Geri De jose Demonteverde (entrep report)

Revenue Models and Financing

What is a revenue model?

A revenue model is a conceptual structure that states and explains the revenue earning strategy of the
business. It includes the offerings of value, the revenue generation techniques, the revenue sources, and
the target consumer of the product offered. Revenue can be generated from a myriad of sources, can be in
the form of commission, markup, arbitrage, rent, bids, etc. and can include recurring payments or just a
one-time payment. A revenue model includes every aspect of the revenue generation strategy of the
business.

How to develop a revenue model:

1. Identify your target customer
2. Determine your business/company’s value proposition (defines the benefits your company's products
and services offer to the customer. This explains the essence of your business in a way that compels the
customer to buy or avail your products and/or services)
3. Evaluate revenue model options
4. Select revenue model
5. Adapt and adjust

Types of revenue models:

Markup(commercial/retail)
- the most common and oldest revenue model that businesses use
- come up with the selling price of the good/product by adding profits and overhead charges to its initial
cost price
- commonly used by retailers, wholesalers, etc. who act as middlemen and buy the products from
manufacturers/other parties before selling it to others

Arbitrage
- makes use of the price difference between two different markets of the same good
- buying security, currency, and/or commodity in one market and simultaneously selling that same product
in another market at a higher price - and thus, making profits from the temporary price difference.

Licensing
- common among inventors, creators, and intellectual property owners which grant a license to use their
name, products or services at a predetermined or recurring cost. The revenue model is common among
many software companies and legally protected intellectual property owners (intangible assets such as
patents, trademarks, copyrights, etc) which grant a license (with terms and conditions) *time, territory,
distribution, volume, etc.

Commission
- a type of transactional revenue model where a party charges commission for every transaction/action it
mediates between two parties or any lead it provides to the other party
- one of the most common revenue earning strategy among the online marketplaces
and aggregators where they provide a platform for selling items digitally and charge a commission as a
percentage or fixed price on every item sold. (e.g. Affiliates, brokers, and auctioneers)

Rent/Lease
- a physical asset is involved
- could be recurring (rent) or one time (lease) payment for temporary use of the asset.
Subscription
- common strategy among SaaS, entertainment services, and online hosting companies
like Netflix, Youtube, spotify, where they provide the specified service for a pre-determined periodic cost.

Advertising
- usually adopted by media houses and information providers which usually earn money by including
advertisements in their content

Fee-For-Service
- charges the customers for the type of service or the number of times that service is provided
- pay-as-you-go or pay-per-usage revenue model where the customer pays only for the services he actually
consumed
- common in telecom and cloud-based services industries.

Interest
- interest-based revenue strategy or an investment based revenue strategy is common among banks. Banks
usually generate revenue in the form of interest on their offerings (loans).

Donation
- Many companies provide their products and services free of cost and rely totally on donations paid to
them by their customers. These companies hardly make any profits as donations usually cover only their
operating costs. (Wikipedia)

Financing
- activity of funding the many aspects of a business (borrowing, investing and/or purchasing)
- Equity is simply money obtained from investors in exchange for ownership of a company, while debt
comes in the form of loans from banks that must be repaid over time.

Debt Financing

- is the process of borrowing funds from another party

- this money must be repaid to the lender, usually with interest

- Debt financing may be secured from many sources: banks, credit cards, family and friends, etc.

*Elements involved when considering financing

- maturity date of the debt (when it must be repaid in full)

- payment amounts and schedule over the period from securement to maturity

- interest rates

Advantage
- debtor pays back a specific amount

- when repaid, the creditor releases all claims to its ownership in the business

Disadvantage

- repayment of the loan typically begins immediately or after a short grace period, so the entity is faced
with a fairly quick cash outflow requirement

*Loans are usually acquired for two categories: working capital and fixed assets. 

Working capital is simply the funds a business has available for day-to-day operations. If a business has
only enough money to pay bills that are currently due, that means it has no working capital, thus, a
business in this position may want to secure a loan to keep the business operations running.

As for Fixed assets, these are major purchases—land, buildings, equipment, and so on. The amounts
required for fixed assets would be significantly higher than a working capital loan, which usually cover just
a few months’ expenses.

To add up, some banks demand collateral to borrowers who loan a significant amount of money. 

*Collateral - something of value that a business owner pledges in order to secure a loan (In a real estate
loan, the property you are buying is the collateral. In a way, loans for larger purchases can be less risky for
a bank, but this can vary widely from property to property.)

Equity Financing

- In terms of investment opportunities, equity investments are those that involve purchasing an ownership
stake in a company, usually through shares of stock in a corporation. Unlike debts that will be repaid and
thus provide closure to the investment, equity financing is financing provided in exchange for part
ownership in the business. Like debt financing, equity financing can come from many different sources,
including friends and family, or more sophisticated investors.

Advantage

- there is no immediate cash flow requirement to repay the funds, as there is with debt financing

Disadvantage

- the investor is entitled to a certain percent of the profits for all future years unless the
entrepreneur/business owner repurchases the ownership interest, typically at a much higher value.
In addition, some financing sources are neither debt nor equity, such as gifts from family members, funds
from crowdfunding websites, and grants from governments, trusts, or individuals.

***To summarize, in terms of ownership, the lender owns stake in a company for equity financing, while
one doesn’t in debt financing. And in terms of cash, there is no immediate cash outflow in equity financing,
while there is a required early and regular cash outflow for debt financing.