Even in a small business there may be multiple revenue streams. Revenue streams are derived from different market segments or they can come as an additional revenue stream from an existing customer segment. In examining revenue streams it is important to remember that cost must be subtracted from revenues in order to determine earnings. Too often owners tell me about a great revenue stream that is generating great cash flow for the business, but when we analyze the stream and subtract the cost, the actual earnings are either very small or, in some cases, create a loss.
There are several ways to identify revenue streams:
- The most typical is the selling of a product or service. I look at this as a “one time” revenue stream. I may sell a lawnmower for a fixed price; from that I subtract my hard and soft cost, and the balance is my earnings on that sale.
- Another is the subscription based revenue model. For example, my grandson belongs to an online game group for which he has to pay a monthly fee in order to continue playing. If you belong to a gym you pay a monthly fee for the privilege of exercising in their facility.
- A rental home can create a revenue stream because a tenant is granted the exclusive right to use that home for a fixed period of time for a fee.
- Licensing can be a great revenue stream. By giving customers permission to use protected intellectual property in exchange for a fee the business has a revenue stream while retaining ownership.
There are other revenue streams that can be identified within a given business depending upon the products or services that are offered. In working with clients we have identified other revenue streams that are specifically applicable to a given business.
It is very important that potential revenue streams are identified and then a pricing analysis be completed for each income stream. Price is a factor based on market conditions. The important thing to remember is that you can’t make up a loss per sale by increasing the number of sales.
The value provided to a market segment is the primary factor in determining the sales price and the pricing method for a particular revenue stream.
Revenue streams are one of the key factors in determining the profitability and sustainability for a business. Spend time with your mentor/consultant on this segment of your business and review the pricing of each revenue stream at least every six months.
There is no passion to be found playing small – in settling for a life that is less than the one you are capable of living. Nelson Mandela
Nick J. Petra CFP