Right, In this lesson, we're gonna be talking about money, or as they like to say, revenue. That is, how do you get money yet? What are people going to painful? As always, we've got a number of questions that we we start off with, and I'll run through those now. So what value will customers pay for? What's it what's, what will they demand for free?

What will they actually pay for? And this is really the the core core of your business. If you create something that's great, but people won't pay for it. You've got to be proper. If you've got something that that's pretty good that they're going to pay for awesome. I was talking to somebody the other day, and he said, when they started off, what they did is they sent out a review system and all the customers were saying, I'm getting great value.

I'm getting great value and great acting great guy rightfully. So then what he did is he just gently increased the price. until people were just starting to say, yeah, the value is really good a little bit, but it's getting to be a bit expensive. And there he was able to find the right price point for for his product. And so this is a really good example for the value that people will pay for. And so you also have to ask what our customers or segments paying for at the moment.

If you've got a brand new startup business, you may not be able to answer this. But it's a great excuse to to go out and start looking at your competitors and see what customers are paying for at the competitors. Are they pay a lot more for the same value? are they paying the same price but getting a lot less value? This is something that you really need to start understanding and getting clear about so that you can generate your own value perception. And it's also worth thinking about how are they Paying at the at the moment, I mean, typically with with many online places you'll be able to pay by credit card, but you want to offer bitcoins Do you want to offer stripe?

Are these payment? Is PayPal important to your customer base? Are you looking at lots of cross border transactions, in which case Payoneer might be useful? Do they need to pay cash on delivery, which is very common across South and Southeast Asia. All these have an impact from cultural basis and your customer segments. And certainly my experience.

We've had one company that I was running, we found that we really hated cash collection. It was an absolute pain, it slowed everything down. The logistics, were a nightmare. The progress was a nightmare of collecting cash, but at the same time, 30% of our customers wouldn't buy from us unless they could pay cash. So that was pretty critical. And so that's the next question that you need to answer.

How will customers pay? Yeah, what do you have to do to satisfy that debt payment requirement? If you've got more than one segment in your selling with more than one group of people, let's have a look at all the different revenue streams that you've got. So if you've got a business and part of it is a is a business to consumer or b2c play, part of it is the business business client. How much revenue Are you getting from each if you if it's about equal that does one thing is I start having a look? Okay, what is the different profitability of these revenue streams?

Alternatively, if you've got it very skewed in one direction, or another, so 95% of your revenues or sales come from wall consumer segment, you then have to ask yourself Why am I putting in the effort into this particular segment where I get very low amount of sales? And is it because it's a it's a foot footprint so that at a later point, I want to expand that bridge head and branch out. So I'm doing it to gain experience. So I'm doing it for strategic reasons. Is it something that I started off a long time ago, I'm still doing because I haven't thought about it. And it's just consuming resources that could be better spent increasing the sales for your your more successful segments.

Revenue streams are basically all the sales that the company makes and each of your segments should be generating a revenue stream. Each of your value propositions again, is contributing to to that revenue stream. Now need to be clear about this. Not every segment is to generate cash or revenue. Yeah. Many cases, especially online, you will find that particular segments get the the value of the service for free.

There are many types of freemium software out there, where one segment consumes a basic offering for free, whereas other segments are pay for an enhanced offering, and then effectively cross subsidize the rest of the segment. In Google, we, we get the search functionality, we get a lot of the the docs the Gmail for free, because that then allows advertisers, Google to reach out to advertisers with a stronger value proposition. And it's the advertisers who are paying for the normal users to get everything for free. However, you need to make sure that these revenue streams balance what is the cost of providing The free search or the free email for consumers at ease that matched more than matched by the revenue that's coming in from other segments. There are generally two types of revenue that you need to look at. The first type is transaction revenue.

And this is familiar to everybody from the time that we were five, five or six years old and headed down to the sweet shop with their their $1 or one pound and gave the money and got some sweets back. Yeah, that is transaction revenue. So I buy this from you, I give me some cash and we've got a simple exchange going on that and that has been very much the traditional retail approach for for many years, and in fact is predominant still on the internet. The second approach is the subscription model. Know that is when your pay on a regular basis, thought product or service. So a few examples of subscription services, I worked with one company and they sell bras for oversized women, and they do it on a subscription box basis.

So you pay, I think it's 50 or $60 a month, and then every three months, you get a box full of new bras. Another example is I got an SMS from my bank this morning, telling me that the economist had automatically charged me 150, reengage, and therefore I'd be getting the next three months of the economists delivered to my iPad every every Friday, Friday morning. So these are recurring revenues that keep on happening on a on a regular basis. Another example would be a a bank, lending you money for a mortgage, they lend you know, as a mortgage money, you then pay them back with a regular cash flow. Good time. So there are lots of different ways of generating revenue.

