Revenue Streams

Learning Goal: Determine if money and mission can be created through the business.

Revenue Streams - The result from the value propositions successfully being offered to customers. Revenue streams are the ways we collect money from the product produced and marketed to customers.

Overview

If customers comprise the heart of a business model, Revenue Streams are its arteries. A company must ask itself, For what value is each Customer Segment truly willing to pay? Successfully answering that question allows the firm to generate one or more Revenue Streams from each Customer Segment. Each Revenue Stream may have different pricing mechanisms, such as fixed list prices, bargaining, auctioning, marketing dependent, volume dependent, or yield management.

Questions to ask when building block #5:

For what value are our customers really willing to pay?
For what do they currently pay?
How are they currently paying?
How would they prefer to pay?
How much does each Revenue Stream contribute to overall revenues?

1. How many will we sell?

In the physical channel, companies generate revenue by selling their product, collecting revenue either as a one-time sale, via time payments, or though such financial tools as leasing or subscriptions. They also solicit referrals from current customers, often rewarding customers for referring others.

Determine your market size and market share hypothesis, which translates into the anticipated number of customers (as in 10 percent of a million-person market = 100,000 customers)

Question 2: What's the Revenue Model?

The revenue model is what more about what people are buying. Think about our the car industry. The revenue model is selling cars (asset sale). However, car dealerships make the majority of their money through car maintenance (usage fees). This is really interesting when you consider that Tesla does the exact opposite. Tesla makes the majority of their money in the sale of the car (asset) and very little money in maintenance (usage fees).

What is the revenue model?
Why have they taken this strategy?

1. Asset Sales

The most widely understood Revenue Stream derives from selling ownership rights to a physical product. Amazon.com sells books, music, consumer electronics, and more online.

Example: Fiat sells automobiles, which buyers are free to drive, resell, or even destroy. (Ford, Walmart)

2. Usage Fee

This Revenue Stream is generated by the use of a particular service. The more a service is used, the more the customer pays. A telecom operator may charge customers for the number of minutes spent on the phone. A hotel charges customers for the number of nights rooms are used.

Example: UPS, package delivery service, charges customers for the delivery of a parcel from one location to another. (Amazone Web Services, Verizon, FedEx)

3. Subscription Fees

This Revenue Steam is generated by selling continuous access to a service. A gym sells its member monthly or yearly subscriptions in exchange for access to it exercise facilities. Nokia’s Comes with Music service gives users access to a music library for a subscription fee.

Example: World of Warcraft Online, a Web-based computer game, allows users to play its online game in exchange for a monthly subscription fee. (Salesforce.com, Netflix.com)

4. Lending/Renting/Leasing

This Revenue Stream is created by temporarily granting someone the exclusive right to use a particular assets for a fixed period in return for a fee. For the lender this provides the advantage of recurring revenues. Renters or lessees, on the other hand, enjoy the benefits of incurring expenses for only a limited time rather than bearing the full costs of ownership.

Example: Zipcar.com provides a good illustration. The company allows customers to rent cars by the hour in North American cities. Zipcar.com’s service has led many people to decide to rent rather than purchase automobiles. (Chegg.com, Borrowlenses.com, Enterprise)

5. Licensing

This Revenue Stream is generated by giving customers permission to use protected intellectual property in exchange for licensing fees. Licensing allows rights-holders to generate revenue from their property without having to manufacture a product or commercialize a service. Licensing is common in the media industry, where content owners retain copyright while selling usage licenses to third parties. Similarly, in technology sectors, patent holders grant other companies the right to use patented technology in return for a license fee.

Example: Redbox pays for the license of the movies they make rentable to their customers. The customers then pay Redbox to watch the videos. (Microsoft Software, EA Sports Games)

6. Brokerage (Intermediation) Fees

This Revenue Stream derives from intermediation services performed on behalf of two or more parties. Credit card providers, for example, earn revenues by taking a percentage of the value of each sales transaction executed between credit card merchants and customers. Brokers and real estate agents earn a commission each time they successfully match a buyer and seller.

Example: Visa and Mastercard are the brokers for most credit and debit card transactions. If you look on a debit/credit card you will notice that the there is an emblem like this telling you who will actually be processing the payment. (Airbnb.com, etsy.com, etrade.com, real estate brokers)

7. Advertising

This Revenue Stream results from fees paid by brands and companies to get in front of potential customers.

Example: Google creates massive numbers of users to incentivize advertisers to pay to use their service. (mint.com)

3. Finance

A good pricing model recognizes Market Type, accommodates manufacturing costs, the value the product delivers, market beliefs, and competitive prices. It also charges "as much as the market will bear" to maximize profits.

Revenue and Profit Growth?

Negative growth rate is terrible.
3% Revenue Growth is not good. It doesn't cover inflation.
10% Revenue Growth is great for a mature company

Accounting Equation

Assets = Liabilities + Equity (stockholder's or Owner's)
House ($475,000) = Owe ($200,000) + Own ($275,000)
Debt/Equity Ratio = $0.72 of debt to $1.00 of Equity

How much do we charge?

Value Pricing: Based on the value delivered by the product rather than the cost itself. (Investing software, patented pharmaceuticals)
Competitive Pricing: Positions the product against others in its competitive set, typically in existing markets. (lawn care)

4. Can they/you fulfill your mission?

We have talked this entire year about having a purpose and mission that supersedes money. However, I like to tie the two together from a business perspective. While non-profits are great the world needs more people who are creating sustainable business that has greater purpose. At Westminster, we hope that mission brings redemption to the world through bringing creation back to its intended point. The question is: Can you fulfill your mission while generating enough money to justify the business. These two must go hand in hand or you end up on the streets looking for handouts to fund your startup, which just became a non-profit. This is not a horrible thing but we need more creators who find unique ways to make philanthropy viable. Think Warby Parker and Toms.