In a 2021 study among over 1000 executives, McKinsey & Company found that these business leaders expected 50% of their company’s 2026 revenue to come from products, services, or businesses that had yet to be created. Additionally, the study found that only 62% of these companies were prioritizing new business building to generate or access new revenue streams. As a growth strategy consulting firm, we at Denneen & Company realize the importance that new and diversified revenue streams play in growing, and in some cases, just maintaining, businesses. The following provides high level guidance to business leaders as to how to think about defining and accessing new sources of revenue to accelerate growth and create value within their companies.
Why diversify revenue?
As stated above, generating new sources of revenue can help companies increase and accelerate growth. However, there are additional benefits to a more diversified portfolio of revenue. These include tapping into higher margin value pools to improve overall company margins, increasing resiliency and insulating against industry disruptions, gaining access to new data and insights to drive sustained competitive advantage, and increasing overall valuations. Given these benefits, revenue diversification should almost always be a consideration during any growth opportunity and/or strategy conversation. The following table summarizes the main reasons to diversify revenue:
What are the different revenue streams?
There are three main types of revenue streams:
- Product Sales
- Recurring Revenue
1) Product sales are straightforward. A company offers a certain product for a given price. Additionally, there are opportunities within a product portfolio to expand, update, innovate, and/or create new and different products that diversify revenue within this revenue category. Consulting firms and agencies largely play in the 2) services revenue space, often based on billable hours or service fees, but numerous companies have services as part of their overall offering. Finally, 3) recurring revenue is made up of several different types of revenue streams, all of which generate revenue at relatively predictable intervals. Recurring revenue streams include subscriptions (Netflix, Verizon), licensing (Disney, NFL), Advertising (Facebook, NBC), leasing and renting (Hertz, CBRE), and brokerage fees (Uber, Airbnb). Consider Amazon, once an online bookseller (product sales) that has grown exponentially via a diversification of revenue streams. And while each business brings unique value to Amazon, some elements of the portfolio are much more valuable than others. As an example, AWS only represented ~12% of revenue in Q4 2019 but delivered more than half of Amazon’s total operating income. See Amazons evolution and revenue diversification below:
What are the “ways in” to discovering new revenue streams?
There are numerous ways to help identify and uncover opportunities to diversify revenue. The following considerations are intended to help business leaders think beyond current offerings in order to identify potential opportunities for new ones.
- Look for the new with what you have. The most turnkey way to access new revenue streams is to utilize what already exists. Are there other applications for current products? New consumer or customer groups or segments to access? New geographies in which to expand? New business models to utilize that would bring your offering to market in a better/different way?
- Define the job to be done. Clearly identifying what jobs consumers and customers are hiring your current offerings to do can expand how you think about your product or service, the competitive set, and possible alternatives. For example, Home Depot customers arguably aren’t buying drills, they’re buying something that satisfies the job of creating a hole (the job-to-be-done), and former Blockbuster customers weren’t renting videos, they were accessing at-home entertainment (which Netflix understood). This level of market-back, job-to-be-done understanding and mentality can help identify innovation opportunities (while also highlighting potential ways in which the current offerings can be disrupted).
- Analyze value pools. Examine the entire value chain, from raw materials through the end user/consumer, where your company sits and what value it’s accessing, and what value others are capturing. Where is there significant value? Which players are making the best margins and how do you compare? Are there synergies to vertical integration?
- Gather competitive intelligence. What are your core and adjacent competitors doing? Where are they investing? What have they accomplished, and for how much? Ongoing market intelligence gathering can help to spur ideas as to potential new sources of revenue to explore. A watchout is to ensure that you’re not too myopic in how the competitive set is defined, as the adjacent competitors of today can quickly become the core competitors of tomorrow.
- Define how far the brand can stretch. Unless you’re Virgin, which seemingly can expand into any product or service category, understanding how far your brand (or brands within a given portfolio) can stretch can help identify new places for the brands to play while also highlighting ones that are not a good fit and should be ignored. This understanding provides a rough guide to the playing field in which your offering can compete, and can help guide decision-making when further diversifying.
Putting it all together
Identifying and accessing new revenue streams isn’t easy and running the day-to-day business at the same time can be a constant distraction. However, once opportunities are identified, business leaders will need to determine if it makes sense while answering the following:
- What resources and assets will be required?
- How long will it take?
- Does it fit with the company vision and purpose?
- Does it align with areas of expertise and/or passion areas?
- Can it be done internally, or should inorganic options be considered?
- Do the additional streams complement each other?
Accessing new revenue streams can be challenging, but as discussed, is often critical to growing and creating long-term value. What percent of your 2026 revenue do you expect will come from new revenue streams and what is your plan to get there?
Denneen & Company is a growth strategy consulting firm that has been helping companies find and follow their unique paths to growth for over 29 years. With experience across 20+ industries, 40+ consumer categories, and 40+ countries, Denneen & Company consultants leverage their former