While a mega-corporation and your nephew’s lemonade stand might not have much in common, revenue is at the core of both businesses. Whereas a lemonade stand likely has a simple revenue model revolving around one product, big and small companies alike often have multiple revenue streams.
But what exactly is a revenue stream? And how many types of revenue streams are there?
In this guide, we’ll explore the answers to these questions, as well as how to choose and manage revenue streams for your business.
What is a revenue stream?
A revenue stream is how a business earns money—usually by selling a product or a service. Businesses can generate revenue by selling one product or service (a single revenue stream), multiple products or services, or a combination of the two (multiple revenue streams).
Just because a business starts with one type of revenue stream doesn’t mean it can’t diversify streams in the future. For example, ecommerce business Epic Gardening started as an income-earning blog before expanding into ecommerce.
Revenue stream vs. income: What’s the difference?
While revenue streams and income both deal with money a business earns, the two concepts are different. Revenue is the gross money a business earns on a transaction. Income, on the other hand, is the net profit, or the amount left over after accounting for expenses.
For example, if your company sells 10 lipsticks at $25 each, the revenue for that product is $250. Meanwhile, the income would subtract expenses like taxes and advertising from that $250.
4 types of revenue streams
- Transaction-based revenue stream
- Recurring revenue stream
- Service revenue stream
- Project revenue stream
There are two main types of revenue: operating and non-operating. Operating revenue is what a business earns from its main business activities, like selling goods. Non-operating revenue comes from indirect revenue sources, such as earning interest on investments.
Within these two categories, you can further classify revenue:
Transaction-based revenue stream
Transaction-based revenue is when a business sells products or services for one-time customer payments. Transaction revenue is a common type of revenue and falls within the operating revenue category. This is a broad category, including a retailer selling clothing, a coffee shop selling lattes, and a software company licensing its products.
Recurring revenue stream
In a recurring revenue stream, customers make ongoing payments at regular intervals. Generally classified as operating revenue, recurring services include:
- Subscriptions and memberships. Customers pay a recurring fee for access to a product or service, such as a monthly magazine, gym passes, or subscription merchandise boxes.
- Rent. Businesses can collect rent by letting customers temporarily use their physical assets for monthly fees, such as warehouse or office space, a vehicle, or other equipment.
- Brokerage fees. These are commissions or fees that a broker charges a client on individual transactions.
- Affiliate marketing. Individuals or businesses (affiliates) can promote third-party products or services and earn a commission on every sale that results from a referral.
Service revenue stream
Service revenue streams come from services rendered on a wage basis—typically an hourly rate. Service revenue includes fees charged by consulting firms and individual professionals (accountants, fitness trainers, therapists, etc.).
Not all services fall within this category. For example, continuing services offered on an indefinite basis would be considered recurring revenue streams.
Project revenue stream
Project revenue streams are similar to service revenue streams, but instead of relying on a time-based calculation, project revenue depends on the completion of certain tasks or milestones. For example, a coder may receive payment in installments based on the successful rollout of a series of websites, apps, or other digital products.
How to choose the right revenue streams
There are several revenue models and just as many factors to consider before creating revenue streams:
1. Do your research
Whether you want to try a new type of revenue (like adding a subscription service to your ecommerce store) or add new products, start with a keen understanding of the field you want to enter. For example, Razvan Romanescu, the co-founder and CEO of Underlining, the parent company of several beauty brands, starts by studying the market in which he hopes to launch a product.
Before selling beauty products, Razvan tested the waters by dropshipping items in different beauty categories. Ultimately, he decided to delve further into the beauty industry—even though it’s a crowded field—because he was sure his brands could stand out. That was particularly the case with eyebrow care and microblading company TatBrow.
“You always have to have a unique selling point or a differentiator,” Razvan tells Shopify Masters. “For TatBrow … we [realized that] microblading, a medical procedure to tattoo your eyebrow a certain color, was exploding across North America. There was a lot of virality coming out around it [and] people having horror stories. So we said, hey, this is a clear opportunity. How can we disrupt a brick-and-mortar trend online with a product that’s cheaper, gives you the same result without the pain, the risk, all of that, for a fraction of the cost? And that’s why our first product was the TatBrow microblading pen, and that was our biggest hit.”
2. Consider your competition
A solid competitor analysis provides insight into what others in the same space are doing well, where there’s room for improvement, and what your shared customer segments prefer. This can reveal areas of opportunity.
For Underlining’s nail powder brand, Nailboo, the co-founders realized there was a niche area that no one had filled yet.
“No one really made [the dip application method] their own on digital or social yet,” Razvan adds. “People are actively spending $80 to $100 per application to get dip powder done and there’s no leading dip brand.”
3. Understand your customers’ needs
Whether you survey individual customers or look through reviews on social media, it’s important to understand your customers’ needs. With the Epic Gardening blog, business owner Kevin Espiritu received comments from readers about a product he used that they wanted to purchase. This pushed Kevin to get answers—and to start his ecommerce store.
