Diversifying Revenue Streams
Revenue streams are vital to every company and organization. They are the sources from which a business earns money through the sale of goods or services. Revenue streams consist of one-time transactional revenue and recurring revenue.
As a business owner, you often get stuck doing business way one. Hence your revenue and growth potential get limited. By diversifying revenue streams, you can grow the business and increase its value. Here we discuss the most common types of revenue streams and how they impact the value of your business. By consulting with Peak Business Valuation, a business appraiser in Utah, you can discover additional ways to generate revenue.
Transaction-based Revenue Streams:
Sale (Asset) Revenue
This is the main source of revenue for most businesses. It comes from the revenue a company receives from the sale of goods. It is also commonly known as an asset sale. This can be a physical product, business, etc. Once the asset sells, the owner has the right and freedom to do whatever they wish with the asset. Sales are usually one-time customer payments. As such, this type of revenue is often less attractive and less valuable. This is because each sale requires action by the company to continually attract customers. For example, a customer in a grocery store buying a gallon of milk or a bottle of shampoo.
Here a company generates revenue by providing a service to its customers. Service revenue is generated by trading time for money and is ultimately restricted by the time available to transact. As such, the only way to increase service revenue is to increase the number of employees. This presents a limit to revenue generation and can lower the potential value of your business.
An example of a service revenue business model is a consulting firm that charges an hourly rate based on the number of hours spent. However, there are options for business owners to switch service revenue into recurring revenue. This can increase customer loyalty and drive sales. A business valuation analyst/consultant can help you identify opportunities to do this.
Revenue comes by how often a customer uses a service. The more a customer uses the service, the more revenue a business receives. Essentially the customer pays on a per-use basis. Examples include cell phone companies charging per data usage or ATM machines charging per transaction.
Project revenue is earned through one-time projects with new or existing clients. Companies whose main form of revenue is project reliant invest significant effort into maintaining and building customer relationships. Valuing companies who rely on project revenue is difficult as it is hard to know the demand for projects in the future.
Companies collect revenue in the form of interest by selling either an asset or a service to a customer and then extending credit to the customer so they can pay for the purchase over time. Many financial institutions and large furniture companies rely heavily on interest and lending revenue.
This type of revenue is the amount of money a company earns from renting/leasing out space or equipment. Here a company grants the exclusive right to the temporary use of an asset to a customer for a fixed period of time. Examples include Airbnb or Rent-a-car. The agency gives the customer exclusive use to the property for the term of the rental agreement. While the asset is assigned to the customer, no one else can use it. Once the period ends, the asset is assigned to another customer. Rent and lease revenue can be either transactional or recurring revenue.
One earns dividend revenue by holding stocks of other companies.
With this revenue stream, a customer receives permission to use an asset in exchange for paying a licensing fee to the right holder. The advantage of this is that the right holder generates revenue from the intellectual property without the additional cost of making a physical product. For companies who have copyrights or patents, licensing allows a third party to use their intellectual property for a fixed fee or a royalty on all sales. Many examples are found in the music and photography industries. People pay the owner a fee to access their work. The licensee pays a fee on a per-listen or per-use basis. Licensing revenue can also be either transactional or recurring revenue.
This revenue stream makes money by connecting people with people or people with companies. Revenue is generated by the intermediary service performed between two or more parties and received through a referral fee or commission.
Examples of this include credit card companies, real estate agents, and business brokers. A credit card company collects a brokerage fee by connecting the merchant to the customer. The credit card company owns nothing, they just facilitate the transaction. Another example of a brokerage fee is when a real estate broker earns a commission for successfully matching a buyer and a seller. Brokerage fees are typically transactional, one-time revenue.
With unending access to information and content through the internet, many companies create revenue through advertising. This form of revenue makes money by presenting a product, service, or brand on your social media channel, online website, or physical property in exchange for a fee. Advertising can either be transactional or recurring revenue.
Recurring Revenue Streams:
There are a variety of recurring revenue streams. These types of revenue are often the most profitable. Recurring revenue is earnings from ongoing payments for continuing goods or services to your customers.
Recurring revenue is the most predictable and most valuable as it ensures the company’s source of revenue is ongoing. Most companies track recurring revenue on either a monthly basis or an annual basis.
To learn more about each of these, see our blog Growing Your Business Through Recurring Revenue.
- Subscription models
- Membership groups
- Service contracts
- Piggyback services
- Evergreen revenue
There are many examples of recurring revenue business models. For instance, streaming services like Netflix, Spotify, and ESPN. Fitness centers have monthly recurring fees providing access for their users to the gym. Whether you use the service a little or a lot, the price is the same. Companies that collect bills consumers pay on a monthly basis also receive recurring revenue. For instance, water, gas and electric companies operate this way.
Determining the Right Revenue Streams for your Business
The ultimate goal is to create recurring revenue streams. Companies with strong recurring revenue receive the highest valuation multiples. There are many different revenue streams a business can use. The industry a business operates in will also help dictate which revenue models are best. The best way to determine which revenue streams will be profitable for your business is to assess your target market and your value proposition. A business valuation expert can help identify potential opportunities to grow your business and increase revenue streams through a business valuation.
The valuation analyst will conduct market research to assess your strengths and weaknesses. They will also identify areas of opportunity and compare you to your competition. There are many valuable insights one can gain by annually receiving a business valuation.
Peak Business Valuation, a business appraiser in Utah, helps small business owners identify opportunities to grow their business through diversifying revenue streams and creating recurring revenue. We are always happy to answer any questions you have! Please reach out by scheduling a free consultation.
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