1.9 The All-Important Revenue Model

What Venture Capitalists Look For

Venture capitalists make a living by deciding which promising new products to invest in. Experience has taught them to look for three things: money, money, and money. That is, they look for (1) a product that will be competing in a market that generates hundreds of millions of dollars in revenue, (2) a product that demands a price far exceeding its cost, and (3) a management team that has a history of turning a profit. Venture capitalists look at how a new product idea is monetized; that is, they look at the product’s revenue model. Indeed, the revenue model is one of the first things that venture capitalists look at. It is one of the first things that marketers should look at too.

Flying Cake Pan—Product Demands a Price Exceeding Its Cost

Walter and Lucille were tossing a cake pan back and forth on the beach in Santa Monica, California, when they were offered 25 cents for their flying disc. Walter is quoted as saying, “That got the wheels turning, because you could buy a cake pan for five cents, and if people on the beach were willing to pay a quarter for it, well—there was a business.”1 Walter continued experimenting with the idea, applied for a patent, and manufactured the first plastic flying disc. He tried several names such as the WhirloWay, Flying Saucer, and Pluto Platter. He demonstrated the flying disc at fairs and other public gatherings and always saw strong interest and demand. On his 37th birthday, he sold the rights for the flying disc to Wham-O, which renamed it Frisbee. Over the years, Walter earned millions of dollars in royalty payments from Wham-O, all from what started as a five-cent flying cake pan he could sell for a quarter.

The concept of a successful revenue model is simple but can be surprisingly elusive. Walter’s flying disc demanded a price far exceeding its cost, consistently generated strong demand in a large market, and was consequently worth developing into a full-fledged product and brand. Walter knew he had a winner when perfect strangers walked up offering to buy his flying cake pan for five times what he had paid for it. Thinking through the revenue model before starting up a marketing program is just common sense. However, we observe again and again that common sense is usually not common practice. Consider the story of Pizza Hut’s Bigfoot Pizza described below.

Bigfoot Pizza—Can the Product Make Money?

It is easy for marketers to fall in love with their own ideas, and because of their can-do attitude, marketers often have a hard time distinguishing between big opportunities and big money pits. Such was the corporate stumble of the Bigfoot Pizza. In 1993, Pizza Hut introduced the Bigfoot Pizza, supported by a big $300 million advertising and promotional campaign. Pizza Hut marketing managers envisioned the Bigfoot as a way to tap into the economy pizza market dominated by Little Caesars and as the next big thing for building revenues for the business. The Bigfoot was two square feet of pizza cut into 21 slices. For a similar price and with a similar taste, Little Caesars offered two pizzas. Little Caesars owned the economy pizza category and had a very strong reason to believe that it delivered value because it was selling two pizzas for the price of one. While Bigfoot might have met expectations for an economy pizza, the consumption experience actually fell far short of expectations for many loyal Pizza Hut customers because of the lower product quality. Ultimately, the Bigfoot stumble drove many brand champions away from the Pizza Hut brand. Bigfoot was a “me too” product and a sad one at that. Big marketing budgets do not compensate for products with poor value propositions that don’t address unaddressed pain.

To make a tragic marketing tale even more tragic, the launch of the Bigfoot Pizza ultimately helped Little Caesars more than it helped Pizza Hut. Pizza Hut’s advertising campaign looked so similar to ads Little Caesars would run that the Pizza Hut ads ended up driving customers to Little Caesars and spiking Little Caesars’s sales. To make matters even worse, Pizza Hut sales for their traditional higher-margin pizzas fell noticeably. Marketing managers had not paid close enough attention to the all-important revenue model before launching the Bigfoot. Bigfoot revenues couldn’t compensate for lost higher-margin sales of traditional Pizza Hut pizzas, much less make up the cost of the expensive marketing campaign. Pizza Hut needed to sell two Bigfoot pizzas to earn as much as just one of their traditional pizzas. Excitement over attacking a new segment of the market got ahead of interest in whether the product could make money for the company. The Bigfoot revenue model was awful, and Pizza Hut quickly started looking for ways to kill the product gracefully.