Revenue, the Essential Nature of Revenue

Revenue. Big Red Car here to talk about revenue. Y’all love revenue as much as the Big Red Car loves revenue?

I think you do.

If you whip out your accounting text, you will read first about operating and non-operating revenue. Scratch a little harder, you will learn about sales, rent, dividends, and interest.

If you are really on your game, you may stumble on “contra” revenue. Contra revenue is discounts and returns.

For what we are doing — startups — the revenue picture is slightly different. Let’s bring it into focus, shall we?

Types of revenue

Suppose you are involved with a generic startup and you have identified your world-beating hypothesis and its resultant pain-alleviating good or service. What kind of revenue do you have?

 1. If you sell a particular product, you may have a one time bit of sales revenue. You end up with a check and a customer name.

If you are selling a single product with a long life — Away — you have to make a profit on every sale. There is no real CTA v LTV. The time between sales is too long and the goods are too long lived.

 2. Let’s say you are a SaaS company and are, essentially, renting your product on a monthly basis. You end up with a monthly payment. The more customers you have, the higher your monthly rent revenue.

Nothing is as simple as it seems as you will have MRR (monthly recurring revenue) from original sales, renewals, and upgrades.

You will also have churn — losses of customers and their attendant negative impact on revenue.

 3. You may have subscription revenue — kissing cousin of rent, but slightly different as it may be in addition to one time sales revenue.

Imagine that you sell something to a client (think Harry’s or Dollar Shave Club) like a razor and, then, send him a monthly supply of blades. Combination of one time revenue plus subscription revenue.

Of course, you could afford to lose money on the initial sale if you could make money on the long term relationship.

 4. You may have service revenue which is determined by some level of usage — an example would be an AWS server which prices its service on the level or time period of use.

 5. Some revenue is a combination of a one time sale, subscription revenue, and level of usage revenue.

You can count on the cell phone business for great examples of this combination.

They get you for the phone, the access to cell phone service, and the level of data usage. They have a modestly sophisticated model.

This combination of revenue streams is diversified and provides the ability to focus on LTV of the customer. Once upon a time, cell phone companies could give you the phone for next to nothing and make it up on the monthly service plus the data. Today, phones are more expensive and they finance the phone transaction in their monthly bill.

What is the nature of the revenue of your company’s revenue?

Pricing, Big Red Car?

All of this discussion brings us to the issue of pricing. Pricing — your strategic approach to pricing — creates the revenue stream.

We will discuss pricing in more detail another day, but just as a tease, you need to think about pricing as a means of creating the first dollar of revenue which then becomes the torrent of revenue you want after the value proposition takes hold for the customer.

You can see it is pretty hard to create much follow on revenue if you are selling a mattress. A customer needs a mattress only every so often, right?

On the other hand, if you sell them a sleep mask, sleep masks wear out within six months, you leave them on planes, forget them at hotels — there is a slight recurring revenue.

Razor blades have a constant recurring demand. The money is in the relationship is in the razor blades. I only want to sell 5 razor blades — to every Chinaman?

Cell phones have a combination of equipment purchase, service provision, and data usage. The pricing model is slightly complex.

A special word about MRR

We mentioned MRR earlier, but I want to ensure you realize it is dynamic.

You have the following elements:

 1. New MRR — new customer;

 2. Expansion MRR — existing customer requiring “more” of the product or service;

 3. Reactivation MRR — lost business which returns of its own volition;

 4. Contraction MRR — a negative number which is attributable to existing customers who want “less” of the product or service;

 5. Lost business or churn MRR — a negative number which is attributable to customers who have left and abandoned your product or service.

I introduce this as almost a vocabulary exercise because it is important to know the relative percentages of these elements.

Then, there is “negative” churn which is when Expansion MRR exceeds (Contraction MRR + Churn MRR). Think about that one for a few minutes.

Bottom line it, Big Red

OK, dear reader. You have to know the nature of your revenue.

You may want to develop multiple sources of revenue.

You want to ensure you track New, Expansion, Reactivation, Contraction, Churn MRR.

But, hey, what the Hell do I really know anyway? I’m just a Big Red Car. Be good to someone who needs a lift. Be good to Big Red Cars.

My buddy, the Bonanza