ENTR 2030 - Ch 9 Textbook Notes PDF

Preview

Summary

Textbook notes for chapter 9 - they are concise...

Description

ENTR 2030 Chapter 9: Creating Revenue Models 9.1 Define a revenue model and distinguish it from the business model. ● Revenue ○ The income gained from sales of goods or services ● Revenue model ○ A key component of the business model that identifies how the company will earn revenue and generate profits ■ In other words, it explains how entrepreneurs will make money and capture value from delivering on the customer value proposition (CVP) that is outlined as part of their business model ■ Part of this strategy is asking a few simple questions: ● How much are my customers willing to pay? ● How many customers do I need? ● How much revenue can be generated through sales? ● If I have more than one revenue stream, how much does each stream contribute to the total? 9.2 Illustrate the 10 most popular revenu models being used by entrepreneurs. ● Unit sales revenue model ○ Measures the amount of revenue generated by the number of items (units) sold by a company ○ typically , retail businesses rely on the unit sales revenue model by selling products or services directly to consumers, whether face-to-face or online ○ 2 different types of unit sales: ■ Physical goods ● Include clothing, food, beverages, housewares and hardware, furniture, and cars ■ Intangibles ● Include digital products such as music sold through iTunes or games and apps sold to smartphones and tablets ○ Razor-and-razor-blade model ■ This phrase was coined by Gilette, which generates huge revenue from offering a physical product like razors at no or low cost to encourage sales of the more expensive razor blades ■ Also become known as the printers-and-ink model (printer is sold at low cost but the ink or toner cartridges are priced much higher generating ongoing revenue) ● Advertising revenue model ○ Relies on the amount of revenue gained through advertising products and services ● Data revenue model ○ Companies use the date revenue model when they generate revenue by selling high-quality, exclusive, valuable information to other parties ● Intermediation revenue model

1

Describes the different methods by which third parties, such as brokers (or “middlemen”) can generate money ■ Brokers are people who organize transactions between buyers and sellers ● Ex: eBay acts as an auction broker as it manages the transaction between seller and buyer and generates revenues by charging a listing fee plus commission on a sale Licensing revenue model ○ A way of earning revenue by giving permission to other parties to use protected intellectual property (copyrights, patents, and trademarks) in exchange for fees Franchising revenue model ○ Describes the process whereby the owner of an existing business (known as the franchisor) sells the rights to another party (known as the franchisee) to trade under the name of the business ○ The franchisor helps the franchisee by providing support in marketing, operations, and financing, and in return, the franchisee pays the franchisor royalties based on an agreed % of sales ○ Ex: Anytime Fitness, Subway, KFC, Supercuts Subscription revenue model ○ Involves charging customers to gain continuous access to a product or service ○ This type of model has been traditionally applied to magazines and newspapers that charge customers a subscription fee to receive each issue of the publication Professional revenue model ○ Provides professional services ona time and materials contract ○ Ex: consultant lawyers and accounts charge by the hour for their services Utility and usage revenue model ○ Charges customers fees on the basis of how often goods or services are used ○ This is also known as a pay-as-you-go model ○ Some mobile phone carriers use this model by charging users a fee for the number of minutes used on calls or for the volume of text messages ■ The greater the number of minutes or volume of texts, the higher the payment Freemium revenue model ○ Involves mixing free (mainly web-based) basic services with premium or upgraded services ○ In this model, businesses create at least 2 versions or tiers of products or services ■ The company gives away the low-end version of the service for free ● The free “basic” version usually comes with limits on usage and functionality ■ The company also creates and sells higher-end versions that offer more functionally and performance ● Ex: LikedIn which gives members free access to build a profile and maintain a professional network - it charges a fee for its premium service, which further benefits job seekers and recruiters with added functions such as search filtering, sending personalized messages, and tracking visits to one’s profile ○

●

●

●

●

●

●

2

9.3 Explain how companies generate revenue by profiting from “free.” ● The freemium revenue model, which offers a product or service for zero cost, is becoming more popular as a means of encouraging widespread customer adoption ● Direct cross-subsidies ○ Refers to pricing a product or service above its market value to pay for the loss of giving away a product or service for free or below its market value ■ Ex: cell phone companies lose money by giving away the phone handsets for free, but then they cover the loss by charging monthly service fees ○ This model attracts customers by eliminating, or reducing, the up-front cost of a product or service ■ It then makes up the loss with subsequent charges, which the company expects customers to be willing to pay because they are pleased with the product or service and don’t want to go through the hassle of switching

3

●

Multiparty markets ○ Involves giving a product or service to one party for free, but charging the other party or parties ■ The classic example of a multiparty market is the ad-supported free content model that is common on the internet ■ The challenge for the multiparty market model is to prevent costly overuse by those who get the service for free, as well as making the business valuable enough to the party that does pay

