Revenue modeling – Startup essentials

What use is a Business Model without a clearly defined revenue model?

Whereas a business model details the entire framework for a business, complete with operational models and strategies; a revenue model specifically outlines the revenue generation streams, the cost of establishing these streams, and other expenses, so that there is a clear-cut profit goal.

Revenue modeling will detail all the structures put in place for and geared towards revenue generation. Today’s market is competitive, and no business will survive without outlined revenue streams. Sometime in March, I found a post on Instagram where a beddings vendor narrated that she just sat down to do her books, and that was when she realized that she had been running at a loss for about 7 months. Clearly, she was still selling her goods at the same price she sold in 2018, and in that period, the cost of electricity had gone up, rent for the showroom had gone up, importation fees had gone up amongst others.

Somehow, she had felt relaxed selling at the same price, because the cost of the good remained the same thing. Her mistake however was in not factoring in the cost of the other structures put in place for the business. A revenue model should say how much you will spend to get your products out, how much you will sell them for, and what your profit margin will be.

Does this story make revenue modeling clearer to you now?

You are not running an NGO or a Not-For-Profit organization, so why wait until business realities begin to choke you? Revenue modeling should be done before you even commence business operations. Like I have said in an earlier post, even though your idea solves a problem, it is not a business idea until you establish the fact that they are ready to pay for it. And that is the beginning of revenue modeling.

This is particularly a challenge for copycat entrepreneurs because a revenue model is usually unique to a business in a location. So, an e-commerce business in Kenya will have a different revenue model from a similar business in Nigeria. Even within states and cities, policies differ and so do the costs of operations.

To get a good revenue model, you must identify your target market, determine your value proposition, evaluate the revenue model options that apply to you and you think would work best for you. After that, you pick the best revenue model for you and adapt and adjust it to suit your business. Consider also your cost structure and all the expenses you will incur in your processes.

Some startups may have multiple income streams while some tend to start with just one. Check out what others in your space are doing and why they are doing what they do. Some businesses may have product subscriptions, sales of products and services, monetizing on YouTube or any other media, sponsorships, etc. The list goes on and on but varies within industries.

Take note of your recurring revenue; transactional revenue projected revenue and service revenue. Some revenue models you could look at while setting up yours are;

Mark up revenue model – This is a model that will clearly spell out the cost of production and define the markup cost and profit margin. This model is particular to businesses that are into buying and selling.

Commission revenue model: This model tries to reduce distribution costs by setting aside a defined percentage as commission to the seller of the product.

The subscription revenue model for businesses like PayTv or another online streaming platform.

Find what suits your business, and go with it. If you have more revenue modeling tips for start-up entrepreneurs, you can share them in the comment section.