“I had products that brands were sending me, products I was testing out in the garden,” Kevin tells Shopify Masters. “I was just kind of listening every time I’d put out a piece of content … to the comments and people kept asking, ‘What are those little raised bed things that you have in your front yard.’ I was like, ‘You know, it's a good question. I actually don't know. Let me go figure out where these things came from.’
“I messaged the manufacturer about three, four times over the course of a year saying, like, ‘Hey, you know, can I get it? Can I get some of these? Can I offer some of these in America?’ They weren’t really big in America yet. Eventually they said yes. And that’s how the whole Shopify store started.”
4. Be mindful about trends
It might be tempting to move into an area because other businesses are, but not every revenue stream will be a fit for you.
“You’ll see so many people try to [offer] subscriptions on something, just because they’ve heard everyone say, ‘Subscription revenue is where it’s at,’” Razvan explains.
“But they never ask themselves: Does your customer even buy in this manner? Do you have a product that even needs a subscription or are you just forcing something?’ If you pick right from the jump, you’re going to have to do all the same things to get the brand where it needs to be. One will take you 10,000 times further than the other.”
Tips for managing revenue streams
After you select your revenue streams, aim to fuel growth. Here are a few tips:
Start small
You don’t need to start big to find success. When Epic Gardening began selling products, Kevin didn’t have a warehouse and instead relied on different vendors.
“[At] the start it was mostly just using vendors that are specialized because I was at least smart enough to know that I didn’t know the world I was jumping into,” he says.
“After some trials and tribulations, I eventually just went to a third-party logistics company … or a company that helps organize your freight to move it across from, in my case, Australia to America. That was actually quite helpful. Eventually, we did in-house our warehousing.”
Find the right partners
The right partners can help you arrive at creative solutions. While dropshipping products, Razvan made “strategic relationships” that helped his companies differentiate themselves.
“When we started Underlining, we actually ended up manufacturing everything to be branded for ourselves to make sure it’s top quality,” he says.
“We moved away from dropshipping, but what our manufacturer did is they own the fulfillment centers in the US and they own the manufacturing facilities overseas. We would pay them as we sold the product, so it was like a hybrid between the two [models]. I would call it premium dropshipping. … We found a very supportive manufacturer that produces for us, doesn’t need all the cash upfront—it’s almost a pay-as-you-go.”
Seek mentors
Mentors who understand your challenges can help you learn the ropes.
“Don’t do what I did and, like, not get a lot of advice. I would recommend having a peer group of people who are somewhat near your level but also having people that are one step function above,” Kevin says.
“So if you’re a $1 million commerce business, try to find someone who’s a $5 million or a $10 million, maybe even in a similar category, so that you can understand what they’re operating like, how they had to change. Presumably, they went from one to five, right? And so what do I need to do to be the person that can run this type of business?”
🌟Looking for a mentor? Discover how to find a business mentor and learn why every entrepreneur can benefit from having one.
Set key performance indicators
Setting and tracking key performance indicators (KPIs) can give you a sense of how your revenue streams are performing. For example, you can measure customer lifetime value (CLTV), which is how much revenue a customer generates for a business over their entire relationship with your brand. You could also measure your revenue growth rate to see how much your company’s revenue has grown over a period of time.
Example of a diverse revenue stream
Epic Gardening was a media company offering tips and information to gardeners. Though it already had several revenue streams (ads, affiliate links, and brand deals), business owner Kevin decided to further diversify its revenue streams.
“It was a YouTube channel; it was a blog; it was social media; it was a podcast,” Kevin says. “The business was making revenue off of that media, so ads or affiliate deals or brand deals. I kind of looked at the landscape and I was like, Why would I just accept a deal from a brand that I like working with? What do they really want? They want my access to my audience, and I have that. … So why wouldn’t I try, at least, to offer something directly to that audience?”
Today, Epic Gardening’s ecommerce store drives 90% of the business’s revenue. The growth has enabled the business to raise capital and acquire seed company Botanical Interest, further diversifying its revenue streams.
“[We] have Epic Gardening,” Kevin adds. “And there’s a media side, and then there’s a product side. And then there’s Botanical Interest, which is a seed company, which doesn’t have the same structure as Epic. Botanical Interest is a business that’s a primarily wholesale business, so we were stocked at 4,500 stores around the country.”
Revenue streams FAQ
What is a revenue stream example?
An example of a revenue stream is selling a product through an online store.
How do I start a revenue stream?
You can start a revenue stream by offering a product or service for sale. Doing market research and considering your audience’s needs can help you create a revenue stream that attracts customers.
What is the difference between revenue and income?
Revenue refers to the total money a business earns. Income refers to the earnings a business keeps after paying expenses.
Why do businesses diversify revenue streams?
Businesses diversify their revenue streams in case one revenue stream dries up. If a business sells a single product, unexpected supply chain issues can affect the manufacturing and transportation of that product, impacting the bottom line.
What revenue streams can ecommerce businesses use?
Retail ecommerce businesses commonly use transaction-based revenue streams, but they can also offer products through a subscription business model.
