8.13 Revenue Streams

Revenue Streams is the building block representing the cash (not profit, which is revenue minus costs) a company generates from each Customer Segment.
Such Revenues are the lifeblood of a company. Revenue Stream may have different pricing mechanisms, such as fixed list prices, bargaining, auctioning, market dependent, volume dependent, or yield management.
A business model also distinguishes revenues resulting from 1. one-time customer payments from 2. recurring revenues where ongoing payments deliver a Value Proposition or after-sales services to a customer. Companies continually research the answers to such questions as: What are customers willing to pay for what value? How are they currently paying, and are they satisfied doing so? How much does each Revenue Stream contribute to overall revenues and profits?

Revenue Streams can be generated in many ways:

Asset sale

Ownership rights are sold of a physical product. Amazon.com sells books, music, consumer electronics, etc. online. Ford sells automobiles, which buyers are free to drive, resell, or dispose of.

Usage fee

Use of a particular service is sold, the amount paid depending on the usage. A telecom company may charge on the type of call and minutes spent on the phone. A hotel charges customers by the type of room and nights occupied. A delivery service charges customers for the delivery of a parcel from one location to another.

Subscription fees

Here a continuous or repeated access to a service is sold. A gym sells its members a monthly or yearly subscription for access to its exercise facilities. World of Warcraft Online, a Web-based computer game, allows users to play an online game in exchange for a monthly subscription. Nokia's music service gives users access to a music library for a subscription fee.

Lending/Renting/Leasing

The Revenue Stream is created by granting someone the exclusive right to a particular asset for a fixed period in return for a fee. Lenders receive recurring revenues, and lessees pay a fraction of the full cost of ownership. Rentals (cars, cottages, farm machinery, etc.) are familiar examples.

Licensing

Here the content owners retain copyright while selling licenses to third parties. Media companies obtain their revenues in this manner, as do patent holders of particular technologies.

Brokerage fees

Revenue here derives from an intermediation services performed on behalf of two or more parties. Brokers and real estate agents earn a commission each time they successfully match a buyer with seller. Credit card providers earn revenues by taking a percentage of the value of each sales transaction executed between credit card merchants and customers.

Advertising

Fees for advertising a particular product, service or brand form the basis of this Revenue Stream. Newspapers, and the media industry generally, rely on this approach, which has spread to website advertising and to software sales.

Pricing Mechanisms

Pricing may be Fixed or Dynamic. The first is based on static variables. A List Price is as stated in the brochure etc., but may be subject to discounts depending on the number of items purchased or service required. Price may also be tailored to characteristics of the particular Customer Segment. Dynamic Pricing, by contrast, depends on market conditions, and is subject to the power and negotiating skill of the purchaser. In Yield Management the price depends on the inventory and time of purchase (as in airline seats or hotel rooms). Price in real-time markets is dynamically established by supply and demands conditions. Prices at auction result from competitive bidding.

Relevant Case Studies

Nitendo reinvested its revenue streams in low-tech games.

Amazon reinvested book sale revenues into general retail and then computing services.

Dale Abrahams had no significant advantages in any business element, and so lost money.

Intel spent billions of its revenues on marketing its logo to PC purchasers, but got the money back through premium-priced chips.

PayPal had to spend lavishly on marketing a 'sure fire thing'.

Questions

1. What are revenue streams exactly? Why are they important?
2. What are the seven types of revenue streams?
3. Describe the different pricing mechanisms.
4. What ebusiness approaches and technology bear on revenue streams?

Sources and Further Reading

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