the profit center is now purpose capital
When you start a business and are developing your strategy, an important part of the strategy is going to be your revenue model – after all you need to generate income! There are several revenue models that can be implemented. Many times a business will have more than one revenue stream within their revenue model and determining which ones are the right fit for your business is vital in ensuring the financial sustainability of your company.
I recently read that almost 30% of the small business owners do not have a revenue model in place and that 15% are evaluating their current model to find and fill gaps*. Not having a strong revenue model can have a detrimental impact on your business in the long-term, so I encourage you to be thoughtful and strategic when you are evaluating yours. When you are deciding on your revenue model, a few questions to consider are:
• How does your current/future expense structure align with your revenue model?
• What is your value proposition?
• How are your competitors priced?
• What is your strategy around marketing and customer engagement?
Below are 5 examples of revenue models you can incorporate when developing your revenue strategy for your business.
This revenue model is probably one of the most common and straightforward where you charge your customer a set price for your product or service. There are several pricing tactics you can implement for this revenue model including:
Markup: this is common for product companies, and is when you take the cost of making/purchasing the product and add a % markup to get to the price of the product that will generate a target profit margin.
Project based: if you are a service based business you may consider using this pricing model where you charge a set price for each project that you complete for your client.
Licensing: this revenue model is renting out your good or services to other businesses and people. This is common for intellectual property such as trademarks and patents but you’d retain full rights to the copyright.
This revenue model allows you to offer a product or service to your customers over a period of time and generate income on a recurring basis with payment terms at set intervals like monthly or annually. Many times with subscription based pricing you may offer different tiers of pricing and service offerings to reach a broader customer base who can opt in based on their specific needs. While this revenue model can provide ongoing residual income from one sale, you have to be mindful to track and monitor you attrition or unsubscribe rate.
This is a revenue where the customer only pays for the amount of a product or service that they use, for example charging billable hours for a consultant or service based business. One consideration for this revenue model is that it can be somewhat unpredictable if usage fluctuates from month-to-month.
This revenue model involves selling advertising space for a fee. This can be implemented for both online and offline businesses. For example, if you have a high-traffic website you can charge businesses to place an ad on your page. Another example might be if you own a building and allow a company to advertise on it.
this involves charging either a fixed rate or % of the sale price to generate revenue. This is common for businesses that connect a consumer to a product or service provider. The affiliate model is a type of commission-based revenue where the seller of the product pays you. An example being you place a link to a product on your website, and when a customer uses that link to purchase the product on a third-party site, you earn a commission.
Understanding the different revenue streams for your business and the drivers for each will help you build out your revenue goals in your financial projections and assign the appropriate costs to each.
* Source: https://www.incfile.com/blog/incfile-small-business-owners-and-finances-survey
Purpose Capital is a strategic finance consulting firm that supports leaders of high-impact organizations effectively manage their financial resources.