Yes, this is the part where you start capturing the value created to your customers.
It’s the definition of who will pay for what and how much.
WHY IS THIS A FUNDAMENTAL QUESTION?
First, because revenue is what makes your business valuable. Without it, your business is not sustainable in the long term.
In other words, without a solid revenue streams strategy, some day—depending on how much of cash available you have and how much your net burn rate is—you’ll end up with no money.
Second, identifying which are the most effective revenue streams makes a huge difference in your results.
For some businesses, trying to charge directly its users is a big mistake, because the value delivered doesn’t justify them to open their wallets.
So, you need to design effective ways to capture the value your startup is generating…
FINDING THE ANSWER…
There are many viable revenue streams for your startup. But, before thinking about ways to capture the value, you must know who are your startup’s stakeholders (those that are impacted directly or indirectly by your startup).
1. Who will Pay?
Start making a list of the people or organizations that might benefit from your solution somehow. For example:
- Users: those who interact with your solution to complete a specific task.
- Sponsors/Supporters: those who financially support the user. E.g., a company paying for a service used by its employees.
- Advertisers: people or organizations that want to make themselves or their products/services visible to the users of your solution.
- Buyers (marketplaces): those who want to do transactions with people that sell through your solution.
- Suppliers (marketplaces): people or organizations that want to connect and transact with buyers through your platform.
2. How much will you charge?
The second step is to identify how much could you charge the people you’ve mapped on step one.
To do that, you’ll need to understand what is the benefit you’re offering to them and what are the best alternatives they have today to perform a similar job.
2.1 Jobs To Be Done
One useful concept to understand the value of your solution for your customers is to analyze it through the perspective of customer’s jobs-to-be-done.
This concept was built by Clayton Christensen, a worldwide-recognized professor at Harvard Business School and author of the best-seller “The Innovator’s Dilemma“:
When we buy a product, we essentially “hire” it to help us do a job. If it does the job well, the next time we’re confronted with the same job, we tend to hire that product again. And if it does a crummy job, we “fire” it and look for an alternative.Clayton M. Christensen, Taddy Hall, Karen Dillon, and David S. Duncan – Harvard Business Review – FROM THE SEPTEMBER 2016 ISSUE
Based on the jobs your solution is doing for your stakeholders, you will be able to compare it to the alternatives available in the market.
Through this comparison, you’ll have a clearer notion of how much would your customers be willing to pay to have that job done.
2.2 Ability To Pay
Of course, there is an important constraint to your pricing definition: people’s ability to pay.
For instance, your software may be 10 times faster than current alternatives in the market. But, simply charging 10 times more is a bad answer.
The more you charge, the smaller the number of people that will be able to pay for it. So, you must define an optimum price—that maximizes your total revenue—or search for different alternatives on how to charge your customers.
That’s our next point…
3. For What?
Now, you must define what will you charge your customers for:
Alexander Osterwalder, presentes in his book “Business Model Generation“, the following alternative revenue streams:
- Asset Sales: when you set a price to deliver the asset (physical or digital) to your customer.
- Usage Fee: based on how much the customer uses your product/service.
- Subscription Fee: related to the access your customer have to your solution features.
- Lending/ renting/ leasing: related to the exclusive use of physical assets for a period of time.
- Licensing: related to the use of some technology or brand.
- Brokerage Fee: when you charge your customers for intermediating a transaction.
- Advertising: when you charge someone for providing visibility of their products or brands to the users of your service.
4. Impact on the business
Finally, you must take into account the impact your revenue streams and pricing strategies have on your business financials.
In other words, you must be sure that the potential total revenue generated by your revenue streams strategy support the business on becoming sustainable and scalable.
In this last step, you need to simulate the impact of your revenue streams strategy and pricing alternatives on the financial forecast of your startup.
If you are not familiar with finance nor spreadsheets, it’s time to look for help.
Of course, the steps suggested above are not that linear.
For example, you may find that the alternatives you generated for charging your customers don’t result in a positive outcome for your startup. So, you should go back and redesign your strategy.
However, by keeping in mind these 4 elements to determine your revenue streams strategy, will help you on building a sustainable and scalable startup.
After designing your first revenue streams hypothesis, it’s time to answer our next question:
by Alexander Osterwalder and Yves Pigneur