In the Business Model Canvas, the Revenue Streams building block details the way a business intends to solve customer problems for financial gain. Revenue streams represent the various ways a business generates cash from each customer segment.
Contents
Understanding revenue streams in the Business Model Canvas
In determining revenue streams, the business must answer the following questions:
- For what value are customers ultimately willing to pay? This is determined by how big a problem is in their life.
- How much does each revenue stream contribute to overall revenue in terms of percentage contribution?
- How do customers prefer to pay? In other words, how will these preferences influence the revenue stream(s) chosen?
There are two types of revenue streams. The first is a transaction-based stream, where customers make a one-time payment for a product or service. The second is a recurring stream, where customers make continuous payments to maintain access to the product or certain product features.
Note that this section of the Business Model Canvas represents the cash the company generates – not the profit.
Revenue stream pricing mechanisms
Pricing mechanisms refer to the impact of pricing on the expected supply and demand of a product. Each company revenue stream can have its own pricing mechanism, which can be divided into two types.
1 – Fixed pricing
Fixed pricing mechanisms have predefined prices based on a static set of variables. Examples include:
- List price – where prices are fixed and non-negotiable. The main courses on a restaurant menu are list price. Every diner pays the same amount for the same dish.
- Product feature dependent – here, the price depends on product quality or value proposition features. Organic foods tend to attract a higher price than their non-organic equivalents.
- Customer segment dependent – where the price is determined by a customer segment. Some businesses offer discounts to seniors or those with a qualifying membership card.
- Volume dependent – where the price is a function of the volume purchased. Costco shoppers who purchase in bulk tend to be charged less per item than customers who shop in traditional supermarkets.
2 – Dynamic pricing
Dynamic pricing mechanisms, on the other hand, change according to fluctuating market conditions.
There are also four types in this category:
- Yield management – product pricing is determined by inventory levels at the time of purchase. Yield management is a feature of airline and hotel reservation systems, with prices fluctuating according to supply and demand.
- Negotiated pricing – where the buyer and seller negotiate a mutually beneficial price. Negotiation is often involved in the sale of a home or vehicle.
- Real-time market – prices are determined by broader supply and demand factors. The stock market is perhaps the best example, with share prices based on the number of buyers and sellers at any given time. Oil, iron, coal, uranium, and other commodity prices also fluctuate for the same reasons.
- Auction – where the price is determined by a competitive bidding process.
Revenue stream models
How are revenue streams generated? Let’s take a look at a few models below:
- Asset sales – where a company sells the rights to a physical product to consumers. Amazon and eBay are two examples.
- Subscription fees – which are paid by consumers for constant access to a product or service. Examples include Spotify and Netflix.
- Usage fees – in this case, the company earns revenue based on how much a consumer uses its services. Pricing for smartphone contracts depends on how much data the customer desires.
- Licensing – this involves a company charging customers access to copyrighted or patented intellectual property. Licensing is a common revenue stream in the music, sports, media, and technology industries.
- Lending, renting, and leasing – as the names suggest, money is made by the company selling temporary access to its products or services for a set period.
Key takeaways:
- In the Business Model Canvas, the Revenue Streams building block details the way a business intends to solve customer problems for financial gain. These revenue streams may be transaction-based or recurring.
- Revenue streams are based on fixed or dynamic pricing mechanisms, with both mechanisms influencing price via broad and sometimes more localized supply and demand factors.
- Examples of revenue stream models include asset sales, usage fees, subscription fees, licensing, lending, renting, and leasing.
Use Revenue Modeling Instead
Read: Revenue Model, Pricing Model.
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