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, no. There 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 Journal, New York Times, New 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