Understand Revenue Stream

Knowledge Sharing:
1. The publisher makes money because he or she is being paid a commission for any work that coincides with the affiliate program. Advertisers make money because they keep the majority of the sale, or get new leads and only pay the publisher if they help the advertiser.
2. Marketplaces are difficult businesses to get off the ground. A marketplace without buyers cannot attract sellers and vice versa.
3. In fact, the infamy of this proverbial chicken and egg problem detracts entrepreneurs from the challenges that a marketplace presents after it has successfully gained adoption and is successfully matching buyers with sellers. After all, marketplaces for products, like Ebay and Etsy seem to have it all working for them once they gain adoption.
4. Services marketplaces, however, present a unique challenge. Most services marketplaces cannot facilitate a transaction before the buyer and seller agree on the terms of the service. Also, actual exchange of money often follows the delivery of the service and the delivery of the service requires the buyer and seller to directly interact with each other. Connecting buyers and sellers directly before facilitating the transaction cut weakens a marketplace’s ability to capture value. The party that is charged is naturally motivated to abandon the platform and conduct the transaction off-platform.
5.  Marketplaces that fail to capture the transaction often resort to a lead generation, paid placement or subscription-based revenue model. The classifieds model has traditionally worked on paid placement. Dating websites and B2B marketplaces work on a subscription-based model while several financial comparison engines work on a lead generation model. However, lead generation models are attractive only at very high levels of activity and subscription-based revenue models make the chicken and egg problem worse than it already is. If your monetization model involves extracting a cut from the buyer-seller transaction, you need to figure out a way to own the transaction.
6.  Services marketplaces like Fiverr, Groupon and Airbnb try to solve this problem by preventing the users from directly connecting before the actual transaction. These marketplaces typically try to provide all the information that a buyer needs to make a transaction decision. Groupon features services from sellers that are largely standardized. While less standardized, Airbnb and Fiverr try to provide enough information for the buyers to make a decision without having to contact the seller.
7.  Additionally, some marketplaces charge the buyer ahead of the transaction and remit money to the service provider after the provision of services, thus providing some insurance to the buyer, encouraging her to transact.
8.  Unfortunately, the above strategies fail with professional services marketplaces for two reasons.
First, it is much easier to take the transaction off-platform in the case of marketplaces connecting professionals. Freelancer marketplaces like Elance or expert marketplaces like Clarity are particularly prone to off-platform transactions for two reasons:
a) Clients need to know information about service providers before making a transaction decision
b) Once the end users know each other, they can potentially connect directly on LinkedIn or other networks, thus avoiding the platform cut
Second, professional services marketplaces require discussions, exchanges and workflow management during the provision of services before the actual charge can be levied. As a result, charging the buyer ahead of the transaction is all the more complicated.
9. This may sound counter-intuitive. After all, a marketplace’s goal is to connect the two sides, complete the transaction and get out of the way, isn’t it?
10.  Clarity provides additional call management and invoicing capabilities that serve to capture the transaction on the platform. Since the call management software manages per-minute billing, advice seekers have the option to opt out of a call that isn’t proving too useful. For the experts, the integrated payments and invoicing provides additional value. There is enough value for both sides to prevent them from leaving the platform to avoid the cut.
11.  Clarity is one of many examples of platforms which are using workflow management solutions to capture the transaction. Services marketplaces like Elance focus on providing work-tracking and billing solutions that provide value to both sides and capture the transaction on-platform.
12.  Secondly, a marketplace is only as good as the liquidity of available suppliers. As a result, there is no real need for a buyer to stick to a particular marketplace, transaction after transaction, especially if two or more competing marketplaces have similar liquidity and choice. Workflow management solutions help create stickiness because the requirement of on boarding on and learning new workflow management tools acts as a greater barrier to switch and can potentially keep users loyal to a particular marketplace.
14.  In recent times, we have been seeing the model flipped. Businesses are now building SAAS workflow solutions first to get entrenched among the demand side and then opening out the marketplace, to get suppliers in. An invoicing service spreads out to become a B2B order management platform. A payroll software provider expands to append a marketplace that can bring in freelancers which are then managed using the same payroll software. This also solves the chicken and egg problem by staging the launch of the marketplace.
15. In general, if you run a marketplace that requires services to be exchanged remotely, provisioning workflow management solutions to facilitate this exchange is a great way to own the transaction and create greater engagement and stickiness for users.
16. Software as a service (SaaS; pronounced /sæs/ or /sɑːs/[1]) is a software licensing and delivery model in which software is licensed on a subscription basis and is centrally hosted.[2][3] It is sometimes referred to as "on-demand software".[4] SaaS is typically accessed by users using a thin client via a web browser. SaaS has become a common delivery model for many business applications,
17. In marketing, lead generation is the generation of consumer interest or inquiry into products or services of a business
18.

