A revenue stream is one of the foundational building blocks of a business model, and the economic value customers are willing to pay for the products and services offered. While a revenue stream is not a business model, it does influence how a business model works and delivers value.
Revenue streams vs. business models
How Airbnb described its revenue streams as a business model.
One of the greatest misconceptions is about revenue streams and business models. In short, for most entrepreneurs how you make money is also your business model.
While this simplification does work out (especially in pitch decks where investors might want to have a simplified story of a business model) it might be limiting if you’re an entrepreneur trying to grow or dissect competitors’ businesses.
Therefore, revenue streams affect a business model, and a revenue stream is an essential building block of any business. But that is only part of the story.
Missing this point means limiting your business around the bottom line alone.
Why does understanding revenue streams matter?
In a digitally-driven business world, it’s easy to fall into the trap of focusing on aspects that are too far from monetization.
In contrast, monetization and revenue streams are not all that is.
They are critical building blocks that need to be figured out, tested, and iterated quickly.
From them, it depends on the survival of your company.
There is another element that makes the action of having your customers pay for a service or product you offer, which is tied to the so-called “revealed preference.”
That is a theory offered by the American economist Paul Samuelson in 1938.
The theory asserts that consumers’ behavior – assuming a constant income and an item’s price – is the best indicator of their hidden preferences. In short, that is how people reveal what they really want.
We can call this “Skin in The Game Data.”
To understand this point, in the FourWeekMBA interview with Alberto Savoia, he explained:
So skin in the game data means not people telling you, “Oh yeah, if you build it, I will buy it,” they need to give you something. So the smallest amount of steering the game somebody can give you is a valid email address with a clear understanding you will use that address to let them know if the app is ready. So you have this video, you either buy some ads or you put it on some forums, you say, “okay, here’s an app I am trying to build, if you are interested, please give me your email address, and once I launch it, I will let you know.”
While complex businesses make money in many different ways.
Looking at revenue streams and where the key customer is can help us assess the nature of an organization.
Of course, this is in theory, as many digital platforms are very complex.
At times who and those who can’t be deemed as customers are often the most valuable assets for a digital organization.
This is true for media businesses and in some cases for digital platforms.
For instance, Google is free for its users.
Yet users are the most important “returning customers” for the search engine.
As users’ data is the monetizable asset Google sells to companies on its search results page.
Let’s draw a line here.
The bottom line is highly tied to its key customers for simple, more linear business models.
For more complex business models, things get trickier.
In short, platforms, super platforms, and non-linear businesses where there is a more complex interaction between the bottom line and the key players’ revenue streams are only a tiny part of the story.
For other, simpler business models, revenue streams reveal business facts that can’t be ignored.
Branding vs. revenue streams
Focusing on revenue streams doesn’t mean ignoring the rest.
In the business world, companies often praise themselves for being extremely focused on the bottom line and their key customers.
However, thinking in terms of the bottom line alone might give us the appearance of being rational business people, but it doesn’t leave space for nonlinear growth, which can be achieved through branding efforts.
When we focus on revenue streams and the bottom-line, we can work on direct actions intended to bring more customers in.
However, we might end up ignoring marketing and branding activities – that, while harder to track and explain from a logical standpoint – can bring our business to the next level.
That is also what leads to confusion.
For instance, in the startup world, a freemium model is often seen as a business model or revenue stream.
Instead, a freemium model is, in many cases, a marketing and growth tool that helps the company leverage virality to make its brand go to places where customers alone can’t bring you.
You can still build a revenue stream or a whole business model around a freemium (take the case of DropBox).
Still, in many other cases, as a business person, you need to accept there is no linear connection between your free offering and the bottom-line.
What is a revenue stream in the business model canvas?
For what value are your customers willing to pay?
What and how do they recently pay? How would they prefer to pay?
How much does every revenue stream contribute to the overall revenues?
When you build a business model, it might – at times – all start by identifying a problem or perhaps creating the perception that a problem exists (which is the whole point of demand generation activities).
From there, a product or service which entails an identified value proposition is launched or tested in the marketplace.
What you think is valuable might not be so for your potential customers.
For instance, at the launch stage, you need to find what some might call product-market fit.
Or finetune the value proposition (which provides a solution to a problem or a set of problems) with a group of people willing to pay for it.
When you reach that stage, you have a revenue stream and thus an essential building block of your business model.
Revenue streams and value propositions
Oftentimes, mainly when a company has scaled up, there isn’t a single value proposition that is aligned with the value demand.
That is because there are multiple vital customers, thus making the way the company delivers value more complex.
One example is Amazon’s value proposition.
Another core example is Apple’s value proposition.
Why testing your revenue streams early on makes sense
In the FourWeekMBA interview with Ash Maurya, he highlighted how:
On a business modeling side, we have the way we deliver value, so that would be the solution you build. Yes, we can make it as efficient as possible in the early days, but that is again chasing pennies and letting dollars slip through the cracks.
What we instead should be doing is focusing more on the revenue streamside, trying to maximize things like pricing, for instance. Trying to identify the right customers, for instance.
In the digital world, it’s easy to focus on parts of your business model that have nothing to do with the bottom line.
Thus, postponing the experimentation of the revenue stream early on. In the end, if you got venture capital money, why spend that on experimenting with pricing, and potential revenue streams, when you can burn it all on growth?
Income Statement and Cash flow statement from WeWork Financial Prospectus.
Suppose you take a case like WeWork, the office-sharing startup that went from Decacorn to Unicorn, up to touch the ground.
The company did grow its revenues, but it didn’t create a sustainable revenue stream.
Therefore, the only cash at the bank came from venture capital funds or financing activities.
Bootstrapped companies have a different approach in their DNA, as they need to master their key customers very quickly before going out of business.
