The coronavirus pandemic has emphasized the need to diversify revenue streams. Having all your eggs in one basket and depending on one single revenue stream can be risky, especially in the current climate. While you already have your revenue stream, there are ways to identify new opportunities and diversify your income.
If you can tap into different ways to generate revenue, you can keep your income flowing and put your business in a more secure position going forward. By understanding the revenue streams available, you can dive deep into your business to identify opportunities to make money.
In this article, we’re going to look at how you can target new customers, create new revenue streams and stay ahead of the competition.
Skip ahead to:
- What is a revenue stream?
- The importance of revenue streams
- How to choose the right type of revenue stream for your business
- 8 revenue stream examples
What is a revenue stream?
Revenue streams are sources where your business generates money. The sources of income vary depending on your type of business. A revenue stream is not a business model, but it does influence your business model and decisions. Here’s a breakdown of the difference between a business model, revenue stream, and revenue model:
- Revenue stream – the source of your company’s income
- Revenue model – the strategy of managing the revenue streams
- Business models – the structure of the company including your revenue model and streams and how everything works together
Often, when talking about revenue streams, these three terms are used a lot and it’s easy to confuse them. A business can have a single or multiple revenue streams, depending on the business model. When you’re looking at your revenue model, you’re diving deeper into elements like price and your value offering. Your business model takes everything into account, including your revenue streams and model. It’s a way of optimizing your business so that all elements work together to maximize profits.
An example of a company that has multiple revenue streams is the apparel brand, Lululmeon. First, they have eCommerce and digital sales. But, they also sell wholesale products to health clubs, gyms, and fitness centers to increase brand image. Other streams of revenue include sales from temporary shop locations and showrooms. The brand has also branched out into the home fitness world with the Lululemon Mirror, after buying the fitness startup Mirror last year for $500 million.
The importance of revenue streams
Naturally, revenue streams are important because you need an income. It’s no surprise that revenue streams are essential, but they do more than just generate money for your business. You can use revenue streams as a way to evaluate performance across different areas of the business. For any business, revenue is a key performance indicator (KPI).
By having a clear understanding of your revenue streams, you can track patterns and generate revenue projections across the business. If you can spot changes, trends, or dips in income, you can identify the cause and find out where you need to spend more time. Through a good understanding of the different types of revenue streams, you can identify opportunities to make more money.
There is a clear need to diversify revenue streams to help reduce risk in an economic downturn. Advances in technology and a shift to digital transformation across most industries mean that there are new ways to diversify your current products and portfolio. From adding a subscription service to offering online workshops and training for customers, you can diversify revenue streams to target new customer segments.
How to choose the right type of revenue stream for your business
As a startup, you may have to rely on one single source of revenue. But, the quicker you can diversify your revenue streams, the safer your business will be in the long run. Because if your one revenue stream dries up, your business could be in trouble. One of the biggest examples of a company that uses multiple revenue streams to drive growth is Amazon. The online retailer has eCommerce sales, Prime subscription, Amazon Music, AWS, and audible memberships. Of course, you don’t have to be a massive company like Amazon to develop multiple revenue streams.
The best revenue streams for your business depend on your assets, who your customers are, and your current main source of income. With various types of revenue models and streams available, the right revenue streams can differ. At a high level, a company can generate revenue from transactional revenue from a one-off payment like sales or through recurring revenue like a subscription.
Here are three factors to consider when choosing your revenue stream:
- Value proposition – your revenue stream should connect with your value proposition. The value that your product or service delivers should align with your revenue streams.
- The market – your customer base and market fit will determine your revenue streams. If you target individual customers, a subscription service would make sense. But if you’re a software company, then licensing your service could be more suitable.
- Competitors – analyze how your competition generates revenue. You can study their strategies, mistakes, and wins to help you determine your own revenue streams.
A useful tool to help you understand your business model is the Business Model Canvas (BMC). It helps you to visualize and assess your business model and capture value. A BMC includes elements like value proposition, revenue streams, customer segments, and channels to connect the building blocks of your business. Every value proposition should connect with a revenue stream and customer segment. By evaluating your business model as a whole, you can determine the most suitable revenue streams for your business.
8 revenue stream examples
There are several ways businesses can make money. Typically, there are pros and cons to each type of revenue stream. Depending on your value proposition and customers, one revenue stream may be more suitable for you than another. Here are eight examples of revenue streams that represent broad categories of ways your business can make money.
