You identified customer segments and created value propositions for each group. After that, you also mapped acquisition and distribution strategies. And in the last block, you also defined customer relationships. Next up is describing your revenue streams.
Revenue Streams are the fourth Business Model Block after Channels. It precedes Key Resources.
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What Is a Business Model Revenue Stream?
Revenue streams refer to the various ways you can earn money. You may have a single revenue stream. Or even better, define more than one income stream.
A revenue stream, by the way, is not the same as a revenue model or a business model:
Revenue Stream. This term refers to the specific sources of income.
Revenue Model. It describes the general strategies employed in revenue streams, thus serving as the framework for generating sales.
Business Model. It describes how a startup plans to create, deliver, and capture value. One could say that it maps how a company intends to generate sales and revenues.
The confusion might be due to Revenue Streams being one of the nine business model blocks. To be clear, one could consider the entire block itself as the Revenue Model. Within this block are the descriptions of each revenue stream.
Going back to revenue streams, these are income generated from the sales of goods and provision of services. How a company records revenue type depends on its specific activities. Generally, retail businesses have more diverse revenue accounts than service providers.
The purpose of creating and delivering value propositions is to generate revenue. Undoubtedly, investors consider this one of the most important deciding factors for investing. A business model must show how much each customer segment is willing to pay. Using it as a basis, it becomes possible to create revenue stream strategies.
What Are the Different Types of Revenue Streams?
While there are multiple revenue streams, they all fall under these two categories:
Transaction Revenue Stream. These are income made from one-time customer payments for products or services.
Recurring Revenue Stream. These are earnings made from continuous payments at regular intervals. Usually, a recurring revenue model can provide a more stable income source.
What Are the Pricing Mechanisms of Revenue Streams?
Pricing mechanisms describe how pricing affects the supply and demand of goods and services. It is, in essence, a tool that matches suppliers with buyers.
A company is not bound to a single pricing mechanism. Most actually have different ones in place for each revenue stream. Nonetheless, these mechanisms are either fixed or dynamic.
As alluded to, fixed pricing remains uniform, usually due to the lack of variability in a product’s inputs.
Fixed pricing can be any of the following:
Fixed List Pricing. These are the manufacturers’ prices, which distributors and dealers follow.
Product Feature Pricing. This pricing is dependent on the features of products and services. Added features, for instance, mean higher prices.
Customer Segment Pricing. Here, companies consider the customer segment when determining price points. In mass markets, for instance, they may offer lower prices. Usually, though, it comes at the expense of quality.
Volume Pricing. Prices can be lower if the volume is high. Usually, companies that use this pricing mechanism would have pricing brackets based on quantity.
Under this pricing mechanism, prices may change due to various reasons. It may also fluctuate due to market conditions.
Bargain Pricing. Bargaining occurs in some marketplaces. In this case, the outcome depends on who holds the power of negotiation. Negotiation skill, likewise, is also a factor.
Auction Pricing. In auctions, the participants determine the final price of products. Buyers will bid based on their perception of the product’s value.
Yield Management Pricing. The prices of goods in this mechanism are dependent on availability. If the stock is low, prices may increase. Such pricing schemes are prevalent in the airline and hotel industries.
Real-time Market Pricing. In this scheme, the pricing of products is dependent on the law of supply and demand.
Why Do Revenue Streams Matter to Investors?
Most investors want to see on investment (ROI). Hence, like you, they are also interested in how a company generates cash.
Revenue Is a Vital Key Performance Indicator (KPI) of All Businesses. Every company has its set of KPIs, measuring the performance of particular activities. Admittedly, financial status and liquidity are among the most critical concerns.
Each Revenue Stream Has a Different Performance Prediction. It is incumbent upon companies to make financial forecasts. For one thing, it becomes a basis for marketing and other departments to map their strategies. And for startups seeking capital, potential investors will scrutinize these predictions. Generally, recurring revenues are the most predictable. On the other hand, transaction-based revenue tends to fluctuate with customer demand and other factors.
Forecasting Models Vary by Revenue Streams. Each type of revenue stream is unique. Even if you have two or three models under the same class (e.g., recurring type), the forecasting models are not necessarily the same. Nonetheless, each class should have the same structure and pattern in predictions.
What Are Examples of Revenue Streams?
Here are some examples of revenue streams:
Asset Sale. Most businesses use this model to generate revenue – selling physical products. These can be consumer electronics, cars, properties, and anything under the sun.
Usage Fees. Some businesses earn revenue from selling services. Telecom companies, for example, charge customers for the use of their services – calls, data, and others.
Subscription Fees. Some businesses offer services for a subscription fee. Gaming companies, for example, charge players a monthly fee to play online. Likewise, music and video streaming services also use this model.
Rental, Leasing, and Lending Fees. This business model grants individuals and other entities the right to use an asset. Tenants, for example, pay rental fees – usually monthly.
Licensing Fees. Companies may generate revenue by granting customers the rights to intellectual property. A manufacturer, for example, may use proprietary technology licensed from a third party to produce goods.
Commission or Brokerage Fees. Companies that earn by taking a percentage of the transaction amount fall under this category. Some examples are credit card providers, real estate agents, and brokerage firms.
Advertising Fees. Traditionally, mass media, including newspapers, earn from advertisers. Nowadays, most app developers and online platforms like Facebook and Google generate revenues by displaying ads.
Revenue Streams Block Is As Important As the Revenue
The importance of identifying revenue streams is simple. It is as important as the actual revenue. Hence, as you prepare this block, think about the different customer segments and value propositions. Also, consider the channels you defined and how you plan to communicate with customers.
Some questions to consider are:
What value proposition can you provide that encourages customers to pay more?
What value do customers currently get from you?
How are they currently paying?
How do they prefer to pay you?
How much does each revenue stream contribute to the total revenue?
As you go through this process defining new revenue streams, remember that having a solid strategy can help make generating revenue easier. Once you finish this step, you will know what resources your business needs.