The most obvious one is asset sales, where you buy when you sell something, a physical product, most of the time, this could be Akai could be a bulldozer, it could be a stick of bubblegum, it could be a book. And we could, we don't necessarily have to be physical assets. It could be a CD, it could be music, we've got a model that music has changed quite a lot. So it's not always an asset. So nowadays, so that is the one that most people are familiar with. And then you can have models where you buy the usage rights.

One of the most interesting ones is saying Monsanto who sell the usage rights to farmers of potato seeds for a single generation. And that basically means that they get the seeds to grow potatoes. And then if they got any seeds from those potatoes, they're not allowed to actually use those. And other other examples would be if you're renting a car or a jet engine from from somebody else and you're getting the right to use it for a particular period of time. Then there are subscription fees. One, a lot of the time you're subscribing to software as a service.

Salesforce.com is a great example of this. Microsoft and Zoho both offer office suites where you subscribe on a monthly basis magazines and newspapers and as I said earlier, bro razor blades, many things can now be bought on a on a subscription basis. And then you're looking at also lending or leasing or renting. So if you're leasing or renting a property or your higher purchase, so that somebody is lending you an asset, and then you will pay a regular monthly fee to use that asset. And that and that's different to the subscription or the other usage rights. Because the asset of controlling the asset still retains with the, the vendor until you paid it off.

Or in some cases, they can take it back at any time depending on the contract terms. You don't get end up with without ownership of it. Then you could have licenses that can be so so a great Example. This is a Ferrari or Harley Davidson and they sell licenses to other companies to produce hats or, or watches or lighters with Ferrari on them. And Ferrari collects $100,000 for the right to produce electric, somebody produce 2 million Ferrari branded hats. And there's also this is very popular in the media where something like the Great British Bake Off.

The BBC then licenses the format to media companies in the in other countries to then produce their localized versions of it. So there is a great opportunity in many cases for for licensing. There's also brokerage, which is the arbitrage the the ability to make A small profit between buyer and seller. Probably the the most common sort of brokerage is a company like Visa or MasterCard, who charged the retailer for delivering money to them and and then the bank for collecting money from that they stand between your bank and the retailer and making sure that the money goes between the two of them. And for that they charge a small fee. banks do.

Banks and stockbrokers do much the same thing for foreign exchange shares and many other financial devices like that. And the final And the final one is a advertising and you can sell advertising space. Google famously makes a vast amount of money from crop from advertising, and also many other websites. Do it's worth pointing out that advertising is far less effective than it used to be. Simply because with the explosion of the internet, there is so much space available for for advertising and with a massive amount of supply, supply, demand, or the price that you can get from the demand has decreased and it's decreasing year, year on year. So this is worth thinking about if you're thinking about, Okay, I'm gonna have an ad a website, and I'm going to support it through advertising, you need a lot of traffic for that, right.

So there's there's quite a quite a lot to do on on pricing. So, the next way that we next thing about that we can look on on on revenue are the pricing mechanisms that you can use to get money from customers. And broadly speaking, there are two approaches to pricing that you can take you can either go for fixed price or dynamic pricing. This very much depends on the kind of market you're in the customers that you are looking at. And in some cases, people will just not be a decision for you at all. You just go with what is common for your industry or sector.

But always remember, one of the ways to be disruptive is to stop changing, mixing things up and seeing what you can do differently. Yeah, if you do exactly the same as everybody else, you're not in a strong competitive position. If your business model is different, that may convert conferred to you some competitive advantage. So looking at fixed pricing, so the most obvious approach is that is the list price. If you go to a supermarket, you've got set prices on all the items. Yeah, you go in, you pay the list price back.

Very, very simple. The next approaches feature dependent pricing. And this is probably most common when you're when you're going out and buying a new car. So you get the basic model, and he's going to be $30,000 for the car, if you want a sunroof, that's very another 1500 dollars if you want a better CD, that's going to be another $600 if you want that. So, the more features that you want, the more you have to add. And this can be done quite effectively in online sales as you cunningly structure the the different offers that you have available to customers to maximize the amount of money that you can extract from them.

The next approach is Tom pricing differently to different target segments. So marketing what you can do with marketing so if you grow And market the same value proposition differently to different segments, you can get very very different prices. This so for example, I'll take you back and just start lever say so 500 milliliter bottles of shampoo to consumers in the big cities and those go down well with the middle class and they charge a a fair and reasonable price. I'm not quite sure what it is to those consumers and they they buy. However, once you get to the villages, nobody can afford to buy 500 milliliters of shampoo all at once it's a very large purchase. So what they do instead is just sell sachets and the actual cost per sachet is two to three times the the price per milliliter of the big bottles that people buy in the cities.

