Entrepreneurial Mindset

What is a Revenue Model?

• A revenue model is a conceptual structure that explains how a business

generates money. It includes where the revenue comes from and the
resources needed for every aspect of the revenue generation strategy of
the business. Sources of revenue can be in the form of commission,
markup, arbitrage, rent, bids and other types of payments. Part of the
revenue model also are the techniques use to generate revenue
• and the target consumers of the product and/or service being offered. It is
one of the important elements of the business model.
 Different Types of Revenue Models

• With the introduction of the Internet, there are numerous revenue

models both online or offline types which startups may use. Here are
some of the most common and effective revenue models employed by
companies, both big and small.
 Commercial and Retail

• In this revenue model physical products are sold in the market either
through business to business (B2B) or business to consumer (B2C).
Retail sales entails setting up a traditional department store or retail
store that offers physical goods to customers. Retailers require shelf
space at existing stores for a fee. Retailing is best suited for products
that require logistics to reach customers. Today, digital products are also
being traded in the marketplace.
1. Selling physical goods - Traditionally this is the retail world that consists
of high-street stores and malls. However, when Amazon came in the 90s,
the E-commerce which offered less price became popular. Selling over
the Internet presented less real estate costs.
2. Selling digital products - Nowadays, there are numerous digital goods that
could just be downloaded and be consumed immediately. They usually do
not have production or inventory costs or even limitations when it comes
to quantity. Digital products could be in the form of songs, e-books,
games and apps for electronic gadgets.
1. A service sold per unit - This model considers the work-hour applied by
lawyers, accountants, consultants and website developers among others. Other
common units include distance of Grab taxis, weight of parcel shipment
companies and bandwidth of internet service providers. This model is also being
applied by platforms such as Get a Freelancer, Upwork and Elance.
2. A service with fixed price - Here the service being offered has a fixed amount.
In the salon and barber shop, the services have its set amount such as haircut,
styling, coloring as well as manicure and pedicure. In the digital marketplace,
Fiverr, each small service is priced at $5 per hour like translation, editing and
marketing.
1. Sale of services for future use - Phones that make use of prepaid payments
or the use of credit cards for future travels are good examples for this
revenue model.
• 6. Daily deals / flash sales - Consumers are given the chance to buy items
at a steep discount. Here, suppliers sell big quantities via a coupon
company (Groupon Philippines is an example) which allow a decrease in
marketing, sales and inventory costs.
• Subscription and Usage Fees
• This category entails offering customers a specific product or service
that customers can pay for over a longer period of time, usually month
to month, or even year to year. Here are the revenue models under this
category:
1. Subscriptions - This model provides a specified service for a
pre-determined periodic charge. Users are charged a recurrent fee
(monthly or annual) for using their services. Annual subscription fee is
charged on a monthly basis by magazines and newspapers in exchange to
deliver a new issue every month for 12 months. These days, Netflix,
Spotify, YouTube and LivePlan used this model in the software, online
movies and mobile carriers.
1. Usage fees - Utilities such as Meralco for electricity, Manila Waters and
Maynilad for water and Converge for providing Internet are good
examples of companies using this revenue model. Mobile phone carriers
also use this model to charge for minutes of outbound calls and quantities
of SMS text messages.
1. Rental - Rental as a revenue model commonly makes use of a physical
asset. The income comes from periodic basis such as monthly or annual
rental. This could also involve one-time payment called lease for
temporary use of the asset such as land or building for instance.
• Licensing
• This model is common among inventors, creators, and intellectual
property owners which grant a license to use their name, products or
services at a predetermined or recurring cost. Here are some models
under this type:
1. License of usage - The revenue model is common among many software
companies such as SPSS. This is also use for legally protected intellectual
property like patents, trademarks, copyrights owners which grant a license
limited by time, territory, distribution and volume to anyone who fulfils their
requirements and pays for it.
2. Certifications - This is slightly different from the use of license. A good
example here are the various anti-virus programs that require certifications to
make full use of them such as MacAfee, Avast and Kaspersky.
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• Auctions and Bids
• Commonly auction happens when a seller offers an item or items for
sale and expects the highest price. In a specific place, the products are
exhibited and participants try to outbid one another by placing higher
bids. The product is awarded to the highest bidder at the end of the
auction.
• Auctions - The traditional auction industry is being used by furniture,
antiques, painting and vintage cars. eBay however has changed the
industry in the 90s. It offered an online platform to link buyers and
sellers. eBay produces revenue streams from several types of fees.
