Definition of Revenue Streams
Revenue streams are referred to as the sources of revenues or incomes for a company or a business that can include revenues from projects, sales of services and products, revenues from financing or recurring revenues, etc.
Explanation
Companies obtain revenues, sales and finally profits by generating money by exploring various revenue streams. Just like a big river is formed by many small streams of water bodes, bigger revenues are formed by combination of one or more smaller revenue streams. That said, classification of revenue streams can vary from one business to another.
Examples of Revenue Streams
Revenue streams can be of different sorts. Some examples of revenue streams are:
- Goods and services revenues
- Interest revenues
- Lease or rent revenues
- Dividend revenues
- Revenues from capital gains, pay-offs, etc
- Revenues from selloffs and divestitures
A good example of revenue streams in this context is the search-engine giant Google which earns more than 80% of Alphabet’s revenues through selling advertisement spaces. A similar revenue stream classification is observed by Facebook.
In the last fiscal 2019, Roper Technologies, Inc. announced sale of its Gatan business to Ametek, Inc. for $925mn, in an all-cash deal. The revenue income earned by Roper Technologies, Inc. from this divestiture will be recorded as a one-off revenue income. It is always important to note the treatment of such transactions in the financial statements of the company to understand the revenue streams.
Types of Revenue Streams
Some of the major types of revenue streams are as follows:
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- Products- and Services-Based Revenues: In their normal course of business, companies earn revenues from selling products or providing services to the customers
- Project Revenues: Companies that engage in one-off project or contracts often earn revenues that do not have recurring nature and may only be a one-time transaction
- Recurring Revenue: Revenues that are earned multiple times over specific periods due to repetitive providing of services and sale of products. Such revenues include rental revenues, advertisement revenues, subscription sales, etc
- Transaction-Based Revenues: Revenues that are earned when a transaction occurs, and usually one that demands specific efforts to attract a transaction. For example, a furniture sale can lure customers into buying good sofas at cheaper prices, earning transaction-based revenues
Importance of Revenue Streams
The knowledge of revenue streams are important for businesses because it helps in understanding the nature of revenues, the cyclicality and predictability around the revenues, of course, the assessment and analysis of how to increase or stabilize the revenues for the business.
Take for example, an ecommerce business that is selling books and some office supplies to its customers. The annual revenues are somewhere between $100,000 and $120,000. The team wants to know what part of revenues was generated by selling books, selling office supplies, and selling advertisement spaces. The team will utilize the concept of revenue streams to tackle this problem. It may come up with two streams – product sale (95-96%) and advertisement (5-4%), that make up total sales for the business.
Revenue streams are as important to know as revenues themselves. Companies prepare strategies going forward based on revenues and find revenue streams extremely helpful in estimation. Revenue streams give a segregation of revenue earned or recognized thereby deploying resources efficiently to improve business income.
Advantages of Revenue Streams
Some of the key advantages of revenue streams are as follows:
- Foremostly, revenue streams are the elixir of any business. Now, the more revenue streams, the more diversified the business and the less risky it is to market volatility. Imagine a company A that get revenues from product sale, and a company B that gets revenues from selling products, ads and taking projects from other than regular customers. Company B has more diversity and hence better prospects in economic depredation
- Revenue streams help in predicting and estimating sales and revenues of the business. In situations where revenues are difficult to forecast due to seasonality or volatile market conditions, revenue streams give better insights by deep diving into the end-markets or coming as closer to end users as possible
- Company management can associate the key performance indicators and the Key result areas with the segmented revenue streams to come up with an orderly management of revenue
- Some businesses especially conglomerates have more than 5 or 6 revenue streams. Estimate the overall revenues of the business using a common methodology or parameters might not be helpful and lead to discrepancies. In such circumstances, large businesses make use of different models or sales prediction or pro forma statements to allocate to different revenue streams in their businesses
Disadvantages of Revenue Streams
Some key disadvantages of revenue streams are as follows:
- If not properly addressed and vaguely managed, revenue streams can create a mess in the business. If the company selling books does not have expertise managing the revenues from advertisements, it is of no use to allocate costs to manage unproductive revenue streams
- Revenue streams can be an important factor for investors while valuing businesses as they place utmost importance to revenues whilst forecasting business growth. Any weaknesses or volatility in revenue streams can seriously hurt investor confidence
- Any analysis and management around revenue streams can attract huge costs as businesses need to identify markets, nature of revenues, adjust for cyclicity, etc
Conclusion
Revenue streams are an important function of business model canvass used by companies to strengthen growth and stability. A business canvas is based on 9 elements viz. Partners, activities, costs, value proposition, resources, customer segments, channels, and the revenue streams. Revenue streams are defined by the way through which a business converts value proposition in to financial or economic gains by addressing customer needs.
Companies usually identify with 3 major revenue streams i.e. product- or service-based revenues, finance income revenues, and revenues from one-off events. There can be various other streams through which revenues can be earned. Businesses in the ecommerce and internet spaces have subscription-based models to generate revenue streams. Manufacturing businesses manage revenue streams through product-based earnings. Online businesses have blossomed by collecting revenues through advertisement fees.
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