Business Model: Revenue streams

The next element of the Canvas that I will talk about is the Revenue Streams.

In this chapter you will learn how you can make money selling your product or service to your customer segments.

Revenue

First, let’s clarify what Revenue is all about. Revenue is the amount of money that is brought into a company through its various business activities (e.g. sales of products and services). Let’s break this down:

For example, if you sell 100 pumpkins per week and sell each pumpkin for 230 shillings, then your weekly Revenue will be 23,000 shillings. You can do the same calculations for monthly and yearly revenue. However, since sales may vary over the month and year, you may have to do more detailed calculations. But I hope you got the point on how to calculate it.

Number of Pumpkins sold

Price per pumpkin

Total Weekly Revenue

Total Yearly Revenue

(52 weeks)

100

230

100 x 230 = 23,000

23,000 x 52 = 1,196,000

You should be aware that this would be your gross revenue. Your net revenue is calculated as the gross revenue minus any discounts or returns that you had during the year.

Let us assume that a restaurant sold 1,000,000 shilling worth of food during one year. At the same time, it offered 30,000 shillings worth of discounts to students and senior citizens who redeemed coupons. The restaurant also refunded 5,000 to unhappy customers during the year. As a result, the restaurant’s net revenue can be calculated as: 1,000,000 - 30,000 - $5,000 = $965,000

Revenue stream

A Revenue Stream is the building block presenting the cash a company generates from each Customer Segment. Most businesses need at least one great revenue stream to earn money.

Revenue Streams can be generated in many different ways and you can use a mix of these different ways for your company:

  1. Sale of physical product: The customer pays in cash for the product (for example, pumpkins, books, furniture…) and the customer is then free do whatever she or he wants with it.
  2. Usage fee: The customer pays a user fee for a particular service, such as water, phone, hotel room, etc. As such, the amount paid by the customer depend on how much of the service is being used (for example, how many liters of water, how many nights at the hotel, how many calls etc.)
  3. Subscription fee: The customer pays, for example, once a month, or yearly, for a particular service. For example, sports/gym facilities often use this option. Even if you do not use it, you pay. This could also work for products. You have your customers pay an amount to you every month and in return you deliver your product on a regular basis.
  4. Lending/renting/leasing: This Revenue Stream grants someone the right to use a particular product for a fixed period of time in return for a fee. This method can be used for rentals of cars, rentals of farm machinery etc.
  5. Brokerage fees: Through this Revenue Stream, your company gets its revenue from an intermediate service. This method is often used by real estate agents (earning a commission every time they match the buyer and seller) and credit card providers (getting a percentage of the value of each sale completed between the merchant and the customer).
  6. Advertising: Your business may charge fees for advertising a product, service or brand. For example, newspapers and media often rely on this method.
  7. Volume and unit selling: Your company charges a fixed price for a product. However, if the customer choses to buy your product in higher quantities, they could get a discount (either by a lower price or additional products). You can have different prices and discounts for different Customer Segments. For example, to encourage large purchases of pumpkins, you give 2 free pumpkins to every customer who buys more than 50 pumpkins.

While a promotion strategy seems to be very attractive (giving out products/services for free), you should not use it as your main revenue model since customers get easily used to getting them for free and if you suddenly stop giving products/services away, your customers may leave you and move to your competitor.

Also, you need to be aware of the different payment modalities that you may offer to your customers. I will go into this in the Finance module.

Take away: You would need to decide what kind of Revenue Stream best fit your company, and customers.

Esther’s revenue streams

My revenue model for selling pumpkin products is three-fold.

1. Sale of physical product: Processed pumpkin products, such as juice and sauces, can be bought with cash or debit/credit card.

2. Volume selling: For sliced pumpkin pieces, I have a promotion strategy. Since I promise my customers to only sell them fresh products and since pumpkin slices get spoiled quicker than the whole pumpkin, I sell them in bundles. So, if a customer buys one bag of pumpkin slices, s/he pays 350 shillings. If s/he buys three bags, s/he pays only 950 shillings (regular price for 3 bags bought separately would be 1,050 shillings (3 times 350). I give them a discount to encourage them to buy more slices. The likelihood of increased sales increases. And, the risk of spoiled pumpkins is transferred away from me to my customers.

3. Secondary revenue stream: If I have not sold the slices to my regular customers before they start getting spoiled, I sell them to a winery who then produces wine for me.

Take away: Now write down in detail what your revenue model looks like.