So that's you've got a very differential pricing between two different customer segments for an otherwise identical product. And then they the final approached on fixed price is the is the volume dependency. So, if you buy one project, it will be $10 if you buy 1000 products, it will be $4. If you buy $100,000, it will be $2 per unit, the movie and this basically, the company is possible their economies of scale to to you through through that, through that that mechanism. This works best in manufacturing, or when there's high volumes of commodities involved. You do see volume discounts in certain types of software.

So, for example for the user license one year license might be $30. But you'll get to this volume discount of 10,000 10,000 licenses, because fundamentally, the marginal cost of an additional license is very, very close to zero. So now if we look at dynamic pricing, so dynamic pricing is traditionally far more common. A because that is fundamentally what happens when we have negotiation wins. So if you go into a typical meddling, Middle Eastern Market or much in a developing world, prices don't have the same list fixed price that you get in in many Western cultures. And also, you get a lot more bargaining where the buyer and seller aren't quite sure about the value of The good that's being come being exchanged.

This is a little bit difficult to implement online. It's informal, certainly in the real world, in different countries, different cultures, there are a lot of rules and cultural artifacts that are surrounded. However, a variation of this, which is auctioning does have a very, very big place in in the modern world. And we see this a lot of different places. I mean, the most obvious one is in Google's auctions of, of advertising spots in Google AdWords. So if you pay the most and meet a number of other conditions, you'll then get the top spot in the advertising ranking.

And we'll see. options are for things like houses or cars or antique furniture and also for the telecoms licenses. And one of the characteristics of auctions is where the item is difficult to price the market may be a little bit illiquid. So I have set a particular road is sold every two to three years. So you want to know what the general market is doing. You don't know what a particular local market is doing in that particular right.

So it's a way of getting a fair price, but it has a number of flaws as well. Another approach to market dependent pricing is something like like petrol, petrol is very much dependent on do price, and the old price fluctuates each day, hundreds or thousands or 10s of thousands of reasons every buyer and seller has a different opinion on Whether they need to buy or not, whether they're delay or not, that alters the market price. Thus many things from petrol to chemicals to animal feed will then have prices either fully or partially dependent on the market and there is only a certain amount that you can do with that. So, for example, when I used to sell steel, which is a commodity, we were hugely dependent on the general economic climate, because construction uses a vast amount of steel. Yeah, if the economy is then constructions down and therefore, that will push the price of steel down.

Conversely, when times are good steel price goes up, and it's you can then raise the raise the prices that you charge, so that is market dependent pricing. And then the final approach Pricing is yield management. And this is basically charging different people, different prices for the same product. I mean, it's it's classically used in the airline industry. And their problem is, is they've got an aircraft full of seats. And what they need to do is they need to make sure that the aircraft is full of people in those seats.

If they're not full, they're leaving money behind because the seats once that's why it's gone, they never abled but never going to be able to sell those seats ever again. So what they do as the flight comes closer and closer to departure, they change the the pricing of the tickets to reflect the availability and new management could go in one of two two ways. In this time dependent approach. It's like if the flights empty, they might discount just get a discount, trying to get those people who were marginal about Fly to book the ticket and fly with them. On the other hand, if the plane is very, very cool, they can increase the price of the ticket to extract the most value from people who need to fly the plane at the last minute. And that's a quite a complicated subject to actually implement that into your pricing strategy.

When you're when you're going out as a start up and look at looking at your pricing is generally better at this stage to take an overall approach. Look at what other people are doing in your industry, I do something similar because they will have learned a lot of lessons. If you're coming into the market with an intention to disrupt the pricing deliberately that's a that's a that's a different kettle of fish. When you're establishing pricing as or revenues as a as a startup. A lot of the time You're having to do multiple experiments to figure out what the right approach to pricing is, what one customer was telling me about how he's doing it at the moment. And he said, like, well, what I'm doing is I'm giving away my product for free, so that I know that people like it, that gives me my initial validation.

And then I'm giving a very iconic a 90% discount to the next tranche of customers than a 90% and a 70%. And I'm slowly building up to what my target list prices and finding out what is the price that the market demands, because he as a small entrepreneur, doesn't have access to all the pricing data there. One of the big fast moving consumer goods giants like Unilever, or Procter and Gamble has, he's got very limited amount of data. So he's having to do a number of experiments to figure that out. So, in this lesson, we've gone through a point a lot about revenues, how you find them and then several different aspects of pricing and your approaches to how you sell your value proposition to your customer. Add this now onto your value onto your business model canvas.

Make sure that you've got a revenue strategy for each segment, and then feel free to ask questions in the comments box below.