Types:
1. Commerce and Retail(Selling physical and digital goods, Service Sold per unit, Service with fixed price, Sale of service for future use, Daily Deals and Flash sales)
2. Subscription and Usage Fee (Rental)
3. License (Patents)
4. Auction and Bids (Dynamic Pricing)
5. Advertisement (Promoted Content, Sponsorship, )
6. Data (Database)
7. Transaction and Intermediation (Brokerage, Transaction Enabler, Affliate Program, Create a platform and marketplace)
8. Freemium (Paid Version without Advertisement, Without Restriction and With additional Features)
9. Common in the financial industry (Interest Revenue, Asset Mgt Fee)
10. Affiliate model


About Transaction Revenue Model
1. Transaction Processing is not a "net native" business model. There have been businesses built up around processing transactions for a long time. But the Internet and Mobile present some challenges in processing transactions and therefore there are opportunities to build substantial businesses around helping companies process transactions.
2.  The thing that all of these forms of transaction processing have in common is the processor handles a transaction that was generated by another product or service and provides some form of completion service and charges a fee for doing so. That could be processing a credit card transaction, handling a banking transaction, shipping something to someone, completing a call originated on another network, or distributing a third party app on an internet or mobile platform.
3.  Platform distribution fees are the outlier as they are often very significant, Apple charges a 30% cut in its app store.
4.  PayPal processed $145bn of transactions in 2012 and generated $5.6bn in revenue. Out of that $5.6bn, PayPal has to cover all its costs including processing fees to other transaction processors, customer service, fraud prevention, fraud losses, technology and development, and several others. I am certain that PayPal makes a very nice profit off of that $5.6bn of revenue but it is probably on the order of $1-2bn, which is in the range of 1% of the total transaction volume.
5.  Business needs scalability.
6.  One of the challenges of this business model is that the fixed costs required to process transcations can be significant and you will operate a loss until you can get to scale. You can see that by looking at how much capital Square has raised to date. Crunchbase has it at $341mm.
7.  It is better to do business in painkiller than vitamin.

About Subscription Model:
1. Gone are the days of simple one-time transactions with customers as the subscription business model goes mainstream with companies like Dropbox, Netflix, Adobe and Zipcar because it offers a predictable, recurring revenue stream.
2. Subscription models used by companies like Salesforce offer customers different levels of functionality for a variety of prices per seat, per month. That, in and of itself, might not be too complicated to calculate and bill. But what happens when a customer upgrades or downgrades in the middle of the billing period and prorated billing must occur? Or the credit card “on file” expires and renewal billings fail? How do you bill customers for actual usage? What’s the tax rate on your product? Can you track each product’s churn rate?
3.  To settle just one lawsuit for non-compliance in April 2013, Symantec offered $10 refunds or free subscription extensions to 3,900,000 customers
4. 1. Revenue recognition
2. Taxation
3. Credit card expiration/payment method changes
4. Compliance
5. Analytics
6. Lifecycle management
5. Great subscription businesses are built first by steadily booking new business and then by consistently retaining those customers. The ability to achieve each of these goals will be greatly affected by the systems and processes the company puts in place from the start.
6. Building a recurring business means processing a (hopefully growing) stream of subscription orders.
Each of those orders will need to kick off a process to set up a subscription period, provision the
service offering, generate one or more invoices and recognize revenue. Ultimately, it should also
remind you to terminate that subscription at the end of the period—or better yet, help you renew
it. That process is significantly more complex than the one order = one shipment = one bill = one
revenue posting world of the one-off model.
7.  recurring revenue businesses create more complexity in the process and more
demand for data than traditional businesses. They require sophisticated, integrated systems for
handling the throughput, capturing the data and facilitating the analysis. It’s important to set up
an infrastructure in the beginning that can manage the complexity and evolve with your company,
allowing you to react competitively and expand into new areas as you grow. Below are a few
practical recommendations for establishing a recurring revenue business that can grow and adapt
for years to come.
8.

