This is the fifth and last blog entry in our series on how to build a startup. Here's again an overview:

Section 1 - Business Models And Customer Development
Section 2 - Exploring Customer Segments And The Business Model Canvas
Section 3 - Building Customer Relationships
Section 4 - Exploring The MVP
Section 5 - Developing Your Revenue Model

Section 5 - Developing Your Revenue Model

Executive Summary

Very simply: how will your startup make money? And how does your revenue model integrate itself into your business model canvas and customer value proposition? This isn't limited to the pricing of your product or service - but rather the overall strategy and tactics related to collecting the revenue from the value your customers are getting from your product/service.

What Are My Revenue Streams?

A revenue stream is the strategy used by a company to generate cash from each customer segments - so if you have multiple customer segments, you may have multiple revenue streams.

A pricing model is the tactics you'll use to set the price in each of your customer segments. To determine the pricing, you need to understand the value they are willing to pay for. When you're first making your assumptions, you can guess what the pricing could be, but you'll quickly validate how much they are currently paying (and for what value), and how they are currently paying.

Common startup mistakes at this stage include thinking that your price is determined by the cost of manufacturing or producing the product or service or that your price should be lower than any other competitor's pricing.

Determine Your Revenue Model

There are a few types of revenue models you can use as an example for your revenue streams:

• Asset Sale - sale of the ownership right to a physical product (example: buying a car)
• Usage Fee - fee is proportional to the usage of service (example: mobile phone service or database hosting)
• Subscription Fee - fee for a continuous access to a service (example: SaaS products)
• Renting - fee for a temporary access to a good or service (example: renting a car)
• Licensing - fee for use of some Intellectual Property (example: software)
• Intermediation Fee - often found in marketplaces of various types, a fee for bringing together two or more parties involved in a transaction (example: online marketplace sites like Airbnb)
• Advertising - fee paid by brands and companies to get in front of potential customers (example: Google, Facebook)

Each revenue stream may different pricing tactics. Once you've figured out the revenue stream, there are two types of pricing: Fixed pricing and dynamic pricing.

Fixed pricing is based on 3 elements:

• the cost of production & a set markup
• value priced (based on customer segment or features)
• volume priced

Dynamic pricing is based on 3 elements:

• negotiation
• yield management (best example are seats on a plane closer to take off)
• real-time markets (auctions or marketplaces with time sensitive goods)

In an existing market you have to think about competition and how they'll shape your pricing. What are their costs? What are their products? What's their value? Make sure you take the time to research and understand them and use your pricing as a strategy for gaining more customers.

Another common startup mistake is to price from cost from day 1. This isn't a strategic way to price. You want to think about both your internal economics but also the value to customers - don't leave money on the table.

By getting out of the building and understanding your customer segment's pain and gains - you better understand the value your value proposition provides them.

Key Revenue Model And Market Questions

Keep these key questions in mind as you and your startup are choosing your revenue model and pricing tactics:

• What are my customers paying for?
• What capacity do my customers have to pay?
• How will you package your product? (not limited to the physical packaging, but what features will be included)

As for the market type, consider these critical questions:

• What's the market size and estimates of the market share?
• How many can your channel sell?
• How much will this channel cost?
• How many customer activations?
• How much will cost to acquire a new customer and what will be their lifetime value?

Outlook

Today micro Entrepreneurship is a real big trend. This trend is leading to the fact that many people are starting up their own business. But before you start up your own business, you should do your homework and get out of the building to validate your idea. By validate I mean check if customers want it and if you can make money with that idea. Otherwise you will end up like most companies in bankruptcy after two years.

So, if you out there want to become a founder and be successful you should make sure, that you get out of the building quick in order to build a functional business model and develop customers. Make sure you explore customer segments and pin a business model canvas to the wall in our office to constantly iterate with it. Build first customer relationships even if you don't have a product, just to validate your business. Then build a minimal viable product and test it until your customers are happy. Form this point, you only need to validate your revenue streams or pricing policy and the chance that you will be still alive after more than two years is going to be a real one. For sure there is no guarantee or what so ever but if you validate your business idea, the chance of surviving is for sure a better one and it will also open up your eyes with things you were not even thinking about initially.

We wish you guys good look and a lot of fun starting up your own business.