A revenue stream consists of the different distinct source from which the revenues are generated.
Now, let’s break the words and make it more easy for you to understand.
The revenue stream is made up of two words, i.e., revenue and stream. Here, ‘revenue’ means income generated from the sales to the customer or the turnover of the business. And, ‘stream’ actually means the source or the origin.
Altogether, ‘revenue stream’ stands for different sources from which the revenues are generated.
These sources include either a product or a service.
Well, do you know it’s always said to focus more on building more and more revenue streams?
Now, a question arises why. So, here lies the answer in the given fact.
In the business world, businesses should focus on building more and more revenue streams so if one of your streams appears to be weak, then you could depend on other streams.
A company producing more products or offering more services are considered to have more revenue streams.
It is commonly used by businesses for planning strategy and investment decisions for the business.
Now, let’s look at the types of revenue.
Types of Revenues
Revenue as a whole, are classified as operating and non-operating.
Operating revenues are revenues generated from business’ main operations whereas Non-operating revenues refer to revenues generated from business’ side operations.
Let’s make the concept of revenue stream more clear by looking at the below examples.
Examples of Revenue streams
Revenue streams from business are categorized into two, depending on the nature of the revenue and the products or services from which the revenue is generated:
- Recurring revenue
- Transactional revenue
- Project revenue
- Service revenue
Now, to make the concepts more clear, let’s go briefly in all the above topics.
This revenue occurs for a significant period, often on a monthly or annual basis.
Recurring revenue which occurs every month is termed as Monthly Recurring revenue and those on annual basis, termed as Annual Recurring revenue.
It is mainly used by companies or organisations that sell services or subscriptions or in the commercial contracts or a lease or provision of license.
To make it more clear, let’s take an example of phone bills.
These bills are to be paid monthly. So, there’s a contract between a consumer and the phone company.
Here, receive of the monthly bill by the company is considered as the recurring revenue, occurring regularly.
This revenue occurs through a transaction from a customer from a one-time transaction.
Let’s take an example of a customer who purchases a product like a television or a washing machine, etc.
Here, revenue generated from the sale of goods to the customer results in transactional revenue.
These revenues involve huge cash flows and so the companies put a lot of emphasis on building and maintaining relationships with the customer.
Project revenues involve an unpredictable future, making it difficult to predict the generated revenues.
This revenue is often used in combination with other revenue models.
This involves consultancy firms or agencies that offer advice to clients and generate revenue on an hourly basis.
Ways to generate Revenue Stream
Now, there are numerous ways to generate revenue streams. Some of them are listed below:
- Asset sale
- Subscription fees
- Usage fee
- Brokerage fees
This type of revenue generation is considered a Transactional revenue model.
For example, if a shopkeeper sells his mobile phone to the buyer, then this involves the transfer of ownership right to the buyer and so the buyer is with full freedom over what he/she wants to do with that mobile phone.
This type of revenue generation is considered a Recurring revenue model.
For example, a customer pays monthly or a yearly membership fee to the gym in exchange for access to its exercise facilities.
This generates revenue for the gym in the form of subscription fees.
Also, the daily newspaper or monthly magazines which are delivered to your house involves the subscription fees.
The revenue depends on the customer usage of the service, i.e., more the service is used, more the revenue is generated.
For example, a phone call from your phone. The more the duration of the call, the more the amount is charged from you.
This benefits the lender with the revenue and on the other hand, the lessee does not have to spend the whole amount in purchasing the asset.
Instead, he/she incurs a little expense and use the asset for the duration they want.
For example, Zipcar.com is a good example. This company let customers use their cars and earn revenue on an hourly basis.
This facility has helped people in North American cities to decide to rent rather than purchase cars.
Some revenues are generated in the form of a license fee.
These license fees are charged from a customer for granting them the right to use the protected intellectual property.
For example, content owners sell their usage license to the third parties and in exchange charge license fees from them.
For example, stockbrokers and real estate agents are considered as intermediaries, who earn a commission for establishing a relation between the buyer and the seller.
Credit card providers are another example, where they earn revenue by taking a percentage of the value of each sales transaction executed between credit card merchants and customers.
For example, the media industry and event organizers have heavily relied on advertising revenues from the traditional period.
Recently, software and service sectors are also following the same path.
Importance of Revenue Streams
1. Helps in speedy growth
As companies and businesses start focusing on more than one revenue streams, this helps in accelerated growth rate for them.
2. Reduces the risk of unpredicted future
Multiple revenue streams help businesses cover them from any unexpected government regulation or future competition.
This unexpected regulation or competition may affect one of the revenue streams of the business.
But, if there are multiple revenue streams then, this will cover you up and reduce the risk.
3. Provides freedom to make decisions
Since you have multiple revenue streams, you can do experiments with your products and take radical decisions keeping in mind that even if they affect the business, you will not run out of the financial crisis.