References:
http://en.wikipedia.org/wiki/Revenue_stream
http://en.wikipedia.org/wiki/Subscription_business_model
http://en.wikipedia.org/wiki/Advertising
http://www.wisegeek.com/what-is-an-affiliate-model.htm
http://www.bridgepointconsulting.com/wp-content/uploads/2013/02/Recurring-Revenue-Model-Best-Practices.pdf

How to interview Customers

Knowledge Sharing:
1.  Focus groups are a group-think, distraction-filled mess. Avoid them and only talk to one person at a time. If desired, you can bring someone with you to take notes — some UX designers like this approach.
2.  Personally, I tend to do one-on-one interviews because I think people loosen up and thus open up a bit more, but it can be nice to have a note-taker, which allows you to focus entirely on the conversation and body language.
3.  Have your assumptions and thus learning goals prioritized ahead of time. Decide who you want to talk to (age, gender, location, profession/industry, affluence, etc), and target interviewees accordingly. Prep your basic flow and list of questions. You might veer off the plan to follow your nose, which is great, but go in prepared.
4.  Decide up front if your focus is going to be on learning a user’s behavior and mindset, and/or getting direct feedback or usability insights on a product or mockup. Do not mix the two in the discussion flow or things will get distorted.
5.  Put “behavior and mindset” first in your discussion flow. During this part, don’t let the interviewee go too deep in terms of suggesting features, but keep them focused on if they have a problem, how they think about the problem space, and if and how they have tried to solve it in past.
6.  If you want to get feedback on a product, whether on paper or digital, do this after digging into behavior and mindset.
7.  If you don’t do this, you might find yourself selling or convincing, or even hearing what you want to hear. This is called “confirmation bias” and we are all very susceptible to it.  Your initial goal should be learning.
8.  People are trained not to call your baby ugly. You need to make them feel safe to do this. Ask them up-front to be brutally honest, and that this is the very best way they can help you. If they seem confused, explain that the worst thing that could happen is to build something people didn’t care about.
9.  Sometimes it is hard not to ask a yes/no question, but always follow up with an open-ended question like “why?” or “tell me more about that experience.”
10.  people are not very good at predicting their actions, knowing what they want, or knowing their true goals. Your job is not to ask the person for the solution. It is *your* job to figure out the best solution, and then validate that your solution is actually right.
11.  People *love* to talk about features and solutions. When you are in learning mode, don’t let that dominate the conversation.  Try to keep things factual. Get them to tell you stories about how they previously experienced a problem, if they tried to solve it (or why not), and what happened.  Get them to tell you stories about using other products that are in the same domain space. You do want to dive into their emotions, but you can trust a discussion of historical emotions much more than one speculating “what ifs”.
12.  Anytime something tweaks your antenna, drill down with follow up questions. Don’t be afraid to ask for clarifications and the “why” behind the “what”. You can even try drilling into multiple layers of “why” (see “Five Whys”), as long as the interviewee doesn’t start getting annoyed.
14.  If it is not obvious to everyone by now, let me just be clear that you want to avoid doing these interviews with friends and family. There are lots of creative ways to recruit interviewees (the tactics vary depending on who you need to get to), but getting referrals will make the process a lot easier
15.  You need to use your judgement to read between the lines, to read body language, to try to understand context and agendas, and to filter out biases based on the types of people in your pool of interviewees. But it is exactly the ability to use human judgement based on human connections that make interviews so much more useful than surveys.
16.  Each has its place in the Customer Development process, but without live Customer Development Conversations, you are likely compromising your ability to learn your way to Product-Market fit or startup scaling.  What you seek to learn evolves over time, as do the tactics you employ, but every step of the way should be grounded in real time conversations.
17.



References:
http://giffconstable.com/2012/12/12-tips-for-early-customer-development-interviews-revision-3/
http://jasonevanish.com/2012/01/18/how-to-structure-and-get-the-most-out-of-customer-development-interviews/

Do things don't scale

Knowledge Sharing:

1.  More diffident founders ask "Will you try our beta?" and if the answer is yes, they say "Great, we'll send you a link." But the Collison brothers weren't going to wait. When anyone agreed to try Stripe they'd say "Right then, give me your laptop" and set them up on the spot.

2.  There are two reasons founders resist going out and recruiting users individually. One is a combination of shyness and laziness. They'd rather sit at home writing code than go out and talk to a bunch of strangers and probably be rejected by most of them. But for a startup to succeed, at least one founder (usually the CEO) will have to spend a lot of time on sales and marketing.

3.   The other reason founders ignore this path is that the absolute numbers seem so small at first. This can't be how the big, famous startups got started, they think. The mistake they make is to underestimate the power of compound growth. We encourage every startup to measure their progress by weekly growth rate. If you have 100 users, you need to get 10 more next week to grow 10% a week. And while 110 may not seem much better than 100, if you keep growing at 10% a week you'll be surprised how big the numbers get. After a year you'll have 14,000 users, and after 2 years you'll have 2 million.

