Revenue Stream Design

And there it is…an idea. Not just an idea, but an idea that potentially has huge impact. Impact, because it will ease the pain of your customers. Impact because additional gains are offered to your partners. Impact, because implementing this idea would just makes our world a little better.

You started to craft the value proposition, encountered various assumptions and identified a potential market. You want the idea to become a game-changing product. Time to set up lean experiments, because you know the start-up drill of building minimum viable products and need to validate your riskiest assumption. Get out of the building, talk to your envisioned customers. Get to know which activities create value and which are a form of waste. How? Through rapid iteration, data-driven decision making and early customer development.

But wait…… Customer development tools like the Value Proposition Designer helped you to learn more about the pains and gains of your customers, SCAMPER helped you fine tune the possibilities of your added values, the Mom Test and Solution Selling technics assured you asked the right questions while validating your value propositions and customers pains. But how do you probe the willingness to pay via a certain revenue model? What is actually going to be your engine of growth? How much are you saving your customer? How much impact do you want to achieve?

As start-up trainers, we hadn’t yet encountered a useful tool to guide an exercise helping entrepreneurs to design their revenue model in an early stage. Above mentioned tools might already give you insights on how you want to price your product and why your customers want to pay for it. But it doesn’t help you in considering what the product is actually worth to them, how they want to pay or what types of strategies you could use to grow these revenues sustainably. We think it is worth the effort to consider early in the process what are the different options to generate revenue. We have seen multiple start-ups, like Ampelmann, Physee or TAHMO, pivot in their business model to the due fact the supporting revenue model wasn’t appropriate for their intended customers.

So we started to designe a tool that will help you design a revenue stream that results in sustainable growth. An exercise leading you through the big three S’s of creating an individual revenue stream very similar to how the Value Proposition Designer does this for your Value Proposition and your Customer Segments:

Savings, Strategy & Sales

But also taking into account some other S’s: $, Sustainability and Social Impact.

An addition to the value proposition designer: the Revenue Stream Map

After testing and improving the tool during different programs we were involved in, we would like to use this article to share with you: the Revenue Stream Map. It is still work in progress, but we hope that by showing you the tool and our reasoning behind it, we give more people the opportunity to use it and add to it.

The Revenue Stream Map zooms in on one block of the Business Model Canvas: the Revenue Streams. It is designed as a tool to give additional input during the first iterating phases, while describing the building block in more detail. This exercise helps the entrepreneur to project in the best way what sort of options there are to create a sufficient and sustainable flow of revenues to help solve problems and needs of customers by offering their value proposition.

Revenue Stream Map: a simple way to design a revenue model based on your customer’s needs, on how they want to pay you and current growth strategies (Savings, Sales, Strategy). It works in conjunction with the Value Proposition Designer, Business Model Canvas and other strategic management and execution tools and processes.

Let’s take you through the 3 different steps:

Savings

Describe how much savings your value proposition would realize for your customers.

First of all, the insight from describing the pain and pain relievers in the Value Proposition designer exercise gives input for what to fill in when we ask you about your ‘savings’. After you have come up with solutions how to tackle something better, faster, more efficient, the tricky part is to make that quantified. Describing it as a ‘saving’ gives you an insight into the question: “compared to what and how much?” A question jury members and investors love to ask.

While describing the ‘savings’ you could accomplish for your customers, one should be aware of the competitive market and the distinction you offer. How do they relate and in what sense do you realize lower cost, less investment or lower risk?

Furthermore, you need to have an insight in what the current situation is costing the customer. How much effort and money is the customer currently spending. This gives you a reference point related to willingness to pay or likelihood that they would adopt your solution.

To gain more insights in the savings you assume to accomplish, answer the following questions:

• Describe how much the pain is costing the customer. What is the current situation regarding solving these pains and what does this cost?
• What do your customers currently pay for similar pain relievers/gain creators?
• How would they define ‘too costly’?
• What offers do competitors (so competing solutions) make?
• What would increase the likelihood of your customer adopting a solution? (e.g. lower costs, less investment, lower risk, …)

The answers will give you input on the costs of pain, the competitor’s field and the additional gains. Each attribute you should score on the gradient sustainable revenue model contributor (high — low). This will facilitate the priority indication and gives insight in which riskiest assumptions should be addressed first.

Strategy

Describe how to maximize your revenue stream to offer your pain reliever as (cost) efficiently as possible

In order to conquer the market and get enough traction to grow your customer base, you must have a ‘strategy’. A ‘strategy’ to accelerate your engine of growth to reach the customers (which can be through payment, viral or a sticky approach) by lowering your acquisition cost per customer and to reduce your own production costs (economy of scale/ scalable business model). This is part of your company building and internally focussed. However, you should think about the marketing and business development revenue that matches the market you are targeting. There must be insight in the leverage you can create, the multiplier effect you could turn on after a certain amount of traction and know exactly where the possibilities within the value chain occur.

