Lesson: Revenue Relationships with Steve Blank

Step #10 Monetization: Extract revenue for the value of your product

One of the things I just want to reemphasize because we mentioned it earlier, is the difference between single-sided markets and multi-sided markets. Single-sided markets, the customer is the user and the payer. That's a single-sided market. There are no separate users and there are no separate payers. You're it. Congratulations. You're the customer and you're going to pay for it.

But in multi-sided markets, there might be users but there also might be very separate people who are payers. The example we keep using is Google because everybody around the world has probably have at one time or another been a Google user. When you use the Google search bar, you're one side of a multi-sided market. You're the user but you're not the payer. You're not paying for the product. But in reality, you're paying implicitly because there is another side. The other side are the people using Google AdWords to look for keywords and in multi-sided markets, the company, your startup typically cares about acquiring a massive amount of users, and then figuring out how to monetize those users next.

Google decided to go for millions and tens of millions of users and then the keywords came after. Depending on your investors, this may be their strategy. I tend to prefer that we actually try to look for who the payers are as early as possible, but this is a question you might want to ask your investors. Do we go for lots of users and then say, "If we get 10 million people, the revenues will come." Or do we want to look at both sides of the market at the same time. Again, if you're in a physical channel, my suggestion is you want to take a look at users and payers simultaneously.

If you say your business is advertising based, some of the tactics are, how do you get to ten million monthly users? How do you become one of the top five websites? And how much do the payers actually pay?

If you wait two years to find this out, you might have gotten 10 million of the wrong users. So your job is not only to talk to the users in a multi-sided market, your job is to get out of the building and talk to the payers, because you have a hypothesis. An important one is how much will those payers pay for the users you think you're collecting. Guess what? If you're wrong, the time to know about it is now, not two years from now. And it's okay to be wrong because most startups, all you have is a series of hypothesis, and it's really easy to get caught up in the passion that says, "If we get all these people, obviously these people will pay us lots of money."

But as soon as we get out of the building, that obviously might turn into maybe not. And so what we want to do is get the facts as quickly as we can, and then iterate and pivot. So don't worry if your assumptions were wrong here on your revenue model. You just want to find it out before you start burning a lot of cash and building a lot of value prop around the wrong model. There are other companies who want to go for revenue first.

Typically hardware companies, but not always. Sometimes on the web as well. So the questions to ask is how long will it take to start doubling my revenue every month? When will I get to $100,000 a month? When will I get to $1 million a month? And what are my assumptions about my business when I reach these milestones? What's changed to get there? And so, there's nothing magic about these numbers but when you start asking about, "When am I going to get to 100,000? What has to happen in all those other pieces of the business model?" Because if you think about it, you've been working hard on value prop and you've working hard on customer segments and customer acquisition and activation and channel. What did you need to do to get the first $100,000 a month, first $1 million a month. Boy, as a start-up, you feel great when those happen.

Another thing to think about is what's the market size estimate? How big is this and what's the percentage market share realistically you could get? How many can your distribution channel actually sell? And if you have your own direct sales people, do the math. How many customers can they call on at what price, and as you start putting all this into a spreadsheet, you'll actually start building the classic income statement balance sheet and cash flow we haven't even had you do yet.

If you think about this, this entire conversation we've had was how to get the basic data so you can put together a revenue model that's based on fact rather than fiction, and you are going to start thinking about, "If I have a direct sales force, how much can they sell in dollars?" Or "if I'm using an indirect channel, what's a realistic number they sell for other customers? How much will it cost to have this distribution channel?" Hopefully in the last lecture, you start thinking about the cost of your channel, how many customer activations, how much will it cost to get customers into my physical store or my virtual website, and then as we talked about earlier, how much will it cost to acquire a customer? By the way, not only how much does my customer acquisition cost, but what's their lifetime value? How many units will they buy from each of these efforts?