4.  You'll be doing different things when you're acquiring users a thousand at a time, and growth has to slow down eventually. But if the market exists you can usually start by recruiting users manually and then gradually switch to less manual methods.

5.  Airbnb is a classic example of this technique. Marketplaces are so hard to get rolling that you should expect to take heroic measures at first. In Airbnb's case, these consisted of going door to door in New York, recruiting new users and helping existing ones improve their listings. When I remember the Airbnbs during YC, I picture them with rolly bags, because when they showed up for tuesday dinners they'd always just flown back from somewhere.

6.  Airbnb now seems like an unstoppable juggernaut, but early on it was so fragile that about 30 days of going out and engaging in person with users made the difference between success and failure.

7.  That initial fragility was not a unique feature of Airbnb. Almost all startups are fragile initially. And that's one of the biggest things inexperienced founders and investors (and reporters and know-it-alls on forums) get wrong about them. They unconsciously judge larval startups by the standards of established ones. They're like someone looking at a newborn baby and concluding "there's no way this tiny creature could ever accomplish anything."

8.  It's harmless if reporters and know-it-alls dismiss your startup. They always get things wrong. It's even ok if investors dismiss your startup; they'll change their minds when they see growth. The big danger is that you'll dismiss your startup yourself. I've seen it happen. I often have to encourage founders who don't see the full potential of what they're building. Even Bill Gates made that mistake. He returned to Harvard for the fall semester after starting Microsoft. He didn't stay long, but he wouldn't have returned at all if he'd realized Microsoft was going to be even a fraction of the size it turned out to be

9.  he question to ask about an early stage startup is not "is this company taking over the world?" but "how big could this company get if the founders did the right things?" And the right things often seem both laborious and inconsequential at the time. 

10.  How do you find users to recruit manually? If you build something to solve your own problems, then you only have to find your peers, which is usually straightforward. Otherwise you'll have to make a more deliberate effort to locate the most promising vein of users. The usual way to do that is to get some initial set of users by doing a comparatively untargeted launch, and then to observe which kind seem most enthusiastic, and seek out more like them. For example, Ben Silbermann noticed that a lot of the earliest Pinterest users were interested in design, so he went to a conference of design bloggers to recruit users, and that worked well. 

11.  You should take extraordinary measures not just to acquire users, but also to make them happy. For as long as they could (which turned out to be surprisingly long), Wufoo sent each new user a hand-written thank you note. Your first users should feel that signing up with you was one of the best choices they ever made. And you in turn should be racking your brains to think of new ways to delight them.

12.  Sometimes the right unscalable trick is to focus on a deliberately narrow market. It's like keeping a fire contained at first to get it really hot before adding more logs.

14.  When I interviewed Mark Zuckerberg at Startup School, he said that while it was a lot of work creating course lists for each school, doing that made students feel the site was their natural home.

15.  It's always worth asking if there's a subset of the market in which you can get a critical mass of users quickly.

16.  Most startups that use the contained fire strategy do it unconsciously. They build something for themselves and their friends, who happen to be the early adopters, and only realize later that they could offer it to a broader market. The strategy works just as well if you do it unconsciously. The biggest danger of not being consciously aware of this pattern is for those who naively discard part of it. E.g. if you don't build something for yourself and your friends, or even if you do, but you come from the corporate world and your friends are not early adopters, you'll no longer have a perfect initial market handed to you on a platter.

17.  Among companies, the best early adopters are usually other startups. They're more open to new things both by nature and because, having just been started, they haven't made all their choices yet. Plus when they succeed they grow fast, and you with them. It was one of many unforeseen advantages of the YC model (and specifically of making YC big) that B2B startups now have an instant market of hundreds of other startups ready at hand.

18.  without a product you can't generate the growth you need to raise the money to manufacture your product.

19.  Sometimes we advise founders of B2B startups to take over-engagement to an extreme, and to pick a single user and act as if they were consultants building something just for that one user. The initial user serves as the form for your mold; keep tweaking till you fit their needs perfectly, and you'll usually find you've made something other users want too

20.  Even if there aren't many of them, there are probably adjacent territories that have more. As long as you can find just one user who really needs something and can act on that need, you've got a toehold in making something people want, and that's as much as any startup needs initially.