●

The freemium model is often a viable option for web-based companies because of the low marginal costs of providing the service for free uses: online storage and bandwidth are cheap ○ However, companies running freemium models need to be constantly focused on the average cost of running the service for free users, as well as the rates as which free users convert to playing users ○ If the costs of supporting free customers grows too high or the number of paying customers is too low, the freemium model will not work

9.4 Identify the drivers that affect revenu as well as cost. ● Revenue drivers ○ Customers ○ Frequency 4

●

●

○ Selling process ○ Price Cost drivers ○ Cost of goods sold (COGS) ■ The direct cost of producing a product ○ Operating expenses ■ The costs of running your business ■ More difficult to reduce ■ Cutting operating expenses can yield beneficial short-term gains, but it does not always work in the long term

Income statement ○ A financial report that shows revenues, expenses, and profit for a period of time, typically a months quarter or year ○ It subtracts the COGS and expenses (admin, marketing, research, and other operating expenses) from the total revenue to give you a net income figure, which will be either a profit or a loss ○ Also reflectors depreciation and amortization of your company’s assets ○ Sample income statement →

9.5 Identify different strategies entrepreneurs use when pricing their product or service. ● Find the going rate of your product/service (i.e. look at your competition) ● Talk to your friends/family to see how much they would pay for your product/service ● Think about your customers (what can they afford to pay?) ● * The key to sustaining a new business is to create consistent revenue streams ● Pricing products and services ○ The best way to set a price is to base it on the information you have already gathered ● Competition-led pricing ○ You copy the process suggested b y other business selling the same or very similar products and services ○ However, matching a price is not generally enough to encourage customers to buy from you, especially if you’re not an established brand ● Customer-led pricing 5

A pricing strategy that asks customers how much they are willing to pay and then offers the product at that price ○ This “name your own price technique” is a useful way of attracting people to your company, and it still allows you a measure of control over your own pricing Loss leader ○ The practice of offering a product or service at a below-cost price in an attempt to attract more customers ■ Involves giving special discounts and reducing pricing ■ Can be an effective way if competing with an established brand offering similar products/services Introductory offer ○ Encourages people to try your new product by offering it for free or at a heavily discounted price for a certain number of days or to the first 100 customers ○ Generally used for new products or services Skimming ○ A form of high pricing, generally used for new products or services that face very little or even no competition ○ If your product is the first on the market, then you can sell it at a higher price and retain the maximum value upfront, until you are forced to gradually reduce your prices when competitors launch rival products ○ Ex: iPad, PlayStation 3 Psychological pricing ○ Intended to encourage customers to buy based on their belief that the product or service is cheaper than it really is ○ Flash sales, “buy one get one free” and bundled products are all methods of psychological pricing ○ Pricing your product/service one cent lower can make a difference between selling and not selling ■ McDonald's and KFC are among dozens of fast-food restaurants that use psychological pricing to attract customers Fair pricing ○ The degree to which both businesses and customers believe that the pricing is reasonable Bundled pricing ○ Packaging a set of goods or services together; they are then sold for a lower price than if they were to be sold separately ○ The customers feel they are getting a bargain, and the increased sales generate more profit for the company ○ Ex: fast-food value meals, price fixe meals at restaurants, snack food combos at the movies, cell phone packages, and cable TV packages ○

●

●

●

●

● ●

9.6 Explain different methods of calculating price. ● The key to pricing is to ensure you make a profit, as well as to create value for your customers. ● Break-even analysis can also help set price ○ Break-even is that point when your revenue equals your costs

6

Then, anything sold beyond break-even is considered profit A quick break-even analysis can help entrepreneurs quickly determine what they need to sell monthly or yearly, and in some cases daily or weekly, to cover the costs of running the business ○ Break-even is express both in units and in dollars ○ Break-even units = Fixed costs/(sales price per unit – variable cost per unit) Fixed costs are those costs that stay the same regardless of how much revenue you are generating or how much product you produce ○ These costs are typically those operating expenses that are incurred outside of actually producing the product, such as rent, salaries, and utilities ○ Though not always suggested in the accounting textbooks, entrepreneurs should use their total operating costs as their fixed costs because it’s closer to reality for a startup The sales price per unit is the selling price, such as the $20 ○ If you have multiple products, you can simply use an average sales price per unit ○ For example, if you were calculating the sales price per unit for a restaurant, you would use the average sale per person. Variable cost per unit is the COGS plus any operating expenses that actually go up and down with production of the product ○ These may include shipping, inventory costs, or sales commissions. Cost-led pricing ○ A pricing strategy that involves calculating all the costs of manufacturing or delivering the product or service, plus all other expenses, and adding an expected profit or margin by predicting your sales volume to get the approximate price Target-return pricing ○ Involves setting your price based on the amount of investment you have put into your business Value-based pricing ○ Involves pricing your product based on how it benefits the customer ○ ○

●

●

●

●

●

●

7...