The business model canvas provides organizations with a straightforward way of planning their business. Unlike a traditional, full business plan, the business canvas model is simplistic and doesn't take up much time. The business model canvas provides businesses with how they make money, key insights about their customers, and value propositions. This model highlights the importance of revenue streams and outlining them to understand your business. The revenue streams block in the business model canvas explains how organizations can monetize their business, earning money from returning and new customers.
In this guide, we'll cover the basics of revenue and revenue streams. Additionally, you will learn about the different revenue stream models and which approaches you can take to diversify your business revenue streams.
What Is Revenue?
In business, revenue is often referred to as the "top line" because it rests at the top of an income statement. It is the entire income generated by selling goods or services. This means revenue is the total amount of income a company earns before expenses are taken out. Unlike sales, which are just one aspect of a company's revenue, revenue is not the company's proceeds from selling goods or services to customers.
What Is a Revenue Stream?
A revenue stream is essentially another word for income. Historically, revenue streams refer to additional or new sources of income. Though having multiple sources of income was difficult in the past, the internet has made it easier than ever to generate multiple streams of income.
An example of a company with multiple revenue streams is evident with Apple. When Apple released the Apple Macintosh, they generated additional revenue streams with the invention of joy-sticks. Enabling people to play video games on their computers, joy-sticks were an additional source of income for Apple.
Having multiple revenue streams for any organization can be beneficial. However, it is especially advantageous for small businesses wishing to expand and scale. In addition to bringing in additional money, having multiple income streams reduces your risk of completely losing your income. This can prove especially helpful in businesses that experience dry spells and less busy periods.
Additional benefits of revenue streams include:
- Revenue can be a Key Performance Indicator (KPI) for businesses. When analysts look at an organization's performance, they can interpret revenue figures from each revenue stream in their financial statements.
- Revenue helps financial analysts understand the pattern of cash inflows. This allows them to react to unusual changes quickly by explaining any variances.
Revenue Stream Models
Depending on the type of revenue model a company uses, they will need different forecasting models. Here is a list of revenue models that a revenue stream can take the form of:
- Project Revenue. Project revenue is any revenue earned through a one-time project with both existing and new customers.
- Service Revenue. Service revenues are based on time and occur when providing customers with services.
- Transaction-based Revenue. This type of revenue includes the earnings when selling goods. Usually, transaction-based revenue is from one-time customer payments.
- Recurring Revenue. Recurring revenue includes earnings on an ongoing basis. This model is predictable and helps make sure that a business has a stable source of revenue, which is why companies most commonly use it.
One way to determine which type of revenue streams your business could benefit from is through forecasting. Forecasting plays an important role in understanding the health of your business as it evolves and grows. When deciding which revenue model(s) your business will follow, you should try to find a model closest to your business model. For example, Netflix wouldn't need to follow a transaction-based revenue model. Instead, they would follow a recurring revenue model because they make a profit from subscription fees.
Additionally, you should choose a revenue model that makes your business stand out to investors and new customers alike. It should set your organization apart to attract new business. Lastly, you should be flexible when determining which type of revenue model(s) you want to adopt. As a small business owner, you will need to forecast to ensure that your business has a revenue model that will help your business be the most profitable as is possible.
How to Diversify Your Business Revenue Stream
Just as there are different revenue models, there are also different ways to diversify your business revenue stream. Below, we'll discuss various ways you can generate additional streams of revenue for your business:
One way to diversify your business revenue stream is by promoting another organization. For example, your business could charge another company when you promote its product or service. In the past, this type of revenue stream was used in the advertising industry. However, today it can be used on your website as the main revenue stream because of e-commerce and the internet.
Another way to diversify your business revenue stream is by charging a brokerage fee. A brokerage fee can be charged when a company acts as the go-between for communications and transactions between two or more parties. Usually, this fee is a percentage of the gross salary from the organization, a headhunted candidate, or both.
In addition, companies can also charge a usage fee. This fee is typically charged by service providers when customers use their service. For example, a hairstylist can charge a customer a usage fee based on additional services and treatments while in the salon.
A subscription fee is often used when a business offers continuous access to its products. For example, streaming services like Hulu, Netflix, and Disney Plus, charge subscription fees because they provide customers with access to shows and movies. The list of companies that have subscription fees can go on and on as many businesses are subscription-based. So whether you have a jewelry company, sell bath bombs, or own a gym, your company could benefit from subscription fees.
This type of revenue stream occurs when the rights to a product are transferred from seller to buyer. Asset sales can be seen in numerous companies. For instance, car companies like Toyota, Ford, and Honda sell the ownership rights of the cars they manufacture to buyers. Alternatively, companies like Amazon trade the ownership rights of products as small as soap.
Lending, Renting, and Leasing
Another type of revenue stream is lending, renting, and leasing. Some businesses choose to give customers rights to their products for a specified period. The easiest real-world example of this is when someone rents an apartment. Let's say the leasing terms are for one year. The tenant would have rights to the apartment for a 12-month period.
Lastly, licensing is a type of revenue stream used when products, ideas, or services are considered intellectual property. The rights holder, or the person who is "selling" the intellectual property, charges a licensing fee. Without a licensing fee, the rights holder may have to invest in manufacturing their idea, proving costly. A licensing revenue stream is very common in the Technology industry as patent holders can sell licensing to other companies, charging them for using the patent.
Understand Your Business's Financial Health With Skynova
When determining which revenue streams you can adopt for your business, you'll need to consider what will benefit your customers. Additionally, you'll want to note what your customers are willing to pay for, whether or not they're paying for the additional benefits now, and the percentage of the total revenue that each revenue stream will represent.
As a small business owner, accounting can be a tedious and unnerving process. However, with the help of a straightforward accounting software, you can simplify your process with accurate accounting records. In addition, access to your income, expenses, payments, and financial insights can provide you with important insights into your business health. Ultimately, this can help you make informed decisions and diversify your revenue streams based on your findings. Visit our website today to learn about the many benefits of our accounting software and how it can streamline your accounting duties.
Notice to the Reader
The content within this article is meant to be used as general guidelines to business revenue streams and may not apply to your specific situation. Always consult with a professional accountant to ensure you're meeting accounting standards.