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BMG Revenue

Streams & Cost


Structure
GBA 171
STEM Business Honors I
Michael A. Pope, Professor
STEM Path to the MBA
September 21, 2015

Project Alpha Grading


Presentation
Professionalism (10%): Appearance,
Time, Eye Contact, Member Involvement
Communication (15%): Clear, Concise,
Q&A

Canvas
Complete (10%)
Content (50%)
Research/Evidence (15%)
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Project Alpha Grading


Appearance: Business Formal
Men: Suit (charcoal, navy or gray), shirt (white,
ecru, or light blue), socks that match suit color,
black or brown shoes, belt that matches shoe color,
solid or subtle pattern tie
Women: Suit (charcoal, navy or gray) or contrasting
jacket and skirt; white, off-white, solid-color or
pastel blouse; simple jewelry, neutral hosiery
The whole group will be penalized for any member
not dressed appropriately.
If you want to be taken seriously in the business
world, dress appropriately
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Project Alpha
Present results of second set of
interviews
5-minute presentations
3 groups selected at random

Name of Department or Program here

Business Model
Generation

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Revenue Streams
This Building Block represents the
cash a company generates from
each Customer Segment (costs
must be subtracted from revenues
to create earnings).

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Revenue Streams
For what value are our customers really willing
to pay?
For what do they currently pay?
What capacity do my customers have to pay?
How are they currently paying?
How would they prefer to pay?
How much does each Revenue Stream
contribute to overall revenues?
Requires out of the building work directly with
your customer segments
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Revenue Streams
Two key questions
1. What are my Revenue Streams? Strategy
used to generate cash from each Customer
Segment.
2. Within the Revenue Streams, how do I price
the product? Tactical decision on price in
each Customer Segment.
Pricing (tactical) follows the Revenue Streams
(strategic)
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Revenue Streams
1. What is a Revenue Stream?
The strategy that the company uses to
generate cash from each customer
segment ways to charge

2. What is the Pricing Model?


The tactics that you use to set the price
in each customer segment how much
to charge
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Revenue Streams
Example: Revenue Streams vs Pricing
Model
1. 15 sales reps, 27 cities (Revenue
Streams)
2. Cost ($99) + markup($30) = $129
(Pricing Model)
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Revenue Streams
Several ways to generate Revenue Streams:

Asset Sales ownership right, e.g. Ford


Usage Fees proportional to usage, e.g. cell phones,
utilities
Subscription Fees continuous access to service, e.g.
Netflix
Lending/Renting/Leasing temporary access, e.g.
apartment, cars
Licensing use of IP, e.g. software, NASA technology
Brokerage bring together two parties, e.g. real estate
Advertising Multi-sided markets, i.e. users and payers
are different, e.g. Google
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Revenue Streams
Additional Web/mobile resources
Referral revenue: payments for referring
customers to other websites or products
Affiliate revenue: finders fees or
commissions for directing customers to
sites
Email list rentals: subscription/membership
sites rent email lists to advertiser partners
Back-end offers: add-on sales from other
companies as part of their customer
registration/purchase confirmation
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Revenue Streams
Pricing Mechanisms
1.Fixed Menu Pricing - Predefined prices based on static variables Customer Segment
dependent
List Price
Product Feature Dependent Value priced
Volume Priced
2.Dynamic Pricing Price change based on Market Conditions
Negotiation (bargaining)
Yield Management, e.g. airlines, hotels
Real-time Markets
Auctions

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Revenue Streams
Common Mistakes

Assume Revenue Stream is pricing


Set the price based on company costs
not driven by any customer insight
eliminates the discussion on what the
market will support
My price has to be less than my
competitors apples to oranges
comparison?
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Cost Structure
This Building Block describes all costs incurred
to operate a business model. Clearly Revenues
> Costs at some point in the companies life.
What are the most important costs inherent in our
business model?
Which Key Resources are most expensive?
Which Key Activities are most expensive?
Which Customer Relationships are most expensive
to maintain?
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Cost Structure
Two broad classes of business model cost
structures:
Cost-driven business models (e.g. WalMart,
Southwest)
Focus on minimizing costs wherever possible.
Based on low price Value Propositions

Value-driven business models (e.g. Ritz Carlton,


Bose)
Focus on creating more value, and charging
customers accordingly
Based on benefit Value Propositions
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Cost Structure
Important Cost Structure terms
to understand:

Fixed Costs
Variable Costs
Gross Profit
Net Profit
Economies of Scale
Economies of Scope

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Cost Structure
Fixed Costs vs Variable Costs:
Fixed Costs: NOT dependent on goods
and services produced
Variable Costs Cost related to
volume of sales

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Cost Structure
Fixed Costs NOT dependent on
goods and services produced;
Manufacturing companies have high
fixed costs
Rent
Insurance
Salaries
Property Taxes
Utilities
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Cost Structure
Variable Costs Cost related to
volume of goods or services produced
Direct Material cost
Some labor (piece rate labor)
Shipping costs (freight out)
Commissions
Credit card fees (% of sales)

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Cost Structure
Gross Profit: Net sales-COGS
January

February

Software
A Sales

$500,000

$900,000

Software
B Sales

$20,000

$15,000

Cost of
Goods
Sold
Gross
Profit
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March

Total
1st
Quarter

$655,000 $2,055,00
0
$25,000

$60,000

-$200,000 -$500,000 -$450,000

$1,150,00
0

$320,000

$415,000

$230,000

$965,000

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Cost Structure
Net Profit: Gross profit-Operating
expenses-Tax/Interest
January

February

$320,000

$415,000

$230,000

$965,000

$150,000

$175,000

$200,000

$525,000

$10,000

$100,000

$15,000

$125,000

$300

$200

$100

$600

Business
Ins.

$1,250

$1,250

$1,250

$3,750

Loan
Interest

$2,000

$2,000

$2,000

$6,000

$12,000

$14,000

$16,000

$42,000

Gross
Profit
Salaries
Shipping
Bank Fees

Payroll

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March

Total
1st
Quarter

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Cost Structure
Economies of Scale: Cost advantage due
to expanding output average cost per
unit falls as output rises companies with
large fixed costs, e.g. IC manufacturers
Economies of Scope: Cost advantage due
to producing more than one product
same marketing or distribution channel
may support multiple products
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Cost Structure
What are the most important costs
inherent in our business model?

Manufacturing of product
Research and Development of software
Marketing and promotion of product
Website Development & Hosting
Technical Support

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Upcoming Events
Next Class (9/28)
Key Resources, Key Activities & Key
Partnerships, O&P pages 34-39
Interview Results Customer
Segments/Value Proposition, updated
Business Model Canvas
Project Alpha Work Session

Project Alpha October 5


Business Research Academy Test
due no later than 10/12
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