Lesson: Revenue Relationships with Steve Blank

Step #7 Models: Revenue model is the system design monetizing your service

Another type of sale is an actual asset sale, direct sale. This is sale of ownership of the right to a physical product. And in a physical channel, some best examples are, buying cars. Ford or General Motors or Nissan or going into a Walmart buying products in their massive stores, or going to your local hardware store and buying some thermometers. Or as we said earlier, there could be a usage fee strategy, and the fee is proportional to how much of the service you used.

What's an example of companies that do usage fees? Well every time you use your cell phone, either for voice or data you are paying a fee proportional to the services, or if you are a web developer, Amazon's web service has been the kind of the reason why the web has exploded, because you no longer need to buy hardware, but you are paying per computing, or per database size or anything else. Or FedEx, you are now paying for every envelope or package you ship. Or what's really interesting is electric power. It always used to be metered and proportional to the service. But now new solar companies have decided that instead of selling solar panels, their business model, it's we'll install the panels for free, but we'll also become a utility. These are usage fee revenue strategies.

Subscription fee, instead of paying per use, why don't we pay kind of a flat fee every month for continuous access to a service? What's an example of that? Well, Salesforce.com. We pay literally for a continued use of the product or maybe a better example is Netflix with all you could eat downloads for videos. You want to watch infinite number of movies; you pay just a flat subscription fee. There are other revenue models, like Rentit. We rent houses but the best example for me is Chegg in the book business. Now, all of a sudden I could temporarily rent books.

Or BorrowLenses which says, listen instead of buying expensive camera gear which you might just use intermittently for photo shoots, like expensive Hasselblads or expensive lenses, why don't you just go in and rent them for a temporary amount of time. And of course in the US and overseas, car rentals are the exact example for transportation. Instead of buying a car in every city, when you get off a plane, it's very easy and we just kind of take for granted that you could have temporary access to automobiles, drive them for hours or days and return them.

Another type of revenue model is licensing. It's a fee for use for intellectual property, IP. What's an example of using somebody's IP, I can't think of one. Well, if you've ever used any software from any computer manufacturer, congratulations if you've ever read the fine print from Microsoft or Electronic Arts or even Apple, you don't own your software. You are actually using it under a license. Surprise, that means you can't duplicate it and make a million copies and give it away to your friends. You have agreed with Microsoft or Electronic Arts that you are just licensing it for use on one computer or if they are feeling generous this year, maybe your laptop and your phone and one desktop machine, but you do not have infinite rights to their intellectual property.

Another type of revenue strategy could be an intermediation fee. Now sometimes we find this in marketplaces and it's a fee for bringing two parties together involved in a transaction. What's an example? Well the most popular one right now is, Airbnb. They don't own all those places they are renting; but what they do is, essentially a dating service between you and somebody who wants to make money in renting their apartment for a night or a couple of nights. So you, the traveler who need a place to stay, but don't want to stay in an expensive hotel, use their site as an intermediary. Or Etsy, or even better CafePress or E-Trade all these are kind of brokers. And by the way in the physical world the classic is real estate brokers. And they don't own the house and they don't own you, but they are a matchmaking service between you and the property you want to buy.

Another strategy for revenue stream could be advertising. So, again if you remember our conversation about Google, Google's strategy in Facebook and Spice and Mint, it's all about creating massive numbers of users. So I could monetize fancy name for make from all those users not from making them pay, because the last time I looked at Google Search, it didn't cost me anything directly. But Google is actually using me to sell to advertisers. They're saying, "Hey, you want to get in front of people like Steve? All you have to do is pay us for access to these groups of individuals," and in fact if we are very sophisticated, we could segment them by specific keywords or interest.