Real World Example Of Why You Need Revenue Diversification To Survive

Real World Example Of Why You Need Revenue Diversification To Survive

 

I’ve seen many entrepreneurs start their business focused on one product. This is fine, but then their revenue comes from one source. Therein lies the problem.

If something happens to that source, maybe they go out of business or change policies, it can have an adverse impact on your company and there isn’t much you can do about it. By having a single source of revenue, you give control to whoever is sending revenue your way. They have the power to renegotiate and you aren’t in much of a position to counter.

A Solid Foundation Through Revenue Streams

Having a single product isn’t a bad business model with the requirement that there are several revenue streams feeding the growth of that product. When one revenue stream goes away, others streams are still flowing in. There is more potential for growth and exposure. The business is more robust.
It is similar to building a table with one leg vs. four legs. You can visually picture what that looks like and why one works better than the other.

As a startup, focusing on one product allows full concentration and effort on getting that product out the door. There should always be a consideration in the business model for attracting more than one revenue stream as well. How many revenue streams? Two is better than one. Three is better than two. Four is better than three. You get the idea.

 

Real Life Example

Skillfeed was an online course marketplace. Instructors create courses, upload them to Skillfeed and share in the revenue generated from subscription customers. The revenue model splits instructor payments based on total minutes an instructor’s videos were watched during a month.

Skillfeed suddenly announced that they will shut down on September 30th, 2015. This took many instructors by surprise. Worse, judging from comments in the Skillfeed Facebook group, some instructors seem to depend on this revenue stream or have even built their business around it. This is unfortunate. Not only is the loss of the revenue stream a big hit to their business but it is also a big hit psychologically.

Having the right business model in place will ensure your business can withstand scenarios like the one above.

As a sidenote, the signs had been there for a while with Skillfeed.  I’ve seen this scenario play out over and over.  Here’s a few examples I started seeing the beginning of this year:

  • Questions in the Facebook group going unanswered
  • Emails to support going unanswered
  • Extremely long delays in responding to any questions
  • The main contact at Skillfeed and Facebook group moderator suddenly left with no announcement from Skillfeed
  • All courses were copied to Bigstockphoto without any notification to instructors
  • Continued decline in overall minutes for virtually all instructors
  • No promotions being run

I had commented earlier this year in the Facebook Group that I thought they were in trouble and could likely shutter.  Not to be negative but more to warn other instructors.

If you’re curious how to host courses on your WordPress website, in Why I Decided To Roll My Own Online Course Platform, I thoroughly explain how I’m selling courses directly from my site. No dependence on any one else’s platform.

Building A Robust Business Model

There is more to building a robust business then just multiple revenue streams. In developing your business model, an income floor needs to be determined. Meaning, how much revenue does the business require to keep the doors open. Expenses are factored into this model. This is your worse case scenario.

Once the worse case scenario is determined, you build the ideal situation. Realistically, what do you expect the business to do each month in revenue.

Finally, you build another model that displays your goal. This is what the business is striving to achieve in monthly income. This model is always increasing as you reach each set objective. It stretches your business.

What do these three models look like. Below is a simplified version.

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You can see how the model breaks down each scenario. At a minimum, the company needs to general $5750 per month to stay afloat if it wants to achieve $3750 in profit. In this case, the company has determined that $3750 in profit is their breaking point for keeping the doors open. Perhaps the owner or owners have determined this is the bare minimum amount they can live on each month. There can be many factors that determine this minimum amount.

The “Current” model is what the company is bringing in each month right now. It might be an average of the past 6 or 12 months. The “Goal” model is what the company keeps in sight. This is the stretch goal, which should always exist. This is how growth is created. The company’s goals are now clear and written down.

Each revenue stream in the far left column can be made up of multiple streams. For example, “Course Royalties” might include 3 or 4 different course marketplaces, significantly diversifying those streams.

What Does Your Model Look Like?

We can now see the importance of establishing not one but three business models detailing revenue sources. There is more to building these models. For each channel (far left column in the above model), we need to consider how many clients are involved. How many platforms are involved. How weighted are we to each. We don’t want to be overweight to one client. Even with multiple revenue streams, becoming overweight isn’t much better than having a single revenue stream.

Diversifying your revenue will go a long way to building a robust and sustainable business. Building out multiple streams requires your startup or existing company to stretch. The more you plan and calculate how much each stream contributes, the clearer you’ll be on where growth is coming from, and where you should point your ship.

 

 

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