It’s amazing how a business idea that can fit on the proverbial backside of a napkin, can seem such a simple and short concept in its early phases—but as that idea begins to grow, so do all of the associated complexities that accompany any business—and it never seems to stop. This is just one reason why it pays for entrepreneurs to try to keep things as simple as possible. In conceptualizing a revenue model for a new product or service, this is often especially true. 

A startup’s revenue stream is one of the (if not the most) important key performance indicator (KPI)—overcomplicating definitions or processes around your revenues can create issues with reporting, achieving and measuring profitability, and can even introduce unnecessary risk from potential liabilities. Where revenue complications and uncertainties do arise, they should be tracked carefully. Here, we dig into a few ways for founders to develop and forecast simple revenue models. 

The Basics

Before looking at some different revenue models, let’s get the basics out of the way, a definition:

A revenue stream is from where your business generates or earns money, and eventually (hopefully) does so in a capacity where your company can become profitable. Depending on what your business does, your revenue can be the result of selling goods, services, or rentals. For financial institutions, revenues can be the result of purchasing debt or earning revenues on deposit interests. These are just very high-level concepts, and products can of course encompass anything from the sales of online ads space, to physical products like buttons or shoes. On the service side, many consumers enjoy having a lawn care service in the physical world and a Netflix subscription service in the digital. 

For the purpose of this piece, we’ll primarily focus on product-based sales—but in many cases, the same logic can be applied directly to services.

The United Nations' EmpowerWomen.org has a super simple example illustrating revenues projections in pumpkin sales:

This is a dead simple example revenue stream (products sold for cash), and only takes into account gross revenues.

Revenue Stream Examples

Product: You sell a good for a set amount of currency and the transaction ends. Future/repeat sales can occur later, which is ideal; but recurring revenue is not a feature by definition. 

Examples: Shoes, tacos, iPhones

Services: Like products, service-based models can be simple. Today, many online Software as a Service (SaaS) platforms require a monthly or annual subscription. Freelancers, agencies, and other professionals also use change for services when they bill by the hour or on a project basis. 

Examples: Amazon Prime, Stanley Steemer, web development agency

Recurring Revenue: This type of revenue stream builds upon both product and service streams. Rather than a one-time transaction, a customer intends to have the product sent at a specific frequency for an ongoing product or service.

 Examples: Netflix, Adobe Creative Cloud, New York Times subscription

Determining Your Steps to Revenue

In determining your revenue stream, the process may be a simple A to Z in a single step, or as complicated as some of the asymmetric models employed by many of the well-known tech unicorns.

1. Focus on Specific Customer Behaviors

To determine your revenue, first you need to identify the source: your customer. We’ll highlight the difference between pulling in revenue through customers directly and indirectly; but for simplicity's sake, let’s focus on direct exchanges. By pulling in revenue directly from your customers, not only are you already cutting down your steps in the revenue model, but it is easy to track KPIs and report successes to investors or spot issues early.

If your goal is to sell software, the specific customer behavior should be a purchase of said software. If it’s a SaaS offering, this can be a one-time, monthly, or annual fee. The same approach goes for products—when you are selling fish tacos, your customers exchange their currency for your tacos.

In determining your revenue stream, you need to be both detail-oriented and hyper-focused on a specific customer behavior that you can connect directly to your product or service offering.

2. Document the Steps of Your ‘Buyer Journey’

You now know the desired revenue outcome, but the best route forward may actually be to take a look backward. Simply document the steps that you would need to take to go from your customer realizing their need, the whole way to paying you for your product or service, and backtrack through that buyer’s journey.

For each step, write the name of the step and the approximate amount of time it takes, and a couple of sentences that describe what needs to happen in order for that step to be fully completed.

3. Optimize Your Buyer Journey

With your basic buyer journey in place, it should be apparent how to go from taking your product or service from initial framework, to turning open the faucets for your new revenue stream to gush forth into your bank account! 

However, you certainly don’t want any old or thin plumbing that may easily clog your revenue pipeline—so, it’s frequently very important to your customer experience to cut out as many unnecessary steps from the sales/checkout process as possible.

Reducing friction both externally and internally is important, and helps to accelerate growth, which is necessary in growing beyond early trickles of revenue generation.

Cautionary tale of an overly complicated revenue stream 

Take the old website Klout as a cautionary example. When launched, the company offered a ranking system that compiled a person’s social accounts and gave them a ranking factor. Today, influencers are a much bigger part to how many B2C and D2C brands increasingly market themselves; but before that time, Klout was trying to be part of that same solution, sort of.