Recently, there is a development of immediate fixed-price sales on
eBay, implying possible change in users' preferences.
• Dynamic pricing - In dynamic pricing, businesses set flexible prices for
products or services based on current market demands. A few marketing
sectors like the travel, hospitality, entertainment, electricity and public
transport retails widely practice dynamic pricing. The airline industry
change prices based on the viability of the seats, number of seats, type of
the seats and also the length of time before which the flight departs.
Therefore, a seat in flight can have several prices based on demand.
• Advertising
• Advertising as a revenue model makes money by charging the
advertiser per size of the space offered in print, the length of the video
in television or the duration of the commercial in radio. Today,
advertisements have become more complex and creative. With the
Internet, pay-per-views and pay for clicks have been added to the list
revenue models.
• Advertisements - Some time ago, advertisements appeared simply in
traditional media such as newspapers, magazines, billboards, television
and radio. Today, advertising also embraces the Internet and expands on
apps and mobile platforms. Facebook, Twitter, Instagram, and WhatsApp
as social media sites together with Search Engine sites that include
Google, YouTube, and Pinterest obtain the bulk of their money using an
advertising revenue model
• Promoted content - Known also as sponsored or suggested content,
promoted content is almost like a regular user content. Some users
consider it as more credible compared to other forms of advertisements.
Others are unmindful that someone paid to promote the content.
Facebook, Twitter and Yelp are social networks that make use of this
model.
• Sponsorships - Sponsorship is basically a fixed promotion. It can involve
placing a logo on a website or on the jerseys of a popular sports team.
Sponsorships are regularly traded on the audience size. Companies may
sponsor, for instance, sports events, conventions, websites, and
Technology, Entertainment, Design (TED) talks.
• Databases
• The reality of every business today is that it needs data to flourish. A
company using this revenue model collects data and then sell them
directly to a consumer or business customer. A number of companies
use this revenue model such as Bloomberg, Reuters, Standard & Poor's,
Thomson Financial, D&B Corporation and the most popular market
research company which is Nielsen. Today, high-quality data is
valuable., because:
• 1.The more special the information, the superior the value.
• 2.All businesses must generate money in order to have revenue. A business
usually produce money out of its various business activities. The more
products
• 3.The usage will be more valuable and expensive when the data is deepened
with thoughtful analysis.
• 4.Some entities focus in lead generation that create and maintain names and
contact information of possible customers and trade them to 3rd parties.
• Transactions and Intermediation
• Revenue in this model comes from transactions that involve the main
profit-making activity of a business. Transactions include the sale of
goods a manufacturer produces or the sale of items a re-seller buys and
then sells. Intermediation refers to bringing together two or more parties
involved in a transaction.
1. Brokerage - In order to facilitate a transaction, a brokerage company serves as a
middleman that connects buyers and sellers. Once the transaction has been
completed, the company normally receives a commission.
2. Transaction enablers - Other entities makes possible the transaction between
two parties. The revenue here is the fee which is usually an exact percentage of
the deal. PayPal is a good example, which makes possible the transaction
between the sellers and buyers. PayPal tries to reduce the credit risk on the part
of the seller and enhance the information and purchase security for buyers.
1. Affiliate - Commonly found in internet marketing, affiliate revenue model
allows a blogger to make money online. This model works once the
affiliate promotes links to relevant products. If the products get sold there
is an affiliate commission that can be collected which can range in
percentage depending on the company. This can work in combination
with ads.
1. Creating a platform - The Internet makes possible the opportunity to connect
sellers with consumers effortlessly. Here, a platform manager is in-charge of
maintaining and upgrading the online marketplace. He takes care of customer
service, payment collection, mediation and even insurance if available. A good
example is Airbnb that provides "breakfast and bed" to those tourists who are
not interested in hotels. Similarly, Etsy links artists and art seekers in its
platform. CDbaby does similar links with music. This revenue model usually
earn money through a specific percent of the deal such as 30% cut of each sale
in Apple's iTunes and App store.
• Revenue and Cost Drivers
• Revenue and cost drivers are important components of any business
model. Usually revenue and costs are reported in gross in financial
statements. However, revenue and costs are really individual elements
that form those gross numbers. Every business model has its own
distinct revenue and cost drivers.
• Revenue Drivers
• All businesses must generate money in order to have revenue. A
business usually produce money out of its various business activities.
The more products
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• and/or services being sold; the more money a business can produce which
provide higher level of revenue.
