In order for your business to be successful and grow, you need a solid way to make money. A solid revenue model will enable you to achieve higher profits and maximize income.
Once you know who your customer is and what you will offer them – how will you charge?
What does revenue stream mean?
The definition of a revenue stream is a particular source of income for your business, such as offering a type of service or product line.
You may have multiple revenue streams, at least one for each segment of your customer demographic. Some businesses are built around a single stream, others have dozens or even hundreds. It all depends on the diversity of your offerings and customers.
Technically this describes “operating revenue”, which comes from your core offerings. Other types can come from various financial tools or secondary means (interest, rent, etc) and will not be covered here.
What types of revenue streams are there?
Transactional
A one-time sale, generally for products or quickly fulfilled services such as an oil change.
Advantages
Balance is paid in full at time of fulfillment.
Disadvantages
This type of income is generally unstable, and difficult to forecast. No long-term value from a sale, unless the customer is enticed to come back. The average value of a sale can vary widely.
Requires significant volume and/or high margins to be profitable.
Service or Project
A series of payments in exchange for a service or project that will take some time to complete, usually mid-term (several weeks or months). Typically a scope of work is defined, along with estimated cost. Payments are typically made at defined progress marks or phases.
Advantages
Typically represents a fair amount of work for the company, and means they will have income for the duration of the project. Requires fewer customers to achieve a specific amount of revenue.
Disadvantages
Droughts or slow periods can mean expenses mount until the next project is started. Can be difficult to balance the workload when larger projects overlap.
Recurring
Repeated series of transactions, either perpetual until cancelled or for a specific period of time.
Advantages
Steady, long-term cash flow makes it much easier to forecast and target growth goals.
Disadvantages
New subscribers may represent a loss if the cost of fulfillment is higher than the first payment. May not be feasible for companies without sufficient funds to survive until profit.
Examples of revenue streams
Retail sales of clothing would be considered a one-time transaction. You may visit the same store repeatedly, but only commit to specific purchases which you pay for immediately to receive, no further obligation is made.
A digital marketing agency creating a new website or developing an ad campaign would likely break these services into phases, since they will take time to complete.
Many media content providers use a subscription-based recurring revenue model to provide access to video entertainment.
How do you create a new revenue stream?
To add a new revenue stream to your business, consider adding a new service or product line that compliments an existing one. Perhaps offering additional support, or solving the next step problem for your customers.
As with all things in business, you should consider both how your company operates and what your customers need. Find the model that makes the most sense and is beneficial for both parties. Sometimes customers will prefer to spread out cost via subscription or retainer models, others may prefer a single, simple payment.
Project your cash flow using a variety of models to identify any pain points. If at any point a sale is cash negative, you will need to know what sort of reserves or credit to have available.
This is common with transactions, where the product needs to be sourced to be available for sale. Service and recurring can also have short durations of loss in the beginning, or just before the next payment is due.
Revenue Streams in the Business Model Canvas
Once you have created various projections and interviewed potential customers to get their input, define the type of stream you will use for your business.
Plug it into your business model canvas and move on to the next section.
How can revenue streams be increased?
There are three ways to increase your revenue:
Sell to more customers (see growth vs scaling).
Get them to buy from you more often, or subscribe for longer.
Charge more – Raise your prices or add premium options.
Although the details of exactly how you will accomplish this can get complicated, the actual math involved is fairly straightforward:
Number of Customers x Average Sale x How Many Times They Purchase = Gross Income per Stream
You can try to find more customers, though this may be difficult if your service area is small or your niche is very narrow. That’s why market research is so important to determine how many customers you can realistically do business with.
Generally though, finding new potential customers is quite achievable through proper marketing. Do remember to factor in costs associated with fulfilling the offer made, and think about how scalable this offer ultimately is. Selling an e-book is more scalable than manufacturing and shipping physical goods.
One of the easiest ways to make more money is to upsell. This involves creating a new revenue stream that complements the existing one.
Simply charging more can also work, provided you are able to retain enough of your existing customer base after raising your rates. Your best customers likely won’t mind paying a bit more since they truly value what you help them do.
Some penny-pinchers will be lost, but they typically are more hassle to deal with anyway. Think of it as an opportunity to create and even better experience for clients who are already happy!
Another option is to offer a premium variant or luxury version. This way you keep all of your customers, but offer a choice for those who wish to upgrade. Later on, you may phase out the original pricing model.