A revenue stream is one of the foundational building blocks of a business model, and the economic value customers represent it 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.
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Revenue streams vs business models
How Airbnb described its revenue streams as a business model.
One of the greatest misconceptions is around 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 do affect a business model, and a revenue stream is an important 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 understanding revenue streams matter?
In a digitally-driven business world, it’s easy to fall in the trap of focusing on aspects that are too far from monetization. While monetization and revenue streams are not all that is. They are critical building blocks that need to be figured, tested and iterated quickly. From them it is depending 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 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 to 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 from them, it depends on the monetizations of its main asset: the search results page.
Let’s draw a line here.
For simple, more linear business models, the bottom line is highly tied to its key customers.
For more complex business models things get trickier. In short, for platforms, superplatforms and non-linear businesses where there is a more complex interaction between the bottom-line and the key players’ revenue streams are only a small 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, often companies praise themselves to be extremely focused on the bottom line and their key customers.
However, thinking in terms of bottom-line alone, while might give us the appearance of being rational business people, it doesn’t leave space for nonlinear growth, which can be achieved through branding efforts.
When we focus on revenue streams and 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. 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, which helps the company leverage virality to make its brand go in 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), but 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 it might not be so for your potential customers. For instance, you might launch. At that 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 important building block of your business model.
Revenue streams and value propositions
Often times, particularly 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 key customers, thus making the way the company delivers value more complex.
Why testing your revenue streams early on makes sense
In the FourWeekMBA interview to 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.
If you take a case like WeWork, the office-sharing startup who went from Decacorn back to Unicorn, up to touch the ground. The company did grow its revenues, yet it didn’t manage to create a sustainable revenue stream.
Therefore, the only cash at the bank was coming 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 go 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, which 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 built 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.
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 models types based on the kind of interaction we can have with the key customers.
Based on that a whole business model will cascade:
Repeated interaction
The relationship with the key customer doesn’t end after the transaction, but it 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 the 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. In reality, this revenue stream has more holistic and dynamic importance.
When Amazon introduces Prime, it does so, because the service enables 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.
Transactional interaction
In a transactional interaction, the company mostly engages with its key customers on a product or project basis. Usually, a product company has this kind of approach. For instance, Apple comes 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 the best at its launch. Usually, the key customer is engaged on a one-time basis and even if in the long-run she buys multiple products the kind of interaction doesn’t necessarily call for continuous interaction with the key customer.
Intermediated interaction
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 access directly 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.
Direct interaction
In a direct interaction revenue model, the company has access to its customer base and key customers. 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 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 are well aware of how Facebook makes money as it has been so far 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:
- Advertising
- Sponsorships
- Subscriptions
- One-time products and services
- Commissions
- White labeling
- Pay as you go
- Licensing
- And more
Each of those revenue models can influence the overall business model. In many cases, companies rely on several revenue streams. For instance, a publisher like The NY Times runs on advertising, sponsorship and subscription revenues.
Key takeaways
- Revenue streams do affect a business model, and a revenue stream is an important 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, often companies praise themselves to be 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 choice of the kind of business you want to build.
Other resources for your business:
- What Is a Business Model? 30 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
