Today I want to share with you one of the stupidest revenue stream models you’ll ever come across. It represents an extremely short-sighted approach to business development and fails to take into account that the big money in business is on the back end.
Before doing that though, let me recap some key points from a lesson I wrote a few years ago about revenue streams. First off, is the four types of revenue principle:
As shown in the visual, revenue in your business can be classified into four categories – of which one category offers you the greatest potential for long term success. Let’s take a closer look at them.
First of all, a business can generate front end revenue and back end revenue. Front end revenue is that which you receive from first-time customers, while back end revenue is what you get from existing customers.
Next is low value revenue vs high value revenue. Low value revenue is that which is generated from products and services where the unit sales transaction value is low, as is the gross margin. And high value revenue is that which comes from products and services where the sales transaction value and gross margins are high.
With these definitions in place we can classify the sales revenue in these broad terms:
Front end/low value revenue: Low margin/transaction revenue to first-time customers.
Front end/high value revenue: High margin/transaction revenue to first time-customers.
Back end/low value revenue: Low margin/transaction revenue to existing customers
Back end/high value revenue: High margin/transaction revenue to existing customers. These are your high value customers.
Your business has a mix of front end and back end revenue. It is crucial to get the mix right and understand that the more high value back end revenue you can get, the better:
Now, here’s the dumb revenue stream model that many businesses follow:
I think the visual explains it quite well:
1. A business creates brand awareness for itself and its products
2. From that brand awareness, the business generates sales prospects/opt-ins which – if the business owners has half a brain – go into the business’s database.
3. The prospect is then converted into a customer. KA-CHING, a sale is made!
4. That new customer then falls into a black hole, never to be heard from the business ever again.
5. The business misses out on additional revenue from that customer. Instead it focuses on getting more new prospects and customers. In essence, the black hole represents a wasted opportunity.
Why do some business owners operate such a dumb model? Two reasons:
1. Mental and behavioral. Some business owners just couldn’t give a stuff about the back end and so their whole mentality is about getting new business. They operate a dumb model because they themselves are dumb.
2. Strategic. Many business owners understand the concept of the back end, but don’t really know how to put it in practice in their business. So, in this respect they need to know how to strategically develop and implement a sound revenue stream model. In particular they need to know how to create a focused product portfolio, develop the right price points, position their products to the right target markets and develop a proper sales process.
If you have a mental and behavioral block towards developing a back end in your business, it’s unlikely that I can help you.
However, if you want to develop a back end, then continue to read the next few lessons as I go through some other, more effective revenue stream models you can create and implement in your business.
Remember these key points.
1. The black hole revenue stream model is for dummies.
2. The big money is on the back end.
In the next lesson we’ll look at a basic back end revenue stream model and I’ll also introduce some model variations for you to consider.