21.  So long as you're a product company that's merely being extra attentive to a customer, they're very grateful even if you don't solve all their problems. But when they start paying you specifically for that attentiveness—when they start paying you by the hour—they expect you to do everything.

22.  Another consulting-like technique for recruiting initially lukewarm users is to use your software yourselves on their behalf. We did that at Viaweb. When we approached merchants asking if they wanted to use our software to make online stores, some said no, but they'd let us make one for them.

23.  Since we would do anything to get users, we did. We felt pretty lame at the time. Instead of organizing big strategic e-commerce partnerships, we were trying to sell luggage and pens and men's shirts. But in retrospect it was exactly the right thing to do, because it taught us how it would feel to merchants to use our software. Sometimes the feedback loop was near instantaneous: in the middle of building some merchant's site I'd find I needed a feature we didn't have, so I'd spend a couple hours implementing it and then resume building the site.

24.  There's a more extreme variant where you don't just use your software, but are your software. When you only have a small number of users, you can sometimes get away with doing by hand things that you plan to automate later. This lets you launch faster, and when you do finally automate yourself out of the loop, you'll know exactly what to build because you'll have muscle memory from doing it yourself.

25.  For example, the way Stripe delivered "instant" merchant accounts to its first users was that the founders manually signed them up for traditional merchant accounts behind the scenes.

26.  Some startups could be entirely manual at first. If you can find someone with a problem that needs solving and you can solve it manually, go ahead and do that for as long as you can, and then gradually automate the bottlenecks. It would be a little frightening to be solving users' problems in a way that wasn't yet automatic, but less frightening than the far more common case of having something automatic that doesn't yet solve anyone's problems.

27.  I should mention one sort of initial tactic that usually doesn't work: the Big Launch. I occasionally meet founders who seem to believe startups are projectiles rather than powered aircraft, and that they'll make it big if and only if they're launched with sufficient initial velocity. They want to launch simultaneously in 8 different publications, with embargoes. And on a tuesday, of course, since they read somewhere that's the optimum day to launch something.

28.  How many of their launches do you remember? All you need from a launch is some initial core of users. How well you're doing a few months later will depend more on how happy you made those users than how many there were of them.

29.  But even if what you're building really is great, getting users will always be a gradual process—partly because great things are usually also novel, but mainly because users have other things to think about.

30.  It's not enough just to do something extraordinary initially. You have to make an extraordinary effort initially. Any strategy that omits the effort—whether it's expecting a big launch to get you users, or a big partner—is ipso facto suspect.

31.  The need to do something unscalably laborious to get started is so nearly universal that it might be a good idea to stop thinking of startup ideas as scalars. Instead we should try thinking of them as pairs of what you're going to build, plus the unscalable thing(s) you're going to do initially to get the company going.

32.  But in most cases the second component will be what it usually is—recruit users manually and give them an overwhelmingly good experience—and the main benefit of treating startups as vectors will be to remind founders they need to work hard in two dimensions.

33.  In the best case, both components of the vector contribute to your company's DNA: the unscalable things you have to do to get started are not merely a necessary evil, but change the company permanently for the better. If you have to be aggressive about user acquisition when you're small, you'll probably still be aggressive when you're big. If you have to manufacture your own hardware, or use your software on users's behalf, you'll learn things you couldn't have learned otherwise. And most importantly, if you have to work hard to delight users when you only have a handful of them, you'll keep doing it when you have a lot.

Why Engineers aren't good founders?

1.  One is that a lot of of startup founders are trained as engineers, and customer service is not part of the training of engineers. 

2.  Another reason founders don't focus enough on individual customers is that they worry it won't scale. 

3.  Partly because you can usually find ways to make anything scale more than you would have predicted, and partly because delighting customers will by then have permeated your culture.

4.  Tim Cook doesn't send you a hand-written note after you buy a laptop. He can't. But you can. That's one advantage of being small: you can provide a level of service no big company can.

5.  Once you realize that existing conventions are not the upper bound on user experience, it's interesting in a very pleasant way to think about how far you could go to delight your users.

6.  What founders have a hard time grasping (and Steve himself might have had a hard time grasping) is what insanely great morphs into as you roll the time slider back to the first couple months of a startup's life.

7.  But you can and should give users an insanely great experience with an early, incomplete, buggy product, if you make up the difference with attentiveness.

8.  The feedback you get from engaging directly with your earliest users will be the best you ever get. 

9.  When you're so big you have to resort to focus groups, you'll wish you could go over to your users' homes and offices and watch them use your stuff like you did when there were only a handful of them.

References:

http://paulgraham.com/ds.html