Business Revenue Models

• Revenue models explain how a business generates money

Types of Revenue

• Commercial retail involves selling physical products in the market, either through business-to-business transactions
  • This includes selling physical goods, digital products, services per unit, fixed-price services, and future service sales
• Subscription and usage fees involve customers paying for a product or service over a longer period, such as monthly or yearly
  • This includes subscriptions, usage fees, and rentals
• Licensing is common among inventors and intellectual property owners, granting licenses to use names, products, or services at a set cost
  • This includes licenses of usage and certifications
• Auctions and bids occur when a seller offers items for sale, expecting the highest price
  • This includes traditional auctions and dynamic pricing
• Advertising generates revenue by charging advertisers for ad space in print, TV, or radio
  • This includes advertisements, promoted content, and sponsorships
• Databases involve companies collecting and selling data to consumers or businesses
• Transactions and intermediation
  • Transactions covers the sale of goods a manufacturer produces and the sale of items a reseller buys and sells
  • Intermediation involves bringing together parties in a transaction
    • These transactions include brokerage, transaction enablers, affiliates, and platform creation

Revenue and Cost Drivers

• They are important components of any business model
• Revenue drivers involve businesses making money from various activities
  • More products and services sold lead to higher revenue
• Maximizing revenue involves several factors
  • Revenue channels are sources of an entrepreneur's revenue, such as online sales, e-commerce, retail stores or wholesale
  • Revenue streams are the total revenue potentially composed of multiple streams
  • An entrepreneur should identify the most profitable products or services
• Value vs. volume involves deciding whether to sell a large quantity of products/services at a low margin or a small quantity at a high margin
• Cost drivers are the direct cause of cost and its effect on the total cost incurred
• Activity-based costing (ABC) accurately identifies both direct and indirect costs in a particular activity

Pricing Strategies

• Price is a significant element of the marketing mix and the company's complete source of earning
• For startups, three common pricing strategies are used
  • Maximization (revenue growth): Startups use maximization when they make pricing produce the greatest revenue for the business
  • Penetration (market share): Setting low prices in a competitive market to win dominant market share and raising it later.
  • Skimming (profit maximization): Setting high prices and systematically broadening the product offering to address more of the customer base at lower prices as the market progresses
• Calculating price is essential and includes promotion, distribution, and people.
• Cost-led pricing involves adding all expenses (direct material, direct labor, overhead) plus a profit margin to determine the price
• Target-return pricing prices products/services based on a target rate of return on investment
• Value-based pricing uses customer perception of worth to determine pricing
• Bootstrapping involves starting a company with little capital, relying on outside investments
  • Includes looking for seed money,starting with a minimum viable product and using customers
• Crowdsourcing: Getting work, information, or opinions from a big group of people
• Equity financing involves generating capital through selling shares

Stages of Equity Financing

• Pre-seed funding
• Seed funding
• Early-stage investment
• Later-stage investment
• Mezzanine financing

Forms of Equity Financing

• Individual private investors: Seeking assistance from individual investors to raise money
• Venture Capitalists (VCs): Investors provide money after the company has been operating successfully for some years and they already feel it is an established one
  • Early-stage: Provides seed money to start a business
  • Expansion: The small company has a product/service offering and identifies its target market
  • Buy out: The VCs will be providing money to buy out a company or buy out branches of other companies
• Angel investors: Individuals or groups provide financial backing early on at favorable terms, without participating in management
  • Family investor
  • Relationship investor
  • Idea investor
  • Once-removed investor
  • Archangel investor
• Crowdfunding: Raising money by collecting donations from a large number of individuals
  • Donation
  • Reward
  • Lending
  • Equity
• Initial Public Offering: Established companies generate funds through an IPO
• Financial statements represent a formal record of financial activities
  • Income statement
  • Balance sheet
  • Cash flow statement