How To Develop A Winning Revenue Model

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Your business model is good to go? Great, then it's time for your financial plan. Check out this step-by-step guide to build a successful revenue model!

When starting to build a financial business plan there will be a white piece of paper respectively an empty Excel sheet in front of you. It is not always easy to sort the hundreds of thoughts you have and put them together to one organized business plan. That is why it is essential to thoughtfully approach your business plan step-by-step.

The first step of your financial business plan is the profit and loss (P&L) statement. As you would usually calculate the P&L statement top-down (see our last piece on the business plan) you will have to start coming up with budget revenues. This sounds fairly easy, as you could just fill the blank positions with any kind of figure. But remind yourself that you will need to find a basis for your revenue. Every person interested in your business plan, e.g. investor or banker, will at first ask you how you calculated your numbers. In some cases he will even rip your figures apart and confront you with much lower expectations – in order to either test your assumptions (good faith) or to destroy your forecast and therefore company valuation (not so good faith) – which means that you will need to put a lot of thought into your revenues. Questioning sales figures is necessary as most startup companies project stunning revenue growth rates of more than 100% or even 1000% per year. These extreme growth rates in the future are also called “hockey stick effect”, because the graph looks like a hockey stick. In order to be able to let different factors and arguments have an influence on your revenue you will need to set up a revenue model.

In plain theory, setting up a revenue model is quite simple. As we had already shown in our last part, you would just have to multiply price with volume

Revenue = Price x Volume

and the result is your revenue for each period of time (day, month, quarter or year). When it comes to implementing such a model in practice though you will find that there are plenty of problems and challenges with budgeting revenues especially when you are founding a company in a completely new field and do not have any market comparatives.

Note: There is a variety of ways to derive revenues and there is no real right or wrong. It is important to have a logical approach and present a consistent result. This does not necessarily mean that you need a highly complex model. Sometimes simplification is the key, which means you can also draw this up with a pen and a paper. Thus the following illustration is nothing but explanatory in order to show the mechanism.

Types Of Approach: Market-Based vs. Company-Based

Before starting to build the revenue model it is necessary to decide, if you want to approach your model from a market-based view or from your company-based view. This decision needs to be taken both for price as well as for volume and one is not depending on the other.

  1. The company-based approach means that the company’s resources regarding capacities (for volume) and internal costs (for price) need to be taken into account. The result of your review then leads to the assumptions for your model. Still, at the end you will need to reconcile with market data to see if there is a matching demand.
  2. Market-based on the other hand means that you would research the demand (for volume) and the willingness to pay (for price) in the market. With this approach it is required to research possible competitors and their prices and volumes. Competitors can give you a great benchmark for your own company. With this approach also, at the end you will need to reconcile with your capacities or resources, for example if you will be able to meet the demand.

Step-By-Step To The Revenue Model

Before commencing it is important to realize that volume and price are independent figures and therefore need to be set up each individually.

Most of the time price and volume are not depending on one another, which means you can start with either one of the two. Of course, if you follow an economic theory, volume decreases with a higher price. But this is not directly applicable to a startup company as we assume that there is a clear value proposition for the customer and the market volume is (allegedly) big enough.

#1 Determining Price

In order to determine your selling price you can either add your internal (production) expenses plus your planned profit (company-based approach) or you can research the market to see what customers would be willing to pay for your product or service (market-based approach). The company-based approach is much easier, as your own expenses are known to you whereas on the other hand the market-based approach can take a lot of time and effort researching. Either way, in the end of your calculation you will have to match your result with the other approach. If customers will not be willing to pay a price that you need to turn over to cover all your costs, it does not make any sense for you to offer the product. Also if you are not able to produce with expenses under the price a customer is willing to accept, it does not make sense as well.
In practice it is usually a mixed approach. On the one hand internal costs are taken into account, but at the same time market prices are important. You need to take into account the specific value for the customer.

#2 Determining Volume

Volumes can also be determined with the two approaches. The market approach would be to research how many customers there are for your product/service (customer potential). In other words, you need to check how high the demand for your product will be. The company approach is to take into account your production capacity and calculate with a utilization of your capacities. This way your volume is based on a percentage of utilization. Either way, at the end you will need to cross-check with the other approach to verify your volume.

For a startup company it is essential to build capacities fast. Usually the market potential is huge and cannot be served by your company alone.

#3 Combining Results

After individually putting together your assumptions and calculating you need to put together (multiply) volume and price for each period of the forecast time horizon. The result is your revenue. Sounds simple, this time it really is. If your model is set up correctly you are now able to budget all your revenues.

#4 Sensivity Analysis (Optional)

Once you have set up your volumes and your price the result is your budget revenue. Subsequently you can and probably should set up a sensivity analysis in order to show possible deviations in your model. It is an optional feature to your model, but it is highly recommended to build that into your model. Sometimes expectation will not realize the way that they were anticipated so you will need to adapt your planning. Including a sensivity analysis simplifies this adaption, as you can foresee what would happen if single factors change in your model within the period of time.

Sensivity means, setting up different scenarios for your model. It shows for example how revenues would develop when projected volume growth rates are 10% lower per year. Or it can budget how much revenue would be lost if selling prices decrease over the years.

Analysis Of Results

When your revenue model is finalized the first and most important analysis is a general review if your figures make sense in an overall view. Thus the first question you should ask yourself is “Do the results make sense (for me and my company)?”.

This analysis determines if your budget revenue is in line with the idea of the business plan. As an example, if you plan to work all alone as a Solopreneur at first, it would not be fitting to budget revenues of millions of EUR. Of course this example is exaggerating to show the point. You need to take a look at your startup from a third person point of view and review how realistic your budget revenues really are.
With your revenue model you will already be able to derive very important key performance indicators (KPI) for your startup. You will be able to compare them with other companies in your industry (benchmarking). Comparing KPIs with industry averages can support your argumentation when discussing the business plan. Also, in the future you will be able to easily keep track of the development of these KPIs with the growth of your company.


The most important KPI clearly is the revenue for each period. It is the base for financial success. It can be measured at all time and therefore is a great measurement for progress and for target-performance comparisons. In case you find that the actuals differ substantially from budget figures you can react instantly.

Growth Rate

Another KPI in your revenue model is the year-to-year (or period-to-period) growth rate. It allows you to compare your company to your direct competitors or to industry benchmarks. This KPI serves as a great indicator to determine how realistic you have planned. If your growth rates are in a double-digit or triple-digit positive range – which is not uncommon for starting companies – and the industry shows negative growths overall, you need to be able to argue these figures.


Once you have properly set up a revenue model, a great deal of work for the financial business plan is done. It is very helpful to discuss your results with someone on the outside, as they can and will find logical errors, which you might not be able to see anymore. Usually your thoughts are so deep in your model and its details that you lack the overall view.



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