 • There are several factors to consider when maximizing revenue which are:
1. Revenue channels - Here are the sources of an entrepreneur's revenue
which may come from online sales and ecommerce, through retail sales in
bricks and mortar stores, or through wholesales to other businesses. An
entrepreneur may focus in only one channel or may use a combination.
1. Revenue streams - The total revenue may be composed with various
streams. For instance, a small coffee shop could have the coffee sales,
cake and pastry sales and lunch sales as its streams. An entrepreneur
should decide on the most reliable, productive and lucrative stream he
would focus on.
1. Product and service split - An entrepreneur ought to identify the most
profitable products and/or services of his business. These products and/or
services should be strong enough to compete despite market changes, be
able to have stable revenue and adapt well to changes. The most
productive and flexible products and services, the greater the ability of a
company to deliver continuous and developing income for the business.
1. Value vs volume - The question here involves the choice of selling big
quantity of products/services at low margin or small quantity at a high
margin. The business then can generate a more attractive price point and
no value for customers. Using various new channels, new streams or new
products/services an entrepreneur may aim to balance value and volume
for new sales and more profit levels.
• Cost Drivers
• A cost driver is the direct cause of a cost and its effect on the total cost
incurred. In a business, the concern of continuity and discontinuity of it
is cost. If costs exceed revenue, there is a high probability of
discontinuity. If the costs are less than revenue, there is profit and a big
probability of expansion. If the costs equal revenue, it will depend on
the decision of the entrepreneur whether to close or continue based on
other variables besides costs.
• Income Statement
• Also known as a Profit and Loss Statement, the income statement is a
summary of a company's total revenue and its operating expenses for a
given period such as per month, per quarter of a year or for one year. An
income statement is one of the most essential business financial statements
to determine the operating performance of a business over a period of
time. This statement together with the balance sheet are needed by
potential lenders such as banks, investors, and vendors to determine credit
limits for loan applications
1. Sales - This number represents the total amount of revenue produced by
the business. The figure recorded here is the total sales less any product
returns or sales discounts.
• Cost of Goods Sold - Known also as Cost of Sales this number includes all
of the costs and expenses directly related to the production of goods and/or
services. This amount includes the cost of the materials and labor directly
used to create the good.
1. The formula for computing the COGS is:
• COGS = Beginning Inventory + P - Ending Inventory Where:
• P = Purchases during the period
• The cost of goods sold is vital for analysts, investors, and managers in order to
estimate the company's bottom line (net profit). If COGS increases, net
income will decrease. As a rule of thumb, if an entrepreneur wants to know if
an expense falls under COGS, he just need to consider if this expense has
been an expense even if no sales were produced.
1. Gross Profit - This number is the profit of the company after subtracting
the expenses related to manufacturing and selling its products, or the costs
associated with providing its services. Here the cost of goods sold
(COGS) is deducted from Sales (Revenue).
1. Operating Expenses - These include the expenses incurred every day in
the operation of a business. Often expenses are divided into two
categories which are selling and marketing and general/administrative
expenses. Selling and marketing expenses are directly related to the
selling of a product or service. While general/administrative expenses are
not directly related to the selling of a product or service but necessary in
operating the business. Here are some accounts under operating expenses:
•
 • Selling and marketing expenses
1. Sales salaries - These are the salaries plus bonuses and commissions paid
to all sales representatives.
• Collateral and Promotions - Collateral fees are expenses in producing or
purchasing printed sales materials used by sales personnel in have several
cost drivers connected to it. Say for instance, a production activity may
have a machine, machine operator/s, floor space occupied, power
consumed and the quantity of wastes or rejects.
• The Activity-based Costing (ABC) is a method being used to accurately
identify both the direct and indirect costs in a particular activity. Hence,
cost drivers are very much relevant in the ABC costing system.
• marketing and selling a product and/or service. Promotion fees consist
of all product samples and freebees used to promote or sell a product.
3. Advertising - These are expenses in producing and engaging in print or
multimedia advertising.
4. Other sales costs - These take in all other costs related with selling a
product and/or service. They may include travel, customer meals, sales
meetings, equipment rental for presentations, copying, or miscellaneous
printing costs.
 • General/administrative expenses
1. Office salaries - These include the salaries of full- and part-time office
personnel.
2. Rent - This is the expense acquired to rent or lease office or industrial
space.
3. Utilities - These are expenses heating, air conditioning, electricity,
Internet, water supply and phone usage incurred in connection with the
business.
