Generating Revenues



Revenue (or sales) is the money generated by selling a product or service. Without revenues can a business exist? In the vast majority of cases, noThere are some startup exceptions, especially in Silicon Valley, where businesses are funded in the hopes of hitting a home run later. Instagram and Snapchat are recent examples of this phenomenon but are rare instances.

There are many ways to generate revenues:

  • Selling Units: A grocery store on average carries 20,000 items such as food products, toiletries, medicines etc. There you will find many products from P&G including shampoos, toothpaste, Gillette blades, laundry detergents and so on. Each of these products is sold as a unit. P&G sells these units to the grocery stores, which in turn sells them to people like us.
  • Services: Doctors, plumbers, accountants and lawyers are examples of businesses providing a service.
  • Advertising: Newspapers and magazines make most of their money from selling advertising in their publications. Google makes 90% of its revenues from advertising.
  • Licensing: Software companies like Microsoft and Adobe generate revenues by licensing their products to companies and individuals.
  • Franchising: Examples include McDonald’s, Burger King, Subway and H&R Block tax services.
  • Subscription: Virtually all newspapers and magazines, including The Wall Street JournalNew York TimesNew Yorker and Vogue generate part of their revenues from subscriptions. Netflix and Spotify also generate all their revenues in this manner.
  • Memberships: Examples include Costco, Sam’s Club and many museums.
  • Intermediary: eBay is an excellent example of a company that generates revenues by being an intermediary between buyers and sellers.
  • Transactions: A real estate broker only gets paid when a transaction is completed. Schwab makes money when an investor buys or sells a stock.

Do not get hung up on the exact classification such as whether Netflix is a subscription or a membership service. Just understand that there are many ways to generate revenues. Businesses often combine several of these sources.

  • Amazon sells units (books) and has a subscription service (Amazon Prime). It is also experimenting with a new same day delivery service.
  • Microsoft licenses software, sells Xbox and also sells a monthly Xbox membership service.
  • The Wall Street Journal sells newspapers through annual subscriptions and daily unit sales. They also sell advertising.
  • eBay provides both an online intermediary service and a payment service through PayPal.
  • Costco sells products but makes most of its profits from memberships.

Bottom line, by mixing and matching different processes there are a variety of ways to generate revenue.

In considering revenues, you must not only think about the units you will sell, but also the selling price. There is no exact formula to determine the right price. While competitive prices can provide a barometer, the fundamental factor is the value perceived by the user of your product. Existing businesses also must reexamine their prices periodically. Many consumer items go up in price with inflation. Some products continue to add real or perceived value and are priced accordingly.

We will look at Costs in my next post.

Verinder Syal, Author: Discover The Entrepreneur Within

What Is a Business Model?


business model

At one level, a business model answers the question: “How will the business make money?” Beyond that it is also an idea, process, strategy and an insight that results in value creation for the customers and profits for the enterprise.

IBM, HP, Compaq and others were selling personal and business computers before Michael Dell thought of a new idea while sitting in his dorm room. He reasoned that costs could be reduced by selling directly to the customer and eliminating middlemen like Best Buy. The customer would pay at the time of ordering the computer. This money would be used to finance the inventory. By ordering the exact inventory required, the risk of obsolescence would be reduced. The resulting lower costs could then be passed on to the customer, which would lead to higher sales. This, in a nutshell, was Dell’s business model – new, clean, efficient and elegant.

What was Starbuck’s initial business model? It started off selling upscale coffee beans then pivoted to delivering an experience. It was a high quality, highly customized iteration of coffee and milk in a friendly environment. That is why Howard Schultz coined it “a third space” away from home and work. This allowed them to charge $4 for a product where the ingredient cost of coffee, milk and a paper cup added up to about $0.60.

Without the aid of any business books, The Grateful Dead developed a very successful business model in the 1960s and became one of the top grossing bands without ever having a number one hit. Since they did not like working with the record labels, they concentrated on doing live concerts where they encouraged people to record their music for free. They made their money from selling concert tickets, clothing and other paraphernalia to their intensely devoted following of Deadheads.

The profit component is an important part of the business model. Without profits, a business cannot survive for long; the law of financial gravity inevitably reasserts itself. New business models put pressure and sometimes obsolete even seemingly strong businesses.

Newspapers are a current example of such obsolescence underway.“Newspapers with declining circulations can complain all they want about their readers and even say they have no taste. But you will still go out of business over time. A newspaper is not a public trust – it has a business model that either works or it doesn’t.” – Marc Andreessen

The financial purpose of any business is to make money. You sell a product or service for a certain price, which creates Revenues. You incur Costs to generate these revenues. The difference between the two is Profit.

Revenue – Costs = Profit

This is the fundamental equation of a business. Making a profit is a necessary condition for a business to survive. Yes, there are a few details involved, but this is the basis of profitability.

A business model helps us examine and understand the key elements of the financial equation: how the revenues will be generated, what it will cost to provide the service, what support (overhead) structure will be required and how much capital will be needed to start the business. The goal is to both understand these factors and to find ways to improve the model.

We will discuss all this in greater detail in my subsequent posts. Till then, think about what your business model will be.

Verinder Syal, Author: Discover The Entrepreneur Within