Underpinning any business plan is profitability and cash flow. The Revenue Streams and Cost Structure building blocks of The Business Model Canvas can be used to map out the incomings and outgoings for your business.
This section of the canvas can be used to map out the income generated from each of a company’s Customer Segments. It’s important to note that this building block represents the cash generated from each Customer Segment, not the profit. This can be calculated by subtracting costs from the revenues created by your Customer Segments.
In a customer-focused business model, Revenue Streams are key. So, to generate your Revenue Streams successfully, it’s important to have a customer-centric approach– always consider what value your customers are willing to pay for. That way, your products or services will be priced fairly based on their estimated worth.
There are two different types of Revenue Streams where income can come from:
Transaction based revenues
This type of revenue is earned from customers making a one-time payment of your product or service.
These come from continuous payments for the delivery of the value proposition or for customer care post-purchase.
So, how do you generate Revenue Streams?
This type of sale comes from selling the rights for a physical product to a buyer. For example, Amazon and eBay sell the rights to physical products online.
This type of Revenue Stream comes from the use of a specific service. The price of the service increases the more the customer uses it. For example, telephone operators often charge for usage per minute.
These are generated by selling constant access to a service. For example, monthly subscription fees for Spotify or the Adobe Creative Cloud.
This type of Revenue Stream is produced by giving a fee-paying customer temporary access to an asset for a set period.
This is generated by charging customers licensing fees for granting them access to use protected intellectual property. Licensing is beneficial as it allows a business to generate revenues without manufacturing products or selling services. It’s common within the media industry and in technology sectors.
Revenue Streams– The Key Takeaway:
When mapping out this section of The Business Model Canvas, it can be helpful to think outside the box, for example, generating revenue streams through advertising. Try and be creative and always try to bring it back to the customer: what do they currently pay for and is there a better way for them to pay? And most importantly, what value are they willing to pay for that you can provide?
This is essentially all the most important costs for operating your business model. But notice how this is one of the last posts in our series despite being such a key aspect for businesses. That’s because defining your Key Activities, Key Resources and Key Partners first will enable you to establish all your key outgoing costs. Also, building a great business model that will truly provide value to your customers starts with the customer.
When mapping out this section, consider how you can minimise unnecessary costs whilst still delivering value.
Business model Cost Structures can either be cost-driven or value-driven:
This kind of approach concentrates on reducing costs as much as possible. This can be done through outsourcing and automating wherever possible.
This is a more value centred approach to your Cost Structure which focuses on maximising worth for the customer. At Ashton McGill, this is the approach we take: we aim to provide a highly personalised and tailored service that really focuses on minimising Customer Pains and increasing their Gains.
Once you’ve mapped out what Cost Structure your business model has, let’s think about the different types of costs and their characteristics:
These costs remain unaffected even as your business changes. These include rent and staff salaries.
These types of costs change depending on the quantity of goods and services produced by a business. These include things like raw materials and shipping costs.
Economies of scale
These are cost savings generated from increased levels of output, resulting in the reduction of per-unit costs.
Economies of Scope
Economies of Scope are savings generated when the cost of producing a range of products together is cheaper than manufacturing them individually. For example, several products may share the same marketing activities or Distribution Channels.
Cost Structure— The Key Takeaway:
Once you’ve established if your business model is Cost driven or Value driven, consider which of your Key Resources and Key Activities are the most expensive. And always remember to match these costs to your Value Propositions to ensure your business model is always designed with your customers at its core.
Remember to take a holistic approach and think about how your incomings and outgoings effect your wider business model: how much do each of your Revenue Streams contribute to your overall revenues? Which of your Key Resources are the most cost-effective, and which are the most expensive? These are key aspects underpinning any business model so take your time to really make sure you have these nailed down.
Look out for the final part of our Business Model Canvas series where we look beyond this creative tool to consider the risks involved in a business plan and in the market.