Brick-and-mortar businesses, purely dot-com businesses and those that have both a physical and Web location use revenue models. This tactic is especially useful for start-ups and can also be practiced in ongoing business management to evaluate and plan ahead. To create a revenue model, the business owner and management will formulate suppositions about the future growth of the company.
A revenue model is a detailed account of how a company will earn income and generate profits. Details as to how products and services are priced are part of a revenue model as is the strategy the business will use to attract and retain customers.The revenue model includes projections of future sales as to quantities over a specific time frame. Revenue models are generally not used for short-term projections. Instead potential profits are projected through a mid-term period, for example, three to five years or a long-term period such as five to 10 years.
Because revenue models use projected estimates of future income, a business must first know the sources of income to begin outlining a revenue model. For example, the revenue streams may be recurring such as in standing orders from repeat customers or subscriptions to services. Transactional revenue is another type of revenue included in models. This income derives from products or services that consistently sell but on no specific schedule. Food products, toiletry items, automobile oil changes and haircuts are examples of what is meant by transactional revenue sources. Revenue from a one-time project is more difficult to estimate. The business may have repeat customers but may not. Services revenue is also unpredictable unless the customer is under contract.
To develop the company strategy on how to attract a sustainable customer base business owners and management becomes familiar with industry trends. In addition, the company needs access to consumer data within the industry. Demographic data helps the business establish strategy for building a customer base and make decisions on advertising, whether to offer free merchandise or services, coupons or gift certificates, or discounted products and services as incentives.
Business owners and management can approach future sales projections from the top down looking at market size for a product and estimating what portion of that market the business can acquire. For example, suppose a market research survey shows 10,000 potential customers in a particular area for a service business. If the business expects to garner a 20 percent market share, then the revenue model would include projections for 2,000 customers. A bottom-up approach estimates how many units, products or services, the company will sell upfront and future growth rates as in quantities per month or per year.