To build a sustainable business model early on, it’s important to start experimenting with the revenue stream building block as soon as possible.
How to choose the right revenue stream?
Building a business is about identifying an opportunity and going with it. Thus, an entrepreneur is a hard-wired opportunist.
However, business is also a matter of choice. And how you make money is part of that choice.
For instance, if you build a website that generates traffic.
That traffic can be monetized in many different ways. You can simply sell those page views to others, thus acting as a publisher.
You can sell other people’s products or services, thus acting as an intermediary on commission.
Or you can develop your own offerings.
You can do it in all these ways.
And there isn’t one which is better than the other. It all depends on what you’re passionate about and whether the market values your skills so that you can find a niche and build a business on top of it.
That sounds easy, yet it’s not. Often entrepreneurs follow every single opportunity that presents itself without evaluating whether it’s in their frame of reference.
This will force you to look for your Blue Sea:
That will lead you to find your Minimum Viable Audience:
Revenue streams types
There are many ways in which we can classify revenue streams.
For the sake of this guide, we’ll look at revenue streams by looking at the interactions with the key customer.
This classification isn’t flawless; quite the opposite.
And you can argue that it’s not complete, and you would be right.
Therefore, rather than a final or complete representation of the revenue stream types, it’s just a starting point.
Let’s classify the possible revenue model types based on the kind of interaction we can have with the key customers.
Based on that, a whole business model will cascade:
The relationship with the key customer doesn’t end after the transaction but continues.
In a subscription-based model, like SaaS, the software vendor will have to provide support and continuous updates of the software to keep the value of the service worth the subscription.
Other businesses based on a repeated relationship, like Netflix, have to advance and invest massive amounts of capital to keep their platforms interesting enough for subscribers to avoid churn.
Companies like Amazon and Costco also introduced a component of repeated transactions (via Amazon Prime Membership or Costco Memberships) within their business model.
While many analysts look at the additional revenues generated by this revenue model, this revenue stream has more holistic and dynamic importance.
When Amazon introduced Prime, it did so because the service enabled repeat customers to eliminate the cost of shipping, which for repeat customers is the most burdening expense.
Thus, a Prime Membership isn’t just an additional revenue stream but a business model enabler.
In a transactional interaction, the company mainly engages with its key customers on a product or project basis.
Usually, a product company has this kind of approach.
For instance, Apple came up with the new iPhone, which gets sold to millions of customers as a one-time transaction.
In a transactional revenue model, the whole business model needs to be organized so that the product can be distributed at its best at its launch.
Usually, the critical customer is engaged on a one-time basis, and even if she buys multiple products in the long run, the kind of interaction doesn’t necessarily call for continuous interaction with the key customer.
When a company doesn’t have direct access to its key customers, we can call this an intermediated interaction.
In short, the company can’t directly access a customer base but will do that via a third-party platform or distributor.
Think of the case of a company offering its product white labeled. Final customers won’t know its brand.
Distributors will relabel the product with their own brand. Thus, the maker doesn’t have access to its key customers.
In that scenario, the distributor acts as the key customer.
The maker will have to adapt its business model to the requests and policies that the distributor demands.
That is why a B2B2C business model can be way more effective.
The company has access to its customer base and key customers in a direct interaction revenue model.
It can deliver the product via its own channels, and it can control the perception those customers have.
Distribution doesn’t come for free. Instead, it requires maintenance, massive investments, and a strongly recognized brand.
Revenue streams examples
There isn’t a single way to generate revenues.
You might choose a subscription business model, a freemium, a fee, or a membership model.
That also depends upon the industry, product, and service you offer.
For instance, Facebook uses a hidden revenue generation model.
In short, the free platform, in a way, “hides” to its users the way it gets monetized.
Of course, business people and marketers know how Facebook makes money, as it has been a proper advertising channel for many businesses.
However, the average user doesn’t have a clue.
Things are changing now that privacy issues and new regulations have brought attention to the Facebook business model.
Yet for a decade, Facebook has benefited from a vast stream of revenues and high profitability without most users ever noticing it.
Some examples of revenue models comprise:
- One-time products and services
- White labeling
- Pay as you go
- And more
Each of those revenue models can influence the overall business model. In many cases, companies rely on several revenue streams.
For instance, publishers like The NY Times run on advertising, sponsorship, and subscription revenues.
- Revenue streams affect a business model, and a revenue stream is an essential building block of any business. But that is only part of the story.
- While complex businesses make money in many different ways. Looking at revenue streams and where the key customer is can help us assess the nature of an organization.
- Focusing on revenue streams doesn’t mean ignoring the rest. In the business world, companies often praise themselves for being extremely focused on the bottom line and their key customers.
- There isn’t a single way to generate revenues. You might choose a subscription business model, a freemium, a fee or membership model. That also depends upon the industry, product, and service you offer.
- Picking a revenue stream is also a matter of choosing the kind of business you want to build.
Other resources for your business:
- Successful Types of Business Models You Need to Know
- The Complete Guide To Business Development
- Business Strategy: Definition, Examples, And Case Studies
- What Is a Business Model Canvas? Business Model Canvas Explained
- Blitzscaling Business Model Innovation Canvas In A Nutshell
- What Is a Value Proposition? Value Proposition Canvas Explained
- What Is a Lean Startup Canvas? Lean Startup Canvas Explained
- What Is Market Segmentation? the Ultimate Guide to Market Segmentation
- Marketing Strategy: Definition, Types, And Examples
- Marketing vs. Sales: How to Use Sales Processes to Grow Your Business
- How To Write A Mission Statement
- What is Growth Hacking?
- Growth Hacking Canvas: A Glance At The Tools To Generate Growth Ideas
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