To gain more insights in the strategies you want to use answer the following questions:

• Which revenue strategy can support your business growth?(e.g. direct sales, users fee, freemium, SaaS, one for one, razorblade,no cure no pay, subscription, donations, subsidy, licensing, royalties,profit sharing, success fee, commission on matchmaking,advertisement, …)
• Where in the value chain would your value proposition create the most value?(e.g. sourcing, production, distribution, retail, consumption, waste disposal, …)
• How to create a multiplier effect? (e.g. reduce unit production cost, reduced customer acquisition & retention costs, auto renewal, open source, lock in, …)

The answers will give you input on the value chain, the multiplier possibilities and business growth opportunities. Each attribute you should score on the gradient sustainable revenue model contributor (high — low). This will facilitate the priority indication and gives insight in which riskiest assumptions should be addressed first.

Sales

Describe how your customer is currently paying and how they want to pay

It is vital to think about how a customer is paying for your value proposition in order for you to set up the right sales channels. Is your customer signing a purchase contract? Do they pay with cash (and in which currency)? Do they pay ahead or not?

Keep in mind that a recurring customer and long term access to the client are valuable attributes: that might influence the sale deal you want to close. Furthermore, the deal might go further than just the monetary, especially when in B2B the client is contributing to the same value chain or when you deliver products and you want to keep hold on your resources.

Answer the following questions:

• What price tactics could you apply? (e.g. fixed price, percentage, batches,bargaining, depending on customer segment, depending on volume, …)
• What payment method could your customers use? (e.g. cash, in-kind, invoice, scratch card, shares, interests, trading, credit card, …)
• How to measure your revenues for society and planet? (e.g. CO2, fte, biodiversity, lives saved, development, …)
• What would increase the stability of your revenue streams?(e.g. long term contracts, partial payments, offers, consumables, updates,maintenance/ repairs, consultancy hours, workshop/training fees, adding insurance fee, …)

The answers will give you input on the price tactics, stability of the model over a longer period and payment method. Each attribute you should score on the gradient sustainable revenue model contributor (high — low). This will facilitate the priority indication and gives insight in which riskiest assumptions should be addressed first.

The Bigger Picture

When you finished describing your Revenue map, by answering the savings, strategy and sales questions, you should have a more thorough overview of your desired Revenue Stream. You could then use the Revenue Stream Map to check whether your Revenue Stream Design will support the intended Value Proposition and Customer Segments.

Maybe these new insights concerning your revenue model also means that you have to adapt the design of your value proposition or chose for a different customer segment then you originally thought. You keep on searching and iterating before you find the right fit.

In the end, the start-up journey is a bumpy road leading to different iterations, changes and possible pivot rounds. Above exercise contributes to refine your scoreboard. It should be part of the iteration process and be changed accordingly to insight from the customer and value proposition map. In the early stages a lot of uncertainty and changes can occur on a weekly basis but you must be able to learn from it, adjust. Get the insights, the first reactions on whether the customer would buy it and the exact fixed amounts will follow later. At this time, you need to get proof that your steps enhance the success of your idea get to market. That there is a willingness to pay via your newly designed Revenue Stream.

Currently, the Revenue Map is used at YES!Delft during the Discovery Day trainings and by Noorderwind in their innovation sessions. It is issued on the creative commons, so please feel free to use and improve.

This article is a co-production of Boukje Vastbinder (Noorderwind) and Lija Groenewoud van Vliet (In4Art) and was previously published on linkedin pulse: https://www.linkedin.com/pulse/revenue-stream-design-boukje-vastbinder

In this article we refer to/make use of the following sources:

• Business Model Generation, Osterwalder and Pigneur, 2010
• Value Proposition Design, Osterwalder, Pigneur et al., 2014
• The lean startup, Eric Ries, 2011
• The Mom Test, Rob Fitzpatrick, 2013
• The four steps to the epiphany — Steven Gary Blank, 2007
• Reflections on Innovation strategy — Lija Groenewoud van Vliet, 2014
• Business, but not as usual: entrepreneurship and sustainable development in low-income economies — Boukje Vastbinder, Otto Kroesen, Esther Blom and Roland Ortt, 2012

Additional information

We designed the tool in a way that it can be used autonomously and in combination with the value proposition designer and the Business Model Canvas. That also means that we looked at these tools in the design of the worksheets and we would like to encourage people to answer the different questions stated on the worksheet by writing down the different answers on post-it notes and sticking them to the paper.

We tend to use the Revenue Stream Map the most in combination with the Value Proposition Designer. If that is the case, we first ask the entrepreneurs to create empathy maps of all intended customer segments and design their value propositions with the use of Value Proposition Designer worksheets, because they then can build on those insights when designing their revenue model.