Revenue streams refer to different types of sources of revenue that a firm has. Revenue is all the money coming into the business.
Operating Revenue – The most common revenue stream
The most common revenue stream for many businesses is from selling products to individual customers and other businesses.
1. Sales Revenue. The business’s revenue mainly comes from selling tangible goods and intangible services. The formula for calculating Sales Revenue is:
Sales Revenue = Price x Quantity
Quantity refers to the number of products sold to customers. If Burger King sells one hamburger for USD$5 on average and it sells 10,000 burgers in one month, then its sales revenue will be USD$50,000 in that month.
Non-Operating Revenue – Other common revenue streams
Let’s take a look now at the most common revenue streams for businesses around the world.
2. Advertising revenue. Google and other social media companies such as Facebook, Twitter or TikTok earn revenue from advertising such as banner ads and text ads. When users click on those banners or click on the links, the company earns revenue. Advertisers also pay the company certain fees per thousand impressions of the ad. The highest paying niches include keywords such as insurance, loans, mortgage, credit, law, real estate or banking.
3. Transaction fees. Many debit card and credit card companies such as Visa, Mastercard, American Express or UnionPay earn money from transaction fees for processing electronic payments between merchants (sellers) and customers (buyers). Some low-cost airlines such as Ryanair or Wizz Air charge additional commission to those customers who pay by a credit card.
4. Franchise license fees and royalties. The world’s largest fast-food restaurants such as McDonalds, Burger King and KFC, coffee shops such as Starbucks or pizza restaurants such as Domino’s Pizza all operate as franchises. When a person wants to open a branch of a chain in the franchising business, he will have to pay for the license fee at the beginning of cooperation and share a part of the sales revenue. This is how McDonalds, Burger King, KFC, Starbucks and Domino’s Pizza earn their revenue as franchisors.
5. Subscription revenue. Many businesses earn revenue from subscription for allowing customers to access and use a good or service. Gyms and fitness clubs sell annual gym memberships to the people who want to use the specialized equipment at the gym to work out. Debit card and credit card companies charge monthly and yearly fees for using the cards to make electronic payments. Cable and satellite television providers also charge subscription fees providing access to various TV channels. Netflix, American subscription streaming service and movie production company, charges monthly subscription costs USD$8.99 for the basic plan, USD$13.99 for the standard plan and USD$17.99 for the premium plan.
6. Licensing content to third parties. This is when the owners of the content keep the copyright, but allow other third parties to use their content for a certain fee. This kind of revenue stream is very popular for businesses involved in music production, photography or arts. Customers pay the owner of the artistic creation a fee to use the work on monthly basis, or per one download. Many websites offering stock photos and vector graphics such as Shutterstock provide access to over 40 million editorial stock photographs and images covering news, sports and entertainment.
7. Merchandise revenue. Many companies in the entertainment industry such as cinemas, amusement parks, theaters, etc., in the sports industry such as soccer clubs, basketball clubs, etc. and universities sell merchandise. Merchandise includes souvenirs, T-shirts, memorabilia, gift cards, notebooks, calendars, keychains, etc. Selling merchandise is not only an additional revenue stream for those companies, in addition to sales revenue from selling regular goods and services, but also serves as a way of promotion as many of the items has the company’s logo printed on them. Just think about all those people wearing Harvard University hoodies on the subway train.
8. Dividends. Shareholders in private limited companies and public limited companies earn dividends, a part of Net Profit After Interest and TAX which they are entitled to as co-owners of those limited companies. Some of the public limited companies not only have been paying dividends to their shareholders for many decades, but these companies have been increasing those dividends every single year during that time. They are known as ‘dividend aristocrats’. The dividend aristocrats that have been paying out and increasing dividends for over 60 years include The Coca Cola Company, Procter & Gamble, Cincinnati Financial Corporation, Genuine Parts Company, Dover Corp, Emerson Electric and 3M. These are great businesses.
9. Capital gains from stocks. Nowadays, companies own shares in other companies. Some companies even own a big part of their biggest competitors. Capital gains occurs when a business sells their marketable securities for a higher price than what the business initially paid for them. Berkshire Hathaway‘s stock portfolio is worth nearly USD$300 billion as this company owns shares in 48 different companies including Apple, Bank of America or General Motors. In the 2018 Annual Report, the company reported USD$2.8 billion in realized capital gains from the sale of its investment securities.
10. Interest earnings. Individuals and businesses can earn interest from bank deposits when saving cash at the bank. Many large conglomerates such as Berkshire Hathaway sit on a massive pile of cash. As of November 24, 2021, Berkshire Hathaway has USD$149,000,000,000 in cash on its Balance Sheet which is the largest cash holding in the company’s history. So, interest earnings can be an important revenue source for very large cash-rich businesses.
11. Renting or leasing assets. The business can receive revenue from renting out buildings, land, machinery or other equipment which it does not currently need in the production process. Revenue from lending assets is considered non-operating revenue unless the business’s main activity is to earn sales revenue from leasing Fixed Assets such as a car rental company The Hertz Corporation.
12. Gains on sale of assets. Sale of property such as buildings, land or machinery is not connected with the core business activity, but considered as non-operational capital gain. Businesses will usually sell unwanted or unused Fixed Assets in order to raise external sources of finance. Because certain types of assets such as land appreciate in value over time, the company can make a profit when the price of the asset at the time of sale exceeds total initial investment. For many businesses, asset sale will be just a one-time gain rather than a recurring revenue.
13. Sponsorship revenue. The sponsors financially support an organization in return for promotional display of the donor’s brand. Many sports clubs and world’s famous athletes receive millions of USD$ in sponsorship deals. Real Madrid from Spain is number one on the list of the biggest sports team sponsorship deals. Real Madrid receives every year USD$158 million from Adidas and USD$34 million from Emirates.
14. Donations. Donations are the main revenue source mainly for charities and non-profit social organizations in the private sector. Donations include both financial and non-financial gifts from rich and generous individuals, and other businesses as well. Many hospitals, medical research centers, religious places, food banks and universities which do not run for-profit rely on donations.
15. Subsidies. Subsidies are offered by the government to producers of widely used commodities to help them reduce their costs of production, so they will not increase prices. Subsidies are an important revenue source for certain producers as they help them to maintain their profit margins without charging customers higher prices at the same time. The governments will usually give subsidies for essential goods and services such as food, energy, medications, education services, transportation, etc.
As you see, revenue of a business does not only come from sales revenue – the sale of goods and services. Money can come into a firm from other means, known as revenue streams, depending on the type of the firm and its activities. Other sources of non-sales revenue are equally important for a business.
Remember that Sales Revenue is not a profit.
The formula for profit
Profit is a positive difference between its Sales Revenue and Costs. In order to calculate the business’s profit, all costs need to be deducted from the total revenue:
Profit = Sales Revenue – Total Costs (TC)
By subtracting Total Costs (TC) from Sales Revenue, the company generates Profit, the ultimate goal of most of the businesses.
