Revenue: reason and source

Reason a customer pays for a product or service offered by a company is in most cases the source of revenue for the company. But then there are cases when this is not true. The reason a customer pays is one thing, which in most cases is the primary offering, but a completely different secondary or additional offering generates more revenue for the company. These are the cases when the reason and source of revenue are different, though mostly interdependent.

One of the most talked about examples in this case is Hertz rental car service. The biggest source of revenue here is the rental insurance that Hertz provide with its cars which is an additional and optional service the company provides when you rent a car from them (just for kicks, the second biggest source of revenue: used car sale). Another example to consider is the wholesale retail chain that loves to play the membership fee ballgame. Customers go to Costco because they like to buy stuff in large packs at a wholesale price. But Costco makes 70% of its operating income through the upfront membership customers pay for to get in the store. Similarly, consider Google. Customers go to Google primarily to search something on the Internet. Their main source of revenue: advertisements, the contextual offerings next to the search results customers are looking for.

It’s interesting to see an auto rental company, a wholesale store, and a search engine, each excelling in the core area of their business but making the biggest chunk of revenue from a secondary offering. The important thing here is to notice their focal point of operations. Hertz cannot shift its focal point from rental car business and generate the same revenue through insurance. They are able to generate rental insurance revenue because customers like their rental car service and buy insurance for the cars they rent. Similarly, Costco cannot sell memberships if the customers don’t find what they want from the stores and Google cannot generate ad revenue if the search results are not relevant enough for customers to keep using it.

This brings us to the real thing…the success mantra to keep the cash register ringing is: focus on the reason and embrace the source. When the source and reason are the same, its a smoother ride, but when they are different, you got to make sure that you provide great reason to your customers to come to you along with maintaining attractive revenue generating additional offerings.

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