Revenue Streams

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Last Updated:September 12, 2023

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What are Revenue Streams?

Revenue streams are the various sources of money through which your start-up or business will generate revenue and profit. It is the source of cash generated from your operations and business activities and the core of your business's income.

These streams vary from business to business and can be one too many. In addition, they might expand or diminish over time as they are tied to the number and ownership of your assets.

The simple notion behind this term is to consider what generates revenue for your business, whether selling a specific asset like cars or a service like accounting software users subscribe to.

Your revenue streams should correlate with the nature of your business. They can be chosen based on the nature of your customers or users. For instance, you could sell your assets "cars" online or directly at a showroom, depending on your customers' segments.

In this case, you could add another income stream by providing insurance solutions for your customers.

An innovative entrepreneur or business person should be able to create strong and stable income streams that will allow the business to grow and sustain itself in the short and long term.

Key Takeaways

Revenue streams are sources of income that allow a business to generate revenue and profit.
Having multiple revenue streams creates stability if one stream declines. Successful companies often have at least 3-4 revenue streams.
Major types of revenue streams include subscriptions, licensing, product sales, services, advertising, leasing/renting, and brokerage fees.
Choose revenue streams based on existing assets and capabilities, target customers, low need for new investments, and ability to leverage current business structure.
Software companies can start with subscriptions, and then add streams like consulting services and licensing once established. Retailers can add services, rentals, or brokerage in addition to core product sales.

How many revenue streams should you have?

Relying on one source of income for your business can be tricky. As for new businesses or start-ups in their initial commercial stages, they might only be able to create one income stream, but as they grow, they should be able to expand those streams.

The idea is simple: if one source of income disappears, it will cause mayhem for you and your business. Therefore, attempting to diversify your sources will allow you to adapt to market changes and other external variables that may cause your firm to struggle.

Many big-to-medium-sized businesses today diversify their sources of cash.

For instance, Amazon has almost six sources of cash. Some of these sources provide digital solutions, while others provide logistical solutions. So we are trying to say that your new income streams can come from different markets than the one you started in.

Some middle-sized businesses still have different sources of cash, like Icons8. They have four streams that allow them to sustain their business and have a safety net in case one stream dries up.

Size doesn't matter if providing another income stream for your business is suitable or correlates to your resources and capabilities.

As previously stated, the objective behind having many streams is to provide some form of safety net for your business. Still, you may also have the resources to provide a new set of services to your consumers, and you must be efficient in how you use your resources.

Companies today understand how to generate several income streams better than most companies before the technology age.

Data collected today can allow you to know what else your customer might need or what others need through the existing resources you can provide for your customer.

Revenue Streams Types

With the many changes in how businesses can be conducted today and how the internet has created new markets where companies can exist virtually and supply their products and services to customers beyond their physical reach.

Multiple revenue streams suit the nature of different businesses and their activities. There are seven of these known today. Some are tangible, and others are created virtually. Let's take a quick look at those seven streams before we delve deeper into them:

Subscriptions
Licensing
Products sale
Services and consulting
Advertising
Leasing and renting
Brokerage fees

As you can see, the seven streams can exist in different combinations in one business. For instance, you could be providing subscriptions to your products online and selling your products directly through an actual shop at a specific location.

Subscription

This model is relevant for software service or SaaS business models. Saas business valuation becomes crucial in determining the worth of such businesses. Users pay for your products or services through a monthly, quarterly, or yearly subscription fee.

The model provides users or customers with access to your products and services rather than owning them. For instance, with Netflix, you get to watch the movies but not own them.

As long as these users or customers pay their subscription fee, they will have access to your products and services. The plans can vary depending on your segment's purchase power and their need for your products and services.

This model has major advantages, like:

You can predict how much revenue your business will generate next month, quarter, or year through the forecast of your customers' churn rate and new MRR.
You can still generate revenue from existing subscribers even if your marketing efforts are hindered or not performing well.
This model has lower risk when compared to upfront purchases for customers, so it is easier to close sales through this model.

From the users' or customers' point of view, this model also has a lot of additional advantages, such as not having to pay high rates, owning a product, or feeling that there won't be any significant losses if they decide not to renew their next month's or year's subscription.

Although this model seems bulletproof, it still has some disadvantages:

Your business can be making major losses if the average period customers subscribe for your products or services is less than your customer acquisition cost CAC payback period.
During the beginning phase, your revenue may be weak or uncertain because your users or clients may need time to recognize your existence.
You will have to invest more resources to avoid high cancellation rates, whether in the quality of your products and services, the information you supply, or so on.

These are some of the known businesses today that use this model as one of the only income streams:

Netflix for streaming
Finmark for SaaS services
Country clubs through memberships (subscription fee)
Subscription box companies like BarkBox
Dollar Shave Club is an e-commerce company

Licensing

This revenue can exist through multiple forms or plans. For instance, in software, licensing was one of the most famous revenue streams before the subscription model.

One of the best-known companies that still use this model is Microsoft. They still provide access to their products through perpetual licensing.

Even though they also provide their products through subscription, you still have the option of purchasing their product licenses. A well-known example of this is their Microsoft Word product.

Software companies can use this model, but a trademark or copyrighted material of your business can also be provided to other companies through licensing.

For instance, Walt Disney is granting McDonald's a license to use some of their copyrighted characters in the promotion of their Happy Meal Toys, or a music production company granting a license to a movie maker to use their songs in their movie.

