How to Secure a Profitable Future for Your Business with the Right Revenue Model
Updated: Apr 13, 2022
Every business wants to be profitable. Without profit, growth would be next to impossible. It becomes even more important for mission-driven entrepreneurs — if you have no profit, how can you hope to further your mission and help the people you serve?
You don’t have to tire yourself out thinking of ways to drive profit. The surest way to increase your profitability is to find the right revenue model.
In this episode, Christina discusses the different components that you need to determine the right revenue model for your business. She also explores how tracking your metrics, using historical data, and creating a pro forma can be beneficial to growing your business.
If you want to find out how the right revenue model can grow your business and social impact effectively, then this episode is for you!
Here are three reasons why you should continue reading:
Determine the right revenue model for your business.
Learn how to create and leverage historical data and pro forma.
Discover the metrics that you need to track.
Visit our website for more insights on choosing the right revenue model and pricing on the Her CEO Journey™ podcast.
Connect with Tara: LinkedIn
[03:58] What BoomStartup Does
BoomStartup is an online platform that tracks business growth and development.
Their curriculum focuses on financial education and funding readiness.
Not all companies are fundable but all are sustainable. In addition to tracking growth, BoomStartup can provide programs and mentoring.
Tune in to the episode to learn more about BoomStartup’s four main programs: PitchUp, OpenUp, RiseUp, AmplifyUp.
[08:51] Focus on the Customer
The customers must be the focal point of the business model.
“If you don’t have a customer, you don’t have a business.”
The packaging — including branding, labelling, pricing, and distribution — of the solution is important because customers interact with it first.
“The very first part about what drives the business model is who is buying it — it's not using, but the wallet.”
The solution must be innovative and completely within your control.
Differentiation shows why your product is unique and valuable.
These three components can influence customer perception and loyalty, as well as profitability and lifetime value.
“It's very difficult, in fact, to create a confident business model that your customers are buying if you don't have complete control over your solution, so please consider that when you're going through the business model components.”
[12:56] Choose One Business Model
Each model has a different measurement. Choose only one revenue or business model that you prefer.
If you want to add another model, do it later. Avoid doing it all at once.
Listen to the full episode to hear about examples of business models!
“The key message over here is that, choose the right business model, the right revenue model at the beginning. Have that, collect the data, and if you are thinking of another revenue model that you want to add on, do it later on instead of doing it all together…”
[18:19] The Six Elements in Choosing a Business Model
Marketing span is vital to ensure you have low acquisition friction.
Predictable result entails tracking results to find out what works in your revenue model.
Structure income is about how you will make money.
Trackable expenditure is about tracking your expenses, while profitability means having a roadmap on how to make a profit.
Scalable model focuses on making processes more efficient.
“Scalability really means, while you are increasing your revenue, you also want to keep thinking, "How can I make my process more efficient?" Because if you make your process efficient while your revenue is increasing, that means your unit of economics, your unit cost is going to go down, and your overall expenditure is supposed to go down as well, and you can eventually achieve profitability.”
[24:28] Revenue Models: What Are Companies Missing?
Most companies miss scalability in their business model.
It usually takes up to two years for companies to become profitable, but the inherent loss must be reduced every year due to a solid income.
Using the six elements as a checklist helps determine if your business model is right.
Early-stage businesses often miss customer acquisition costs.
[27:34] Observing Historical Data
Looking at historical data helps you build a financial model.
“‘If you cannot look back, then you cannot predict going forward.’ I know it’s sometimes counterintuitive because, in this world, we are reminded all the time looking forward, look and have a vision because the past is already past; we don’t need to look back. However, in building a financial model, actually, looking back to the past can help you…”
Historical data can tell you what works and what doesn’t. This information then plays a vital role in creating and improving your model.
Financial data, marketing activity, sales activity, and customer satisfaction are all part of historical data.
[30:51] When You Need a Pro Forma
Pro forma is predicting future results based on historical data, the current situation you’re in, and the current market condition.
“If you are predicting to move forward, let's think about what are the situations where you need a pro forma. Pro forma is basically predicting the future result based on the historical data, based on the current situation that you are in, and the market condition that you are in, and you are predicting the future.”
You’ll need a pro forma when you’re choosing the debt financing route.
Tune in to the full episode to find out how you can use pro forma to predict profit!
[33:10] Hiring People
When and how you hire is directly tied to company revenue and profitability.
The timeline for turning a lead into cash depends on the historical data and pro forma. You can use these to negotiate payments and compensations until you have stronger cash flow.
If you’re hiring but strapped for cash, you can offer equity as part of your compensation.
Without a vision for your business, you cannot convince anyone to invest in it.
[36:12] Three Key Financial Components
The three components are customers, cost of goods sold, and cost of doing business.
Customer also means revenue, and there are two formulas to get your revenue: number of customers and average sales price.
“Customer is the money that you're going to bring in; it's actually your revenue…you don't have customers, you don't have revenue.”
Cost of goods sold is the direct cost you need to serve customers or create a product.
You can’t know your gross profit if you don’t know the cost of goods sold.
If you want to hear Christina discuss these three components more in depth, make sure you listen to the full episode!
[42:42] Growth Correlation
In building a financial model, differentiating cost of goods sold and cost of doing business is essential.
Growth correlation allows you to determine how your revenue will grow.
“Growth correlation is a lot of the time missing in many financial models.”
[45:25] Runways and Breakeven Points
Runway is the months remaining before you run out of cash.
In building your runway, you must understand how much you currently have, the average time you need to collect cash from customers, and deferred revenue.
Breakeven is the time when cash inflow and cash outflow become equal.
Profitability and investing in the next growth stage are things you should consider after the breakeven point.
Businesses must always monitor profitability and runway.
[50:38] Tracking KPIs
The right revenue model will determine the KPI you’ll want to keep track.
The first KPI you’ll want to monitor is top-line KPI or sales — and getting customers is dependent on the supporting KPIs.
Revenue growth is not a standalone metric; it’s supported by other KPIs.
KPIs are essential in building a financial model.
“You’re choosing right revenue models, then you have to choose the right KPI because at the end of the day, all these KPIs are needed to build the right financial models.”
About Christina Sjahli
Christina Sjahli is the CEO of Profit Reimagined™ and the host of Her CEO Journey™. She is also a BoomStartup Accelerator mentor. For the last 20 years, her focus has been translating the company’s vision into a solid financial growth plan with sustainable profit. Now, Christina’s mission is to partner with female founders who use their businesses as a tool for social impact, to create steady, sustainable business finance growth and profits.
About Tara Spalding
Tara Spalding is the Managing Director at BoomStartup and Founder of Hen House Ventures. She’s passionate about helping companies who intend to better the world through technology innovations. Tara helps them find their voice, build their brand, and connect with customers. At BoomStartup, she’s in charge of overseeing programs that help businesses achieve profitability and create investment strategies.
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