CHAPTER 7

• Robert J. Shiller: 'Finance is not merely about making money. It's about achieving our deep goals and protecting the fruits of our labor. It's about stewardship and, therefore, about achieving the good society.'
• Revenue model


  A conceptual structure that explains how a business generates money
• The revenue model is one of the important elements of the business model
• A revenue model provides a synopsis of the present and future opportunities to earn profit
• It is necessary for a startup to identify its revenue model, since it is vital for the long-term projections of a company
• It is also essential for a start up to have a strong revenue model because investors are always mindful on how the business will earn
• Different Types of Revenue Models

  • Commercial and Retail
  • Subscription and Usage Fees
  • Licensing
  • Auctions and Bids
  • Advertising
  • Databases
  • Transactions and Intermediation
• Commercial and Retail


  • Physical products are sold in the market either through business to business (B2B) or business to consumer (B2C)
  • Selling physical goods
  • Selling digital products
  • A service sold per unit
  • A service with fixed price
  • Sale of services for future use
  • Daily deals/flash sales
• Subscription and Usage Fees

  • Subscriptions
  • Usage fees
  • Rental
• Licensing


  • License of usage
  • Certifications
• Auctions and Bids


  • Auctions
  • Dynamic pricing
• Advertising


  • Advertisements
  • Promoted content
  • Sponsorships
• Databases


  • Collecting and selling data
• Transactions and Intermediation


  • Brokerage
  • Transaction enablers
  • Affiliate
  • Creating a platform
• Revenue drivers


  Factors that drive revenue levels
• Revenue drivers


  • Revenue channels
  • Revenue streams
  • Product and service split
  • Value vs volume
• Cost drivers


  The direct cause of a cost and its effect on the total cost incurred
• Value vs volume


  The choice of selling big quantity of products/services at low margin or small quantity at a high margin
• Cost driver


  The direct cause of a cost and its effect on the total cost incurred
• If costs exceed revenue, there is a high probability of discontinuity. If the costs are less than revenue, there is profit and a big probability of expansion. If the costs equal revenue, it will depend on the decision of the entrepreneur whether to close or continue based on other variables besides costs
• Cost driver


  Causes a change in the cost of an activity, the root cause of why a particular cost happened
• An activity may have several cost drivers connected to it
• Activity-based Costing (ABC)


  A method used to accurately identify both the direct and indirect costs in a particular activity
• Cost allocation based on cost drivers

  1. Compute cost per set-up

  2. Compute cost per machine hour

  3. Compute cost associated with each customer served
• Using the computation of Set-up + Machine Maintenance + Customer Service to get the total cost drivers for each product, the cost associated for each product is computed
• Pricing


  A significant element of the marketing mix, the company's complete source of earning
• Three most essential influencers of pricing

  • Cost
  • Consumer demand
  • Competition
• Three common pricing strategies used by entrepreneurs

  • Maximization (Revenue Growth)
  • Penetration (Market Share)
  • Skimming (Profit Maximization)
• Cost-led Pricing


  A pricing strategy wherein a company adds all expenses which have been used in producing a product which include direct material cost, direct labor cost, and overhead costs then it adds some fraction of a desired profit margin on top and arrived at a price for a product and/or service
• Cost-led Pricing


  • Advantages: Few resources are needed, Justifiable, Complete coverage of cost and a steady rate of return

  Disadvantages: Disregards competition, Product costs overruns, Contract cost returns
• Target-return pricing


  A method wherein a business prices its product and/or service based on a target rate of return on the investment or what the company anticipates from the investing in the business
• Target-return pricing


  • Advantages: Dynamic price determination, Higher profitability, Efficient and optimum utilization of resources, Availability of value-added products and services, Better prediction and response to market changes

  Disadvantages: Reliance on estimating the final selling price of the product correctly, Estimating too low a price, Narrow-minded goal of reducing cost, Estimating a selling price and cost for markup
• Value-based pricing


  A method that uses the perception of the customers on the worth or value of a product and/or service for pricing
• Value-based pricing


  • Advantages: Higher profit margins, Greater brand loyalty, Low competition, Supply and demand balance

  Disadvantages: Niche market, Difficult to expand the business, Competition in the market, Higher production cost
• Bootstrapping


  Starting a company with little or no capital, thus an entrepreneur relies on money excluding outside investments. Includes using personal savings, sweat equity, lean operations, quick inventory turnover, and a cash runway
• Successful case of bootstrapping

  • Sara Blakely, founder of Spanx, launched her women's undergarment with her $5,000 of personal savings and wrote a patent application herself to save on legal fees
• Steps to bootstrap a company

  1. Look for seed money

  2. Start with a minimum viable product (MVP) and/or service

  3. Use customers' money to grow
• Crowdsourcing


  Getting work, information, or opinions from a big group of people who give their data via the Internet, social media, and smartphone apps
• Equity financing


  The process of generating capital through the sale of shares
• Stages of equity financing

  1. Pre-seed funding

  2. Seed funding

  3. Early stage investment (Series A & B)

  4. Later stage investment (Series C, D, etc.)

  5. Mezzanine financing