2.3. Business Model and Revenue Sources
Lesson objective
Understand how activity is converted into revenue.
A company may sell products, charge subscriptions, license technology, earn commissions, display advertising, or combine several models. Revenue quality depends on recurrence, retention, pricing power, and the cost of serving customers.
Recurring revenue can improve visibility, but it does not guarantee profitability. A business may grow quickly while spending even more to acquire or retain customers.
Determine whether growth comes from volume, price increases, acquisitions, or accounting changes. Each source has a different level of durability.
Turn the business model into simple economics
Revenue ≈ Number of customers/units × Average revenue per customer/unit
Subscription example
2 million paying users at an average $20 per month imply a simple annualized run rate of 2,000,000 × $20 × 12 = $480M, before churn, discounts, usage variation, and other products.
| Model | Key variable | |---|---| | Subscription | Retention, pricing, acquisition cost | | Transaction | Volume, take rate | | Advertising | Audience, engagement, ad demand | | Manufacturing | Units, price, input cost, utilization |
The goal is not one universal formula; it is identifying the variables that actually drive the company.
Essential terms
| Term | Practical meaning | |---|---| | Recurring revenue | Sales that repeat through subscriptions or contracts. | | Retention | The ability to keep customers or revenue over time. | | Pricing power | The ability to raise prices without losing too much demand. |
What you should remember
- Ask how, when, and at what margin the company is paid.
- Separate organic growth from acquisition-driven growth.
Practice
Explain a company's business model to someone who has never used its product.