Choosing Revenue Streams For Your Minimum Viable Product
Let’s clear up a common revenue misconception right away. Choosing a revenue stream and settling on pricing are two completely different exercises. The latter is what our customers are going to pay. The former, and what I want to talk about in this post, is what our customers are paying for.
Critical mistakes happen when we entrepreneurs confuse these two processes, or worst of all, use one to provide rationale for the other. For example: “My revenue stream is advertising, therefore the price of my product will be free.”
The arc of figuring out one or more revenue streams starts early, during the MVP phase. The decision includes determining justification of the charge, defining the value of the product or the service, and selecting the delivery mechanism. Actually, it includes a ton of other stuff, but these are the big three we have to nail.
How do we do that? Even though every business is unique, revenue streams usually aren’t. And they almost always start with the same question.
“Who is going to pay for this?”
The Myth of Advertising as a Plug-In Revenue Stream
If the answer to that question is anyone other than the customer, we’re already in trouble. Because that’s all advertising really is, shifting the costs of our product or service to a third party and annoying our customers while we do it.
I’ve had several conversations over the past year with a number of early-stage entrepreneurs who I’ve had to advise against counting on their primary revenue stream coming from running ads through their product.
I’m not here to debate the merits of modern day advertising. But I can state emphatically that in this modern age, the merits of advertising as a primary revenue stream have all but disappeared. Yes, ads can be served and money can be made, but you have to be willing to produce a perfectly-tuned ad-spitting machine.
You also have to sell ads. It doesn’t matter if you’re going door-to-door or plugging any one of the dozens of ad-serving widgets into your app or website (although, come on, it’s Google or Facebook). You’re either going to have to pitch the ROI of your product to your advertisers or you’re going to have to tune your product to some algorithmically driven set of keywords and clickbait that’s going to pay for your product’s existence.
Advertising is still a revenue stream, and when done right, it can provide some income. The delivery mechanism is indeed a snap, just plug in a widget and go. But the justification for running ads through a product or service is always oversold. It’s harder than it looks, it’s trickier than it seems, and it’s never sustainable. Furthermore, it almost always impacts the value of the product, thereby undercutting itself as a revenue stream from the get go.
The Myth of Lowest Common Denominator
We’ve all done the shitty entrepreneur math. It goes like this:
There are millions of people out there who do X.
- Go to college.
- Have mobile phones.
- Consume content.
If we could only get a small percentage of those people to give us, say, a buck, then we’re talking millions of dollars.
I can’t tell you how many times I’ve heard this as a justification for a revenue stream — hell, a lot of times that math is used as a justification for an entire product or service.
But this is just the Superman III theory applied to startup instead of crime.
Pocket change is easy to justify, right? In fact, there’s nothing inherently wrong with targeting the disposable income of a large swath of people. The problem is that people don’t just part with a buck for no good reason. They need to be convinced, or rather, sold.
Value is the issue with a lowest common denominator approach. For a revenue stream to work, the product or service has to deliver equal or more value, and when we set our value proposition to a dollar, or some other small number, all we’re doing is setting a limit on how much we can spend to acquire the customer before we start to lose money.
Which brings up the second problem with lowest common denominator, the delivery mechanism. Look no further than the app economy and how that all fell apart when the delivery mechanisms, namely Apple and Google, started taking bigger and bigger cuts. Then app makers started making apps free and getting someone besides the customer to pay for them.
Mostly advertisers. And we know how that worked out.
The Myth of Free Tier vs. Free Trial
I actually like the free trial model when it’s implemented properly.
The justification is sound. A free trial is a smart bet we’re making that our costs for the trial will be less than our cost of acquiring the customer outright. Plus we get the added bonus of early onboarding and even progress on the initial learning curve.
The delivery mechanism is also hard to beat if you’re working in the digital world. Transactions are frictionless and nearly costless. Value isn’t impacted by a free trial at all. You can test drive a $100,000 car, and that won’t make the value of the car any less than $100,000.
But when we start talking about a free tier, value becomes a huge issue. So I’m about to hit you with a double negative: Never not charge for a product or service if you want to maintain its value.
The owner of a sports team once told me he’ll give anything away for free, merchandise, concessions, custom bobbleheads, whatever, anything except the tickets. And his reasoning is this: The moment someone gets a free ticket, they immediately and unconsciously devalue the product on the field.
Why does he give away anything all? Marketing. Promotion. Get the customer into the store and get them to spend. If they don’t value the food or the merchandise, that’s a risk worth taking. If they don’t value the games, they won’t come to the games, and they’ll never buy the merchandise or the food.
So we need to make sure when we’re giving something away for free that it adds promotional value and includes a direct link to purchasing the product or service we’re selling.
The Myth of Crowdsourced Product and Service
One of the biggest lures of the Internet age is trying to get people to pay you for the output of other people who aren’t you. The penultimate example of this is probably Facebook. People pay Facebook to be able to advertise to people on Facebook who post to Facebook to bring other people to Facebook.
For likes. Facebook sells likes. Pure genius.
But the era of crowdsourced product is over. Consumers are much more savvy these days about being the engines of someone else’s commerce. That same consumer savvy has also ended the era of experimentation in crowdsourced service, this time when the consumers are also the producers, like Uber.
I love the concept of the two-sided marketplace, where consumers pay consumers who act as producers. It gets cloudy because of that original question.
“Who is going to pay for this?”
Are riders paying Uber for the ride or are drivers paying Uber to be on the platform? You can answer the question both ways, and when you do, there are additional hard questions to ask.
So if you’re going to settle on a two-sided marketplace, make sure you understand you’re staring a company that runs whatever service one of your sides is providing to the other side. That includes and all the liabilities, risks, and headaches that come with it.
The Simple Truth About Revenue Streams
Once we strip away all the myths, finding and choosing revenue streams is a simple science.
Our product isn’t a billboard. It shouldn’t be cheap enough to trick people into paying for it. Offering some of it for free doesn’t really lower the bar to get people to pay. And if it doesn’t sell to one user, it’s not going to sell to 1,000 users or 1,000,000 users.
But if we can identify the customer, justify the charge, prove the value, and deliver that value in a consistent manner, then we’ve got a winner.
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