Now let's see the advantages of this model:

Sense licenses are usually provided for a long-term period, which means you will not worry about churn rates.
You make more cash from upfront purchases.

The disadvantages are:

Your customers will only pay for your license once unless you enhance the licensed product or service and add new features that will make them reconsider their initial purchase.
Your sales can reach zero if no one purchases your licensed products or services during a business month.

Product sale

This model is straightforward, as it means you directly sell your product to your customers. However, unlike other models, when your customers pay for your product through this model, they will own it.

This model can have two forms, either selling through a digital approach like e-commerce companies or brick-and-mortar stores. E-commerce companies are the best example of this income stream.

Some of the best-known companies that use this model are:

Walmart
Ikea
Alibaba
Amazon

Some companies provide products through another revenue model like subscriptions and another set of products through direct sales of tangible products.

For instance, Google provides its GSuite software through subscriptions and sells Google Pixel phones through direct sales.

Advantages of this model are:

Low-ticket items are simpler in terms of selling them
High ticket items allow a large influx of revenue at one time

Disadvantages of the model:

Products usually have lower profit margins than software
Every product will need to be manufactured, and then have a logistics plan like storing it, shipping it, etc.
You can indeed produce products at a cheaper rate as you scale up and grow, but there is a limitation to this.

Services and consulting

This model relies on the existing talent within your company or start-up. For instance, you or your employees may have a specific skill in the IT sector, finance, or any other related talent. This can be provided to others in the form of consultation.

Many businesses offer numerous services, each of which is a distinct source of income. Local companies like car repair shops or hair salons are good examples of a pure service business model.

Other examples include:

Marketing agencies and consultants
Financial advisors
Building inspectors

Services might be an effective way to supplement your income without investing in new assets. For example, investing in R&D for new or additional products is unnecessary.

You can survey your clients or users to understand what services they would like to see or have access to, then utilize your existing in-house skills to provide these services.

Services provide many benefits, like:

You have the right to charge more because most services are one-to-one rather than one-to-many, so you will need fewer clients to meet a particular revenue objective.
For instance, if you need to increase your revenue by $10,000 per month, you only need ten clients who pay $1,000 each for high-value consulting services compared to 1,000 clients who pay $10 monthly for a software subscription.

Nonetheless, we could also list some cons to watch out for:

First, your services are not easy to scale—if you decide to add additional customers or users, your marketing activities will need to be scaled. You need to train and add additional employees to offer these services.
Services require more engaging and moving elements than, for instance, software subscriptions.
Providing a service means more responsibility in regard to the product performance compared to providing a product or a subscription.

Advertising

When you have been recruiting clients for a while, you will occasionally (or typically) naturally develop a customer base for yourself that you can use when offering or selling advertising space. This can be achieved in different ways.

For instance, you might be selling different products and services. Additionally, you might have a podcast where you could create ad breaks and sell those ad break minutes to relevant companies. This is how podcasts and radio stations make money.

Pros of this model:

No extra resources needed to be spent to establish this revenue stream
If you have a wide customer base, this means lucrative ads and high prices for you

Cons of this model:

The brand you will advertise for will be associated with you, so you need to know who and what you will advertise for
If you have a narrow customer base, your revenue wouldn’t be as much.
Ads can be seen as a distraction from experience by your audience, so you need to moderate your ads and maintain consistency. Learning to find the right balance is important!

Leasing and renting

Leasing a product or a service to a buyer means giving exclusive usage rights to them for a specific period. You will need assets to be able to establish this model and to make it actionable for you.

There are numerous e-commerce companies, such as those that allow members to rent out luxury items or those that rent out cars to customers.

Businesses like these often have revenue streams like subscription fees and product sales since some people buy the products after leasing.

Some of the pros of this model:

Over time, a large amount of revenue can be generated from a single asset.
Customers are not required to make elaborate long-term purchases, so it is easier to make sales.

Some of the cons of this model:

Assets generating the initial capital can take a period
Assets are susceptible to depreciation
With time, the wear of assets will likely happen.

Brokerage fees

This approach matches people with other businesses and charges a brokerage fee.

For example, freelancing websites connect you to freelancers and then get a brokerage fee for it, or investment companies that conduct investments on your behalf and take a brokerage fee on successful trades.

Pros of this model:

The ability to match people together will make your revenue stream low. This is because you are not required anymore to deliver products or services.
No payment upfront is required. You collect fees from transactions, and this means less friction for sales.

Cons of this model:

This model is not an easy task to set up. Depending on other income streams will make adding a brokerage fee even harder as it requires serious effort and resources.
Only a few industries rely on brokerage fees. In addition, it requires some noticeable experience in the field to match the right people together.

How to choose a revenue stream?

Choosing this will depend on your type of assets, who you are serving, what you are serving to them, and what your main revenue streams are. In addition, it depends on your business dynamics.

You need to understand your existing assets. These should consist of your teams, resources, ability to do activities, and your anticipated pay-back period.

Knowing these factors will take you to the next step of choosing your revenue stream.

A question should arise based on your assets: What is the most effective strategy to generate revenue from your assets? And with that answer, you'll be halfway through the process.

For instance, if you currently have subscription-based software as a service business, does that mean you also have a talented team behind this software service? If yes, you could add, for instance, the consultancy revenue stream model.

The best revenue stream would be the one that does not require you to make major adjustments to your business structure and wouldn't require you to make serious investments in assets.