumer Cost of Goods (Supply Chain) EU Discounts List Revenue Price

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» Channel Economics: Resellers Source: Mark Leslie, Stanford GSB Profit + SG&A + R&D Reseller End Consumer Cost of Goods (Supply Chain) EU Discounts Revenue List Price

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» Channel Economics: Distributors/Resellers Source: Mark Leslie, Stanford GSB Profit + SG&A + R&D Reseller End Consumer Cost of Goods (Supply Chain) Distributor Revenue EU Discounts List Price

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» Cost of Goods (Supply Chain) Profit + SG&A + R&D Reseller Your Product Becomes Your Customer’s COGs Distributor Cost of Goods (Supply Chain) Master Distributor Revenue Reseller List Price EU Discounts Channel Economics: OEM or IP Licensing

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» Example: Book Publishing Publisher National Distributor Printer Wholesaler Retailer Customer

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» Book Publishing Percent of Retail Publisher National Wholesaler Distributor Retailer 35% 10% 40% $7. 00 $3. 00 $2. 00 $8. 00 For their efforts, distributors take an additional 10% of retail. That means you get 35% of retail, the distributor gets 10%, the wholesaler gets 15% and the retailer gets 40% less any discount they offer the end customer Customer $20. 00

ENG 491 Technology Entrepreneurship 20 Week #6 «Channels and Rev. Streams» Book Publishing Economics Publisher National Distributor Wholesaler Retailer Customer Allowances Wholesale costs Bills Credit guarantees Payment guarantees Return rights Credits Payments Markup

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» Book Publishing Delivery Publisher National Distributor Prepare film (content) § Establish identity § Create demand Prepare galleys Printer Wholesaler Retailer Receive § Schedules § Print orders § Bundle counts § Film Determine allocations Merchandise titles Deliver orders Sell magazines Dispose of returns Acknowledge returns Print and ship magazines

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» Bits vs. Atoms Web Bits Product Physical Channel Physical

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» Product and Channel Are Bits Channel Web § Rapid Agile and Customer development Bits § Fastest to acquire early customers and scale Product Physical

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» Web 2. 0 – Product and Channel Are Bits Channel Web § § § Bits § § Product Physical Google Twitter Facebook Zynga Cloud Services Physical

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» Product Is Bits, but Channel Is People Channel Web § Rapid Agile and Customer development Bits § Fastest to acquire early customers and scale Product Physical § Rapid Agile and Customer development § Traditional sales channel § May require installation

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» Traditional Enterprise Software Channel Web § § § Bits § § Product Physical Google Twitter Facebook Zynga Cloud Services Physical § Microsoft § SAP § Oracle

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» Physical Products Sold Over the Web Channel Web § Rapid Agile and Customer development Bits § Fastest to acquire early customers and scale Product § Rapid Customer development § Logistics, shipping and Physical manufacturing critical § Customer service Physical § Rapid Agile and Customer development § Traditional sales channel § May require installation

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» Killing Traditional Storefronts Channel Web § § § Bits § § Google Twitter Facebook Zynga Cloud Services Product Physical Zappos Amazon Cafepress Netflix Consumer electronics Physical § Microsoft § SAP § Oracle

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» The Factories May Be in China Channel Web § Rapid Agile and Customer development Bits § Fastest to acquire early customers and scale Product § Rapid Customer development § Logistics, shipping and Physical manufacturing critical § Customer service Physical § Rapid Agile and Customer development § Traditional sales channel § May require installation § Longer customer feedback cycle § May require large capital requirements for scale

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» We Still Make Things that Need Salespeople Channel Web § § § Bits § § Google Twitter Facebook Zynga Cloud Services Product Physical Zappos Amazon Cafepress Netflix Consumer electronics Physical § Microsoft § SAP § Oracle § § § Cars Solar panels Wind turbines Bookstores Consumer electronics

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» Revenue Streams

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» Revenue Streams Two types of companies Companies that care about revenues Companies that don’t

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» Revenue Streams Companies that care about revenues Time Key to doublings for monthly revenues questions: When will I get to $100 k/month in revenues? When will I get to $1 M/month in revenues? What assumptions about my business am I making when I reach these milestones?

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» Revenue Streams Companies that don’t care If you say your business is advertising based, then revenues are related to number of users/viewers: How do you get to 10 M monthly users How do you become one of the top 5 websites visited?

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» This lecture is for those of us who need to care about revenues

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» Revenue Streams Key Questions How many customers, value propositions and revenue models do I have? What are they? 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?

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» Revenue Streams Key Questions (cont. ) What constitutes cost for the company? What are the key financials metrics for your business model? What How are the risks involved? will my competitors react?

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» Revenue Streams Common categories of revenue models Asset sale: Sale of ownership right to a physical product

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» Revenue Streams Common categories of revenue models Usage fee: Usage of service. Fee is proportional to the usage of the service.

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» Revenue Streams Common categories of revenue models Subscription Fee fee: for continuous access to a service

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» Revenue Streams Common categories of revenue models Renting: Fee for temporary access to a good or service

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» Revenue Streams Common categories of revenue models Licensing: Fee for use of some IP (including software)

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» Revenue Streams Common categories of revenue models Intermediation Often fee: found in marketplaces of various types, a fee for bringing together two or more parties involved in a transaction

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» Revenue Streams Common categories of revenue models Advertising: Fee paid by brands and companies to get in front of potential customers

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» Revenue Streams Additional Components of Pricing Exclusive What How vs. non-exclusive do you price? What do you give away for free? does cost vary at different production levels?

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» Revenue Streams Additional Components of Pricing Cost-based pricing Value-based pricing Cost + markup Typically not a strategic way to price Driven by internal economics and not customer insight Based on buyer’s perception of value (e. g. time saved, new efficiency created, etc. ) Understanding the customer’s willingness to pay is the key. . but this is one of the hardest problem in a startup (Customers don’t necessarily feel that they want to pay this way)

ENG 491 Technology Entrepreneurship Week #6 «Channels and Rev. Streams» Revenue Streams Take competition into account Cost-based pricing Value-based pricing Cost + markup Typically not a strategic way to price Driven by internal economics and not customer insight Based on buyer’s perception of value (e. g. time saved, new efficiency created, etc. ) Understanding the customer’s willingness to pay is the key. . but this is one of the hardest problem in a startup (Customers don’t necessarily feel that they want to pay this way)