Without an understanding of how the business will bring in money and what exactly revenue streams (RS) will be used, the chances of it succeeding are negligible. That’s exactly why so many startups, even those that have great and innovative ideas, don’t make it to success. But what are revenue streams? And how to define them correctly?
These are the questions that this article will address.
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What Are Revenue Streams?
Revenue streams are one of the nine building blocks of a famous management template Business Model Canvas (BMC). It is placed in the lower right corner and is used by companies to describe their plans to earn money, as well as the resources they will need to achieve them.
Depending on the customer segments, the number of streams can vary for different businesses. Regardless, one thing is for sure – it’s necessary to identify them all at an early stage so that nothing important slips through the cracks later on.
In addition to defining revenue streams, it’s essential to take the time and consider pricing mechanisms that would be best suited for each stream. For example, they could be:
- Auctions,
- Fixed-list prices,
- Bargains,
- Seasonal offers.
This list, of course, can be expanded, but we’ll get there in a minute.
Importance of Revenue Streams
Creating a business model is not only the right thing to do; it is the only correct way to run a business and leverage its potential by allocating budgets wisely.
Without a clear understanding of their financial situation, organizations can encounter a number of challenges, including:
- Investing in products or services that are not profitable;
- Missing opportunities to optimize revenue potential;
- Failing to diversify income sources and entering new markets.
The worst-case scenario would be a complete loss of control over revenue streams, leading to the collapse of the entire business.
So, though not placed at the top, revenue streams are the key elements of the BMC that tie everything together and give meaning to the business strategy as a whole.
Two Main Categories of Revenue Streams
In general, there exist two primary types of revenue streams, but quite often, they are used together. These are:
- Transactional,
- Recurring.
Let’s elaborate on each of them.
Transactional-Based Revenue Streams
TB streams refer to a business model in which the company’s income is earned from one-time customer payments. In this model, the more transactions people make, the more revenue companies generate. The TB model is most commonly used by e-commerce companies, but it’s equally common in the financial service industry.
Advantages
One of the biggest benefits of the TB revenue stream is the ease with which the income can be tracked. Everything here is simple. The money comes in every time buyers make a purchase and comes out when the company pays wages or orders new goods.
This simplicity brings another advantage. Because sales revenue is so easy to track, it can also be easily adjusted to increase profits. For example, a company can analyze which products are generating the most revenue and increase or decrease the amount of inventory.
In addition, TB revenue streams provide insights into customer behavior, allowing businesses to identify trends and tailor their offerings to meet the specific needs of their clients. Customers, in turn, also prefer this model because of its straightforwardness.
Disadvantages
However, this model is not without flaws. One of them is that in order for transactions to happen, a company must always be involved in the process, which takes time and resources.
Another one is the popularity of transactional-based streams themselves, leading to fierce price competition and forcing businesses to lower their prices to remain competitive. As a result, profit margins may not be as high as desired.
Recurring Revenue Streams
In terms of recurring revenue streams, these refer to ongoing payments that occur whenever customers renew their rights to use the product. Some examples of the RRS are subscription fees, rent pay, and advertisement payments, to name a few.
Advantages
This model’s strength lies in its ability to generate a steady flow of income with minimal ongoing involvement on the company side. Once customers sign up for a subscription, revenue continues to come in regularly until they decide to cancel.
This creates a predictable revenue stream that can be relied upon, without requiring constant efforts and investment in customer acquisition and retention. As a result, companies can better forecast future earnings and plan for growth initiatives, whether it be expanding product offerings or entering new markets.
Disadvantages
Perhaps, the biggest drawback of this model is that some customers may not prefer subscription-based services or products, which can put customer relationships at risk. This is particularly true for businesses that fail to provide value to their clients and/or offer inflexible subscription plans that do not quite align with customer needs.
To mitigate this risk, companies should strive to offer flexible subscription plans that allow people to adjust their plans based on their needs or circumstances and provide excellent customer service support.
7 Types of Revenue Streams
Speaking of the popular options used for earning money, most often, companies stick with the following 7 revenue streams:
- Asset Sale
Perhaps, this is one of the most popular types of revenue streams. The basic idea behind it is that a company creates a physical product and then sells the ownership to somebody else, thus making a profit.
- Usage Fee
As you can guess from the name, this stream is primarily based on the estimation of the frequency of use of a product or service. The more customers use the product (or service), the more income businesses generate. Mobile phone providers are a case in point.
- Subscription Fee
Another way to make a profit is to sell customers access to a service or product that they can renew every certain period of time. This model can be used for both services and physical products.
- Lending, Renting, and Leasing
Unlike a subscription fee, this type of stream assumes that customers can get temporary access to a service or product for the desired length of time, whether it be a few hours, a few months, or a few years.
- Licensing
This stream is mostly used in the areas of intellectual property and technology where customers get the right to use it by paying a certain fee.
- Brokerage Fee
Unlike the streams mentioned above, the brokerage type of stream relies on the percentage paid for the cost of a product or service and is mostly used by intermediary services.
- Advertising
Finally, businesses that have the means to advertise, whether it be through their websites or other platforms, can use this stream as a source of income.
Surely, this is not a complete list of all revenue streams possible, but it should certainly give you an idea of what to look for when devising your own business strategy.
Pricing Mechanisms
Now that we’ve covered what a revenue stream is and what types of revenue streams exist, we can move on to the next step – understanding pricing mechanisms. In general, there are two types of pricing mechanisms that businesses can use:
- Fixed,
- Dynamic.
However, each of them further branches into several subdivisions.
As far as the fixed pricing mechanisms are concerned, there are several strategies that businesses can employ to generate revenue, including:
- List price. These prices are most often used in physical stores and on the Internet. They are fixed and cannot be negotiated.
- Based on product features. Depending on the version of a product or some of its features like size, color, and print, the price may vary a bit.
- Based on customer segments. In this case, the pricing is done based on the perceived value of the product or service to the customer.
- Based on volumes. If customers often buy certain products in bulk, companies may offer them discounts or bulk pricing to encourage them to purchase more.
When it comes to dynamic mechanisms, pricing can be formed based on the following factors:
- Yield management. Prices can change based on inventory levels, with lower prices offered to clear out excess inventory and higher prices charged for in-demand products.
- Auction. A product can be determined by means of bidding for a certain period of time.
- Negotiation. This form of pricing is mostly used for large purchases, like cars, for example, or houses, where buyers and sellers can negotiate the end price.
- Real-time. Sellers of products whose prices can fluctuate every hour or even minute (like oil, for example) are better off targeting their pricing in real-time.
- Based on timing. Businesses may offer lower prices during a limited period of time or during off-peak seasons. When the time’s up, the price goes back to its original value.
The Impact of Revenue Streams on the Other Business Processes
The main reason the BMC is so popular is that it provides a clear and concise framework for business owners and managers to visualize and analyze their business models. All the elements on the canvas are related to one another and interconnected. The same goes for revenue streams.
You need to know who are targeting to be able to define the lower and higher limits of the product or service value. The value itself should be clear and relevant to the target market.
You will also need to have a clear idea of how you’ll communicate the value of the product or service to customers, as well as how you’ll build and maintain relationships with them – all of which are the factors that need to be considered when deciding on the revenue streams.
Conclusion
To bring it to an end, revenue streams are an important element on the Business Model Canvas that ties everything together, allowing companies to optimize their revenue potential, diversify income sources, and enter new markets. Therefore, it’s important to approach them strategically from the beginning.
Hopefully, with our tips, you’ll have no difficulty identifying the revenue streams that best align with your business goals, no matter whether you’re starting an online store selling physical goods or creating a new car rental platform.