1. Depreciation - Depreciation takes into account the loss in value of
equipment used usually for a year in a business. Some examples of
equipment that may be subject to depreciation include computers, office
furniture, automobiles, and buildings that an entrepreneur owns.
• Other overhead costs - These are expenses are not clearly connected with
a particular product or function. These types of expenses may consist of
insurance, office supplies, or cleaning services.
5. Total Expenses - This is a sum of all expenses acquired in business, without yet
the taxes or interest expense on interest income, if there is any.
6. Net Income Before Taxes - This figure is the amount of income earned by a
business before paying income taxes by deducting total operating expenses
from gross profit.
7. Taxes - This is the amount of income taxes that an entrepreneur is indebted to
the government both local and national.
8. Net Income - This is the amount of money the business has produced after
paying income taxes.
• Balance Sheet
• The Balance Sheet also known as Statement of Financial Position,
presents ' the financial position of an organization at a specified date. It
is composed of the following three accounts:
• Assets - An asset is something that an entity owns or controls so that a
company can produce economic benefits in its usage. Assets could be
grouped into current and non-current assets. Current assets are those
expected to be realized in the span of one year from the reporting date.
Non-current assets on the other hand, are those that can provide economic
benefits to the company of over than a year.
 • Assets are also categorized in the Balance Sheet on the following basis:
a. Tangible and intangible - Tangible assets include property, plant and
equipment, while intangible assets are those without physical substance
like goodwill.
b. Inventories balance - This includes goods that are held for sale in the
ordinary course of the business such as raw materials, finished goods and
works in progress.
a. Trade receivables - These include the amounts that are payables from
customers upon credit sales. These are presented in the Balance Sheet
after subtracting the allowance for bad debts.
b. Cash and cash equivalents - These include cash in hand together with any
short term investments that are easily convertible into cash.
• Liabilities - A liability is an obligation that a business owes to someone
and its payment could be in cash or other resources. Liabilities are
classified in the Balance Sheet as current or non-current based on the
timeline the company can resolve the liability. Current liabilities are
expected to be settled in one year. Whereas non-current can be settled for
more than a year.
•Liabilities are also classified as follows:
a. Trade and other payables - These mainly include liabilities payable to
suppliers and contractors for credit purchases. Sundry payables which are
too small to be presented alone on the face of the balance sheet are also
classified in this category.
b. Short term borrowings — These usually include bank overdrafts and short
term bank loans with a repayment timetable of under 12 months.
a. Long-term borrowings — These include loans which are to be settled up
for more than one year. Current portion of long-term borrowings contain
the installments of long term borrowings that are payable in one year of
the reporting date.
b. Current Tax Payable - This is usually presented as a separate line item in
the Balance Sheet because of the importance of this amount.
• Equity.- Equity is primarily what the business owes to its owners. This
represents the remainder amount of capital in the business after its assets
are utilized to settle its outstanding liabilities. Hence, it signifies the
difference between the total assets and total liabilities that belongs to the
owners.
 •Equity is usually presented in the Balance Sheet under the following types:
a. Share capital — It represents the amount invested by the owners in the company.
b. Retained Earnings — It comprises the total net profit or loss retained in the business
once the dividends are distributed to the owners.
• The purpose of the balance sheet for a new business is that:
1. It indicates the capital need of the business
2. It helps to identify the allocation of resources
3. It calculates the requirement of seed money you put up, and
• It estimates how much finance is required
• Cash Flow Statement
• A cash flow statement is a financial report that describes the sources of a
company's cash and how that cash was expended over a specified time
period. It advantageous for determining the short-term sustainability of
a company, specifically its ability to provide payment for bills. It is
highly recommended that an entrepreneur studies his cash flow
statement at least every quarter because of its importance to the success
of the business. Often, a company appears to be profitable based on
accounting standards but there isn't enough cash on hand to pay bills.
 • Cash flow statements organize cash receipts and payments based on where they come from
such as operating, investing, or financing activities. A cash flow statement is distributed into
sections by these same three functional areas within the business:
1. Cash flow from operating activities - This is cash produced from the daily business operations.
2. Cash flow from investing activities - This cash is used for investing in assets, as well as the
proceeds from the sale of other businesses, equipment, or other long-term assets.
3. Cash flow from financing activities — This cash is paid or received from issuing and borrowing
of funds.
4. Net Increase or Decrease in Cash — The increases in cash from previous year will be written
typically, and decreases in cash are usually written in (brackets).
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