Unfortunately, Klout pivoted, stumbled, and eventually crashed after they thought they had their revenue model set. By this time, marketing agencies and niche startups had learned to also focus specifically on online influencers as well. Klout’s path to revenue didn’t quite work out, because it relied on users signing up for the free service, and then connecting brands to their highest ranking members, who would receive items for free, while the companies themselves would pay Klout to facilitate the connection. This model unfortunately encouraged some people to find ways to game the system, in exchange for freebies and free consumers items. It sounds complicated, because it was. 

A general lesson here is that you should aim for the fewest number of steps as possible, especially early on in developing an initial revenue stream. But also, it’s important not to cut steps out of your sales process just for the sake of doing so: many kinds of especially higher price tag sales do in fact require some more personalized or time-consuming steps, and these steps should only ever be removed or minimized when you absolutely know how to do so effectively, without sacrificing the sales itself. Optimization is the name of the game, not reduced complexity for the sake of simplicity by itself.

How a Complex Model Led to a Complete Pivot

Have you ever tried to cook sunny-side-up eggs, but instead got to the point where you had to make them into scrambled eggs? Well, this revenue pivot example is similar to that, and comes from a company initially known as Riya. Here, it’s important to know that scrambled eggs are wonderful too, easy to make, and if the initial plan started with scrambled eggs, the chef would have faced far fewer steps in his or her journey to fulfilling some happy taste buds.

To explain where things initially became overly complicated for Riya, it’s important to first understand the differences between symmetric and asymmetric companies:

• Symmetric: The person who uses the product pays for the product. Examples are the likes of shopping on Amazon or using Salesforce. 
• Asymmetric: The user who uses the product or service is not the one who pays for it. Examples of this are Facebook, Google, and Twitter.

It’s no longer considered a hot-take or controversial idea to also call these Asymmetric companies the purveyors of the ‘Attention Economy’ or describe to platform model as “the users are the product.”

The majority of this article focused on symmetric companies, due to their ease in building revenue models. As any aware user of an asymmetric company’s product or service could tell you, the user is in fact the product—though it is very important to note that the user is also the beneficiary of the services provided, at no apparent monetary cost to them. This can mean a person sees ads, their information is sold, or any number of other not-always-transparent methods are used in order to extract value from user data, allowing the product or service to appear 'free to use' from the perspective of the user. 

When Riya launched, they started with an asymmetric revenue model. Not only did it require the business to acquire millions of users, but the process for the company to generate revenue was exceedingly complicated. The flow chart then branched off into different sub-streams—and that is generally a ‘big no-no’ for a startup revenue model. 

Though the model above is certainly not impossible to execute in theory, for a startup already constrained by their finances, time, and focus on user acquisition, navigating this complexity was a massive additional undertaking.

Below are the steps that were initially required for Riya to properly configure its startup revenue stream:

1. Face recognition as a feature gain a lot of users
2. These users would upload a lot of photos to Riya
3. The users would then need to tag these photos using Riya's face recognition technology
4. The steps then branch (THIS IS BAD), whereb these users would then need to either:
5. a. Upload these photos to Flickr and other sites, which would then allow Riya to build a user-generated version of Google images
5. b. Return to Riya very often, making Riya a destination site for online photos
6. Finally, Riya could then generate revenue from online advertising 

Due to complications in their path to growing revenues, it was decided that Riya would need to pivot in an effort to simplify. In doing so, the company became Like.com, a visual style search engine.

Even as an asymmetric company, Like.com instead used a relatively simplified revenue model. In an interview with Munjal Shah, Like.com’s Founder, he discussed how symmetric companies are often easier to run, yet asymmetric companies dominate the tech world today. “One requires millions of users, the other just needs one.” 

After pivoting, Like.com helped people search for soft goods (clothing, accessories, etc.) through a visual format, which shortly thereafter had generated $10 million in revenue. In 2010, Google came along and acquired Like.com for $100M. The shorter, simple revenue model certainly worked out in their favor!

Symmetric companies can often more easily track customer happiness, because when customers aren’t buying, there is an immediately clear picture that an issue has arisen in the buying process, or with the product or service itself. This means that a company only needs to truly cater to its customers, and not burden the business with other asymmetric user measurements and complications.

Shah stated that there are of course known ways to build successful asymmetric companies, including measuring user behaviors or surveying for user feedback—but there are many failed startups along the road toward the ‘next’ dating app or ‘next big’ social network. Shah emphasizes that from day one, prepared Founders need to be able to show a clearly planned and easily understandable path toward achieving revenue and profitability. According to Shah,

Successful entrepreneurs are more interested in being successful than being right. If a customer or a lot of customers tell you it doesn’t make sense, you probably shouldn’t ignore them. And if they do, change, and you will be successful.

Graduates of the Founder Institute are creating some of the world's fastest growing startups, having raised over $1.75BN in funding, and building products people love across over 200 cities worldwide.

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