3. Business Model & Turning On Revenue

1. Start with a business model (3:42)
Have a business model from day one (needs to be your north star)
why are you starting a company if you don’t have a business model figured out (don’t leave port without a destination)
customer needs to know what they are paying for, and how they’re paying, so those can change (what you pay, how you pay, and payment terms)
[8 mins good info]

First-time founder approach vs serial founder approach
[10 Mins good info] [14 mins good info]

2. How to charge (19:20)
Explain it simply – B2B & B2C Options
-the way you charge customers should be simple and obvious to them

Most common ways to charge:
B2B SaS

• Freemium – both free and paid, hoping to convert the free users to the paid subscriptions
• Flat Rate – charging one price
• Tiered – different premium, business
• Per User/Seat
• Advertising
• White-Label – selling unbranded software who then brand it themselves

B2C

• Subscription
• In-App Purchases
• Marketplace – connecting providers of a service with those looking for the service (membership fee, % of transaction)

B2B to B2C

• Rev-Share

HYBRID MODEL – Subscription based but only charge for the people that actual use it, not the amount of users signed up (pure usage / reduced friction)
-bottom up procurement (single user can signup with a CC)

*In order to charge a subscription a person must get significant value, and their can’t be free options
*You can tell the quality of a product or a company based on how easy it is to return the product or cancel your subscription
*People now perceive that if they don’t like a product they should be able to get out of it at any time or pause it

-It creates so much clarity for your organization when you know that every-time someone leaves its easy for them to leave, you’ll know your churn, you’ll know your north star
-Land and expand (negative churn) – more people subscribing than our leaving or unsubscribing
-(bear metrics? – subscription metrics service to look into)

Startups should increase price over time
-Founders should always be thinking about increasing pricing
-Big mistake from founders is not seeing how much value their providing to the product while they are building the product
-What was the product like at the beginning, how much additional features/value have you added – am I charging for those things
-These new things are increasing value for your customers and saving them money
[29 mins]

How do you increase prices over time?
-B2C grandfather existing customers in for a certain amount of time
-Enterprise side – sometimes grandfather – can release new features in a new tier (LeadIQ example)
-consumers are willing to pay more for increased value (iCloud / GDrive storage/usage model) – Saving people time is very valuable

3. When to charge (39:05)
Great companies turn on revenue early or at least know what their business model will be
Turn on revenue earlier than you’re comfortable
-charge customers from day 1
-if you know you’ve built something of value then charge for it
-if your building a great product you should have no problem charging for it (no one has a problem paying for something that benefits them – save people time)
-if solely ad-based there is something to be said about scaling first and then turning on advertising (rare cases)

Choosing how much to charge
-Flinch test for B2B – we charge 10k, if they flinch say for the 1st month or 1st quarter, if not then you have a new baseline price for your product
-Sometimes you’ll want to charge a lower price to gather valuable data
-Need to know the lifetime value of your customers

4. Revenue streams (49:18)
Home many revenue streams should you have? Answer: One
-strategy, pick one revenue stream and double down on it otherwise you get conflicting motivations inside your organization and too much confusion for customers
-if you don’t have enough resources in your company with multiple revenue streams your going to do both poorly
Exceptions
-sell physical product w/subscription to enhance it
-start content play –> shift to marketplace
-if you find oil, don’t pivot!
[54 mins example of continuing to drill for oil]

5. Unit economics (55:57)
The exact costs and revenue of your business
Build a simple financial model
-start with top-line revenue (optimistic plan – grow 15% MOM) (conservative plan – 7% MOM) (middle plan – 12% MOM
-next costs that go into selling your product (COGS, hard costs)
-operating costs (salaries, benefits, office space, travel, legal, accounting, professional services)
-key here is to test the assumptions that your making (start tracking over time and validate which one is true
Margin expansion
-how do you expand your margins?
-volume (economies of scale) – as your buying and selling more you start paying less -software
-look at how your customers are using your product and figure out how you drive additional value, how do you charge them more
-what additional value can you add to drive additional revenue (integrations to other services, upselling)
-figure out what features matter (how often do they use a feature and how many users use it) focus on features with the most usage and improve
– cycle of testing and iterating and seeing what sticks (can be arduous process for your team important to have a team that loves this process)

6. Competitors ()
-Unless your creating an entirely new market your going to have competitors
-don’t focus too much on competitors
Main focus should be customers
-talk to your customers
-don’t shield yourself from the customer support lines
-don’t wonder if your customers are getting value, talk to them, send them a survey
Learning from your competitors
-even in the rear-view mirror we should be paying some attention to our competitors
-don’t assume your competitors don’t know what your doing
-why are they charging what they’re charging
-(don’t charge less but charge in a different way)
-“your margin is my opportunity” – if your charging too much I’m going to come in and charge less and take some of your customers
-try your competitors products
-talk to your competitors customers
-Look out for competitors trying to interview your employees with no intention of hiring them to gather intel
-competitive intelligence very important
-read the reviews of your competitors, what do people love about them, what do they hate?
-instead of what are our competitors doing, focus on what’s the next thing our customers want (ex prime 2 day to prime same day)
-delight your customers by finding out what it is that your customers dislike most about your competitors

7. Key metrics (1:15:56)
‘the dashboard of the plane’
-its the founders job to hire the team, set the vision, set the metrics
-figure out the north star metric, the metric that sets the core value of the product
Setting up metrics
-track metrics on at least a weekly basis for accountability
-north start metric usually directly tied to revenue
-secondary metric – the extent metric (engagement)
Tracking & refining metrics
-setting yearly goals that are adjusted quarterly
-quarterly offsites – set quantitative and qualitative goals
-make sure your tracking on a weekly basis – put on wall