Revenue Streams
For what value are our customers really willing to pay? For what do they currently pay? How are they currently paying? How would they prefer to pay? How much does each Revenue Stream contribute to overall revenues?
Introduction
Revenue Streams on a business model canvas describe the money the company generates from each of its Customer Segments. Income is calculated from the income minus the costs incurred by the company. Revenue Stream can simply be defined as the main source of business in earning income.
There are two types of Revenue Streams involved in the business model, namely:
- Transaction income generated from one customer transaction.
- Recurring income is derived from continuous payments in terms of providing a Value Proposition to customers and providing support to customers after product purchases.
There are important questions that must be answered in filling out the Revenue Streams block, namely:
- For what value is the customer really willing to pay?
- What are customers paying for today?
- How are current customers paying?
- How do customers pay?
- How much does each Revenue Streams contribute to overall revenue?
Revenue Model
REVENUE MODEL = the strategy the company uses to generate cash from each customer segment
Web/Mobile Revenue Models
“Direct” Revenue Models
- Sales, Product, app, or service sales are the principal revenue source for many web/mobile startups, typically in a one-time transaction that may also lead to follow-on sales.
- Subscriptions, Software, games, and other online products are often sold by a monthly subscription
- Freemium, Use the product for free: upsell/ conversion
- Pay-per-use, Some web products (travel sites and eBay are two simple examples) earn revenue on a “per use” basis, with a subscription or discounted volume purchases optional.
- Virtual, goods Selling virtual goods
- Advertising sale, unique and/or large audience
“Ancillary” Revenue Models
- Referral revenue, Pay for referring traffic/customers to other web or mobile sites or products.
- Affiliate revenue Finder’s fees or commissions from other (typically e-commerce) sites for directing customers to them
- E-mail list rentals Subscription and membership sites often rent their customer e-mail lists to carefully selected advertiser partners
- Back-end offers Add-on sales items from other companies as part of their registration or purchase confirmation processes, or “sell” their existing traffic to a company that strives to monetize it and share the resulting revenue
Physical Revenue Models
Asset Sale
Sale of ownership right to a physical product
Usage Fee
Usage of service. The fee is proportional to the usage of the service. The more a service is used, the more the customer pays. A telecom operator may charge customers for the number of minutes spent on the phone. A hotel charges customers for the number of nights rooms are used. A package delivery service charges customers for the delivery of a parcel from one location to another.
Subscription Fee
Fee for continuous access to a service. A gym sells its members monthly or yearly subscriptions in exchange for access to its exercise facilities. [web/mobile] World of Warcraft Online, a Web-based computer game, allows users to play its online game in exchange for a monthly subscription fee. [web/mobile] Apple’s comes with a Music service that gives users access to a music library for a subscription fee.
Renting
Fee for temporary access to a good or service. For the lender, this provides the advantage of recurring revenues. Renters or lessees, on the other hand, enjoy the benefits of incurring expenses for only a limited time rather than bearing the full costs of ownership. Zipcar.com provides a good illustration. The company allows customers to rent cars by the hour in North American cities. Zipcar.com’s service has led many people to decide to rent rather than purchase automobiles.
Licensing
Fee for use of some Intellectual Property/IP (including software) The Revenue Stream is generated by giving customers permission to use protected intellectual property in exchange for licensing fees. Licensing allows rights-holders to generate revenues from their property without having to manufacture a product or commercialize a service. Licensing is common in the media industry, where content owners retain copyright while selling usage licenses to third parties. Similarly, in technology sectors, patent holders grant other companies the right to use patented technology in return for a license fee.
Intermediation Fee
Often found in marketplaces of various types, a fee for bringing together two or more parties involved in a transaction. Credit card providers, for example, earn revenues by taking a percentage of the value of each sales transaction executed between credit card merchants and customers. Brokers and real estate agents earn a commission each time they successfully match a buyer and seller. Often found in marketplaces of various types, a fee for bringing together two or more parties involved in a transaction
Advertising
Free paid by brands and companies to get in front of potential customers
Each Revenue Streams may have different pricing tactics
Price Model
PRICING MODEL = the tactics you use to set the price in each customer segment
The pricing model is a tactic used to set prices in each Customer Segment.
How do we price the product?
Pricing Models — Physical
• Product-based pricing
• Competitive pricing
• Volume pricing
• Value pricing
• Portfolio pricing
• The razor/razor blade” model
• Subscription
• Time/hourly billing
• Leasing
Pricing Models — Web / Mobile / Cloud
• Product-based pricing
• Subscription
• Freemium
• Pay-per-use
• Virtual goods
• Advertising sales
How Much Do We Charge? (Pricing Tactics)
- Two-part question:
Assesses the costs of doing business
How much will we charge → “what’s the price?” - A good pricing model:
recognizes Market Type
accommodates manufacturing costs
the value the product delivers
market beliefs
competitive prices
Pricing Mechanisms
Below there are several options for pricing that can be seen
- Productbased pricing Based on a multiple of actual product cost. Usually for physical goods. (Typically priced for maximum revenue/profit versus volume)
- Competitive pricing Positions the product against others in its competitive set, typically in existing markets.
- Volume pricing Designed to encourage multiple purchases or users, in situations ranging from office supplies to SAAS software. Value pricing Based on the value delivered by the product rather than the cost itself. Investing or accounting software tools, unique patented products and pharmaceuticals can sometimes optimize profits with this model.
- Portfolio pricing For companies with multiple products and services, each with a different cost and utility. Here the objective is to make money with the portfolio, some with high markups and some with low, depending on competition, lock-in, value delivered, and loyal customers.
- The “razor/ razor blade” model Part of the product is free or inexpensive, but it pulls through highly profitable repeat purchases on an ongoing basis. (Think of the cost of ink-jet printers compared with the cost of the ink.) Often challenging for startups due to the upfront cost.
- Subscription While now thought of as a software strategy, the Book of the Month Club pioneered this for physical products.
- Leasing Lowers the entry cost for customers. Provides constant earnings over a period of years.
Some of these questions can help you in pricing:
• What are my customers paying for?
• What capacity do my customers have to pay?
• How will you package your product?
• How will you price the offerings?
• What constitutes cost for the company?
• What are the key financial metrics for your business model?
• What are the risk involved?
In pricing, start with a few key assumptions, such as:
• Target market
• Package
• Product development
• Sales
• Personnel
• Financing
References
- Riyanthi Sianturi: Revenue Streams
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