Greetings. Welcome to Video 1 of 7, Session 1 in 5093. In 5093, we'll be talking about forming, funding, and launching a technology startup company. In these initial couple of sessions, Session 1 and Session 2, we'll be doing a deeper dive into financial planning and funding sources. Here at this video, we're going to introduce the concept of a revenue model and get a general framework of what that means and then we'll construct one in a couple of videos going forward. Let's go ahead and jump in. A revenue model is essentially the framework or the structure that describes how cash comes into the company. We exchange money for goods and services or we give goods and services, we receive money for that. The process of supporting that transaction, the mechanisms, if you will, is what comes together to describe our revenue model. Net revenues allow for differences or adjustments. We'll track gross revenues and then there may be things like, for example, if there are discounts that we offer or perhaps promotional discounts or considerations, or that there are warranty returns, something that diminishes or impacts revenue after initial shipments. We would like to make adjustments for those things. Our initial thinking here, we're just going to be looking at a straight-up revenue model for delivering products and services. How are revenue created? That is the process or the procedure. It's derived from the business model. It has component parts that come out of the business model, and essentially, is the mechanism or the structure or the transactional steps to exchange or deliver our product and service, or service and in terms of value, satisfying a particular customer need and receiving cash coming into the company in exchange. That mechanism, that structure, is what we call a revenue model. Investors are always looking for a viable model that has substance to it and is operationally sound and with the ability to scale that over time, and especially, as volume production comes online. We want to think about capital equipment considerations and maybe general operating resource requirements. There's supply chains and value chains. All of these things come into play to define our revenue model, to determine those particular structures or mechanisms, processes, or procedures that determine how we exchange our products and services for money. Recall, we started with a business model and we've looked at that and there's a variety of different ways to structure a business model. As I mentioned, we're wanting to extrapolate from this to construct a revenue model. The revenue model would basically provide us with a method to harvest value and feed it back into the company. That's really what a revenue is about. Is the structure, the method, the process, but we're creating value and we're distributing that to our customers. We want to bring some of that value back into the business and that comes in the form of cash. The structure and the process of doing that is what we call a revenue model. Sometimes, it might be called a revenue generator. Revenue generator and revenue model might be and are somewhat exchangeable, but similar concepts. I think of the generator being the very front end of a income statement and the mechanism that generates the revenue that gets fed to an income statement. But for now, we're thinking about a revenue model in terms of how do we actually generate profits and feed them back into the company? When we talk about profits, it's important to recognize there are a couple of different ways to frame or to characterize our reference to earning profits. Gross profits, generally, are those associated with what we call cost of goods sold. We sell a product, let's say, a widget, and it cost us X amount of money to produce that product. We subtract that from the selling price and we get a gross profit. It does not take into consideration the operations of the business, whereas, net profits do. When we're talking about net profits, now, we've taken gross profits, but we've also subtracted out the cost to operate the business, to perform the activities necessary to deliver those products and services and we collectively, we can refer to that as operating expenses. Then there are things like the cost of marketing and sales. What does it cost to actually market the product? What is the customer acquisition cost? How much does it cost to perform a sales transaction? Well, sometimes these are included with cost of goods sold and part of it is maybe a matter of style or their chief operating or chief financial officer may prefer a particular method of accounting. Most common is to include things like marketing and selling expenses with the operating expenses. That's what we'll be doing in the examples that we'll be talking about here. Another consideration is in addition to just having a primary revenue model, we may want to have secondary revenue models. This could have a different expense structure. It could have a different transaction environment. It could be, for example, a complimentary notion of offering products and services by bricks-and-mortar or traditional retail outlet, for example, but complimenting that with products and services offered online as well. They may or may not be exactly the same thing. There are different types of transactions, different delivery mechanisms, if you will, and so each has a particular revenue model. What we've introduced here is the general concept or the structure or the processes or the frameworks that capture value, deliver that to our customers, and bring some of that value back into our business in the form of profits. We'll be talking more about how to give clarity to the structure of a revenue model going forward. That brings us to the end of Video 1 of 7, Session 1. I'll see you in awhile for Video 2.
