Business Model Canvas - Building Blocks - 05 - Revenue Streams

Revenue Streams = How much money the company makes from each customer segment ?

Note: Costs must be subtracted from revenues to create earnings)

If,

 customers = heart of business model

then,

 revenue = arteries.

The question a company must ask itself, for what value is each customer segment truly willing to pay? Successfully, answering this question allows the firm to generate one or more revenue streams from each customer segment. 

Each revenue stream may have different pricing mechanisms, such as:

• fixed list prices
• bargaining
• auctioning
• market dependent
• volume dependent
• yield management

A business model can involve two different types of revenue streams:

1. Transaction revenues resulting from one time customer payments.
2. Recurring revenues resulting from ongoing payments to either deliver a Value Proposition to customers or provide post-purchase customer support.

Questions to ask ourselves while thinking about Revenue Streams:

• For what value proposition are our customers truly 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?

These are some ways to generate Revenue Streams:

• Asset Sale:
  
• This is the most widely understood Revenue Stream.
  
• It derives from selling ownership rights to a physical product.
  
• Example: Maruti sells automobiles, which buyers are free to drive, resell, or even destroy.
• Usage Fee:
  
• This Revenue Stream is generated by use of a particular service. The more a service is used, the more the customer pays.
  
• Example: BSNL/MTNL may charge customers for the number of minutes spent on the phone.
  
• Ginger hotel charges its customers for the number of night roooms used.
  
• DTDC package delivery charges customers for the delivery of a parcel from one location to another.
• Subscription Fees:
  
• This Revenue Stream is generated by selling continuous access to a service.
  
• Example: A fitness club provides access to its facilites in exchange for monthly or yearly subscriptions.
  
• JustBooks is a library which allows users to access reading unlimited  books in exchange for monthly subscription fees.
• Lending/Renting/Leasing:
  
• Make money by temporarily granting someone the exclusive right to use a particular asset for a fixed period in return for a fee.
  
• Example: Ramesh Tours and Travels - allows customers to rent luxurious cars by the hour in Bangalore. Ramesh Babu's service has led many people to decide to rent rather than purchase automobiles.
• Licensing:
  
• This revenue stream is generated by giving customers permission to use protected intellectual property in exchange for licensing fees.
•  Licensing is common in media industry and technology sectors.
• Brokerage Fees:
  
• Generated by Inter-mediation services performed on behalf of two or more parties.
  
• Example: Real Estate agents
• Advertising:
  
• Results from fees for advertising a particular product, service or brand.
  
• Example: In recent years, software and services, have started relying on advertising revenues.

Each Revenue streams can have a different pricing mechanisms. The type of pricing mechanism chosen can make a big difference in terms of revenues generated. 

There are two main types of pricing mechanism: 

• fixed pricing
• dynamic pricing

1. Fixed Pricing - Predefined prices are based on static variables
• List Price - Fixed price of individual products, services or other value propositions.
• Product Feature Dependent - Price dependent on the number or quality of value propositions features.
• Customer segment dependent - Price dependent on the type of the customer segment.
• Volume Dependent - Price as the function of the quantity purchased.
2. Dynamic Pricing: Prices change based on market conditions
• Negotiation (bargaining) - Price negotiated between two or more partners depending on negotiation power and negotiation skills.
• Yield management - Price depends on inventory and time of purchase (normally used for perishable resources such as hotel rooms or airline seats.)
• Real-time market - Price is established dynamically based on supply and demand.
• Auctions - Price determined by outcome of competitive bidding.