Revenue in the Business Model Canvas

In this lesson we cover revenue in the business model canvas. It is one of 9 free lessons in which we cover how to use the business model canvas to grow your startup. We need revenues for our startup as otherwise the lights go out sooner or later. Customers pay us for the value that we provide to them. The amount that they pay us has to cover all of our costs which include our key activities, the resources that we use and the partners who help us deliver.

One of the biggest problems that many startups face is that they deliver value but a customer is not prepared to pay for it. Or not prepared to pay enough to make the business viable. This is what makes the whole process of determining product market fit (or problem-solution fit) so important. It is really easy to create solutions. it is a lot harder to create solutions that people will pay for AND which will cover all the other costs and leave a handsome profit behind.

Photo by Vitaly Taranov on Unsplash

one of the most interesting approaches to revenue in the business model canvas is t give away a solution for free to one or more customer segments. A customer segment which pays for a different type of value then subsidises the free customers. Google does this with the advertisers subsidising free search for the general public. At Dropbox millions of paying users subsidise hundreds of millions of free users.

Revenue Streams is the building block where the cash comes in.

It is important and should match the Cost component of your business model. The difference between the revenue streams and Cost is the profit or loss of your business.

In other words: This is where you confirm the profitability of your business model.

There are many ways to generate revenue. Think of usage or subscription fees, sales, leasing, licensing, brokerage fees for advertising. This is transactional revenue (one-time payment) or recurring revenue. Where the value proposition generates ongoing payments.

Depending on your business model you can have different revenue streams. Two-sided business models can generate revenue from both the demand and supply side. Think of online marketplaces or comparison websites.

Focus on value instead of cost

In many business ideas we see that the production cost determines the selling price.

It is better to look at the value of your product creates for your customer and his willingness to pay for it.

If production cost is the starting point for your pricing strategy larges revenue might be missed.

For example: After programming cost is earned back, the production cost for a copy of the software program is 1% if the selling price. Where the customer value (the willingness of the customer to pay for it) is much higher.

A continuous focus on the customer value is a more successful revenue strategy.

Pricing Mechanisms

Demand and supply dictate the pricing mechanism. It can be fixed (think of List pricing ) where the influence of the buyer is little.

Market conditions dominate dynamic pricing models. This of the taxi rate. During peak hours this is higher.

In other cases the the power of the buyer a big enough to influence the price. Tailored pricing or flexible discounts are examples of dynamic pricing too.

How to determine the best pricing mechanism?

These brief steps help you determines how to setup your revenue streams.

Review your Customer base (from your stakeholdermap if you have created that)
Determine who has the biggest need and the budget and for your products (Revisit the ‘TEST your idea’ step as part of the Innovation Curve)
Which of your potential customers is willing to pay most for your service? Estimate these amounts or find evidence from your Prototype your solution step.)
How do they pay for current alternatives?
What other pricing mechanisms can you apply to their needs?
Estimate cost for development, production and promotion. Does this match with the revenue potential?
Determine the impact on other parts of your Business Model

Your last step is to test your pricing mechanism. Find the evidence it works. Update your Business Model accordingly.

How to Build a Great Business Model Canvas – The FREE Course

In this lesson we have covered revenue in the business model canvas. We have another eight lessons covering all the key aspects of the business model canvas and how you can use it as a firm foundation for your startup or business success.

About Denis Oakley

Explorer | Trail Runner | Mountain Lover

'Big' companies are civilisation. I stay in the wilderness guiding entrepreneurs and startups on their journey to becoming 'Big'.

Then I head back to the frontier

Strategy | Marketing | Operations

As an expert in business strategy and the Business Model Canvas, I've navigated the intricate landscape of startups and business growth. Over the years, I've gained hands-on experience and a profound understanding of the key components that contribute to a successful business model. My insights are not just theoretical; they are rooted in practical knowledge acquired through actively guiding entrepreneurs and startups on their journeys to success.

Now, let's delve into the concepts outlined in the article, shedding light on each aspect related to revenue in the Business Model Canvas.

Revenue in the Business Model Canvas:

Importance of Revenue Streams:
- Revenue Streams are crucial as they signify where the cash flows into the business.
- It should align with the costs in the business model, and the difference between revenue and costs determines the profit or loss.
Generating Revenue:
- Various methods exist for generating revenue, including usage or subscription fees, sales, leasing, licensing, and brokerage fees for advertising.
- Revenue can be transactional (one-time payment) or recurring, where the value proposition generates ongoing payments.
Different Revenue Streams:
- Depending on the business model, different revenue streams can be established.
- Two-sided business models can generate revenue from both the demand and supply sides (e.g., online marketplaces or comparison websites).
Clear Definition of Revenue Streams:
- It's crucial to define revenue streams clearly, taking into account the development, production, and promotion costs of the product.
- The price should match what customers are willing to pay, ensuring the business's viability.
Focus on Customer Value:
- Instead of starting with production costs, it's recommended to focus on the value the product creates for customers and their willingness to pay.
- A continuous focus on customer value leads to a more successful revenue strategy.

Pricing Mechanisms:

Factors Influencing Pricing:
- Demand and supply dictate pricing mechanisms.
- Pricing can be fixed (list pricing) or dynamic, influenced by market conditions or buyer power.
Dynamic Pricing Models:
- Dynamic pricing models adjust based on factors like peak hours (e.g., taxi rates), buyer influence, and tailored pricing or flexible discounts.
Determining the Best Pricing Mechanism:
- Steps to determine the best pricing mechanism include reviewing the customer base, identifying needs and budgets, estimating willingness to pay, considering how customers pay for alternatives, and aligning costs with revenue potential.
Testing and Iterating Pricing Mechanisms:
- The final step involves testing the chosen pricing mechanism and updating the business model based on evidence and outcomes.

Conclusion:

In conclusion, understanding revenue streams and choosing appropriate pricing mechanisms are integral to the success of a business model. These concepts, when applied strategically, contribute to the sustainability and profitability of startups, ensuring they not only survive but thrive in the competitive business landscape. If you're interested in further insights, consider exploring the additional lessons in the free course on building a great Business Model Canvas, authored by Denis Oakley.