A business requires a solid revenue model if it wants to survive and prosper over time. From a financial modeler’s perspective, the characteristics of such revenues are very vital as they also impact the value of the business. Many business buyers are only willing to pay for a business with recurring revenues but see no value in project related revenues as those revenues can stop at any time (unless the pattern is highly repetitive). It is therefore very difficult to sell a business which is project driven and where its revenue model based on one-time sales. From a financial point of view, revenue model templates have important qualities and characteristics, which makes it essential to correctly understand the nature of each revenue model and the associated risks with it. Therefore, we want to review the characteristics of the different revenue model templates in order to understand their impact on a business valuation much better.
Please note, you can pick any revenue model template Excel example from our financial model directory if you want to have a closer look and study the related financial modeling aspects.
Key Person Related Revenue Models
In some cases, revenue can highly depend on the network and contacts of a key person. This is especially relevant for small companies, which heavily depend on the founder and CEO of the company. Especially in consulting company, all revenues are generated from the contacts of the key person as the main criteria to decide who to hire is trust. If that key person leaves the company, the risk is that the revenues will stop as well. Such revenue models are therefore not sustainable and business buyers shy away from paying high prices for such businesses (or even will refuse to buy). Examples of key person related revenue model templates are the following:
- Consulting businesses
- Project businesses
Revenue model template Excel examples are available for consulting businesses.
One Time vs. Recurring Revenue Models
Great revenue models nearly always have recurring character by turning new customers into repeat buyers. Recurring revenues provide stability to the business and give visibility towards the future cash flows of the business, which makes it much easier to plan on that basis. The opposite of recurring revenues is a project revenue business model, derived from working on one-time projects (e.g. construction of a building, construction of machines). These are mostly projects with a defined start and end date, therefore one needs to search for a new project all the time. The revenue models also determine how much can be spent on acquiring a new customer. One can spend a bit more if when repeat purchases can be expected from a customer as this increases the customer lifetime value. Examples of recurring revenue models:
- Software as a Service businesses
- Food and Beverage related businesses (assuming you need to drink and eat all the time)
- Lubricant and car repair businesses (to keep the car in good order)
- Maintenance and cleaning businesses (e.g. elevator maintenance services, cleaning services)
- Service level agreements & licenses (e.g. software support & licensing)
- Gasoline stations
High Margin vs. Low Margin Revenues
The type of revenue model also determines what kind of profit margin can be achieved with this revenue stream. E.g. many businesses do not like giving away their technologies or brands under a licensing fee model, where they only get a few percent of revenues in income, as they can make a 10% or 20% profit margin when keeping that business by themselves. Important to note here is that each source of revenue also comes with a particular range in which profits are possible and businesses may decide to focus primarily on high-margin revenue models.
The Sources of Revenues
Every business has different sources of revenues, but every business nearly always tries to secure a combination of different sources of revenues in order to capitalize on their know-how and expertise. How to model the sources of revenues can be examined in detail in one of the revenue models excel templates indicated below:
- Product Sales: Revenue models on product sales from manufacturing activities can be quite attractive business models to follow due to their scalability. Selling higher volumes can better cover the fixed costs and therefore increase profits than selling small volumes. One of the most famous examples is the iPhone of Apple where nearly all costs are variable costs through outsourcing the production while the fixed costs (mainly development costs) are covered by large sales volumes worldwide. Examples of such revenue model templates in Excel can be found in the Manufacturing cost and profit per unit model or the Manufacturing Company Model. Important to note also, in the case of manufacturing activities, increasing volumes might also lead to fixed costs jumps over time as additional production capacity will need to be installed. There are also many variations possible where the input parameters vary (e.g. in the case of renewable energy projects such as solar parks or wind parks where the sun hours or wind hours vary from year to year).
- Commissions: Commission income is closely related to product sales. The only difference is that the products which are sold, are not your own product, they are the products of someone else, and you receive just a commission on every successful sale. The advantage of this model is that no capital is bound and one can focus its effort on pure marketing activities. Also, Success Fee income such as from the sale of a company, the closing of a lease contract, or a property can be viewed as a form of commission income.
- Sale of Services: Another common revenue model is the sale of services, such as maintenance services, project-related services such as consulting or construction projects, or education services as shown in the Language School Financial Model Template.
- Subscriptions: Subscription revenue models have been used for many years, especially for newspapers or other informative news content. The subscription model focuses on retaining customers and therefore locking customers in to repeat their purchases, which is the main quality of this model. In recent years, many software companies underwent a transformation and sold their products as a service instead of selling the product one time: Software as a Service (SaaS). Another attractiveness of a subscription model is that revenues can be charged upfront, which provides liquidity to the Example financial model temples which focus on subscriptions as the main source of revenues are SaaS Financial Model 1, SaaS Financial Model 2, Website / App Financial Model, Mobile App Financial Model or the Fitness Center Financial Model.
- Rent: Rental revenue is another attractive source of income since equipment can be rented instead of being sold, which transforms a revenue stream into recurring revenue. For customers, this offers more flexibility as they can benefit from low monthly or yearly variable costs instead of having to incur high purchasing costs upfront. Example financial models are the Rental Machine Business Model or the Equipment Rental Cash Flow Model. In Real Estate, renting properties is the relevant revenue model, for this see the Commercial Real Estate Valuation Model, the Apartment Complex Valuation Model, the Serviced Office Financial Model. When renting properties, important is the length of the lease contract, as obviously revenues are more secure when there is a long-term commitment rather than a short-term arrangement.
- License Revenues: Licenses provide the right to use a brand, trademark, or patent in exchange for ceding a part of the revenues. The advantage for customers is that they do not have to incur costs to acquire know-how up front, instead, they can benefit from established know-how and processes. In many cases, 1% – 2% revenues are paid as a license fee, e.g. in the case of a restaurant chain franchise. See the Restaurant Chain Valuation Model.
- Advertisement Revenues: The revenue is derived from ad impressions or clicks. Famous examples are revenue models of Google AdWords, Facebook, and many others. A revenue model template in excel estimates the monthly ad impressions and applies a revenue per impression or click on it such as shown in the Mobile App Financial Model.
- Other: There are many more revenue models which slightly vary in their characteristics and natures of such revenues starting from financial income, capital gains, etc.
There are many revenue model templates a business can consider when setting up its business model. Also when developing expertise and know-how, many times businesses can expand their sources of revenues and seek to secure a new revenue model. e.g. software companies first develop the software and later on offering support and licensing services. The sources of revenues vary greatly in their qualities and in their characteristics. Great businesses seek to secure recurring and steady sources of revenue.
Some more examples of great revenue model templates in excel are provided below.
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