1. Asset sale
Asset sale or selling assets is one of the most mainstream ways that businesses make money across multiple industries. Your business sells something and then your customers own it. An asset sale also occurs when a business owner sells their company. Usually, it’s a one-off transaction sale. Once the sale is complete, typically, a customer can use the product, resell or even destroy it as they own the asset. The sale of a physical product generates revenue for the business.
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2. Usage fees
Usage fees are how much a company charges to use its service. The customer pays you based on the amount they use the service. For example, a phone company charges customers for a certain number of minutes and data. Typically, customers pay a monthly fee to access phone service. Another good example is a car rental. The customer pays a car rental company to rent a car for how many miles they travel. A postal carrier charges you to deliver a parcel from one location to another. Essentially, with usage fees, the more customers use a service, the more they pay.
3. Leasing and renting
This revenue stream is built around customers using a temporary item for a fixed amount of time. For this, you’re giving customers exclusive use of an asset for a specific amount of time. Examples of businesses that use this revenue stream are Airbnb or car rental companies.
Another example of this revenue stream is Rent the Runway, which allows members to rent designer clothes for a specific period of time. The designer rental brand offers both a monthly subscription membership and one-off rentals to customers. Memberships start at $135/month and give users access to up to eight items per month. You can see how they are tapping into multiple revenue streams to develop both recurring revenue and transaction revenue from one-off rental purchases.
4. Advertising fees
Advertising fees are a revenue stream where you make money by charging to showcase a product, service, or brand on your online or offline company assets. Essentially anywhere you charge a fee to advertise and promote another business. An advertising-based revenue stream is often used by businesses that have websites that attract a lot of traffic. You generate revenue by selling ad space.
The benefit of this is that if you have a high-traffic space, online or offline, you can monetize it relatively instantly. The downside is that adverts are everywhere nowadays and you want to consider if you want to distract your customers with an advert. Examples of advertising revenue include incorporating Google Adsense on your website or adverts on your podcast or YouTube channel.
5. Subscription fees
Many businesses utilize a subscription-based revenue stream. Revenue is generated through customers paying for ongoing access to a service. Examples of companies that use subscription fees are Netflix, Shopify, Adobe as well as gym memberships, and fitness studios.
In general, these types of revenue streams tend to be lower monthly amounts so customers continue to pay as it’s something you can easily forget about. As a subscription, customers pay a recurring fee to access a service. Other businesses that use this revenue stream are subscription boxes and some eCommerce companies.
Licensing usually involves one-time customer payments that give a single user or group of users access to a software product. While the owner keeps the copyright, the third party can use the content for free. In the last few years, we’ve seen some major players move away from the licensing model to a subscription-based format.
Companies like Adobe and Microsoft have moved a lot of products to subscription services. But licensing is still a popular option in photography, music, and video games where customers pay to use and access content, while the owner still retains the ownership rights.
7. Brokerage fees
When companies match people with a certain service, they can receive a brokerage fee. In a traditional sense, real estate agents and real estate brokers match people with property and receive a brokerage fee. Other examples of businesses that take brokerage fees are Uber, Booking.com, and Airbnb. They all take a fee matching customers to service.
The benefit of this revenue stream is that you don’t have to deliver the product or service, you simply match the customer with the right business or service. The downside is that this sort of revenue stream really only applies to certain businesses and it takes a lot of time and effort to set up. Any business that acts as an intermediary takes a percentage fee for its services.
8. Consulting or services
The people on your team are also an asset. An asset doesn’t have to be a physical item. You can leverage your team in the form of consulting or services. Examples of this include financial advisors and marketing agencies or consultants. These types of businesses can include both retainer and project work.
Retainer work is similar to a subscription setup where customers would pay a certain amount each month for a specific service. Offering services or consulting is a good way to create a revenue stream without creating brand new assets or developing a new product.
The right revenue stream for your business depends on your value proposition, customers, and your main source of income. While some revenue streams may not be relevant for your business, others could be opportunities to diversify your income and increase future stability.
A great additional revenue stream is one that doesn’t add too much complexity to your current business model. By evaluating your current assets and surveying your existing customers, you can look to identify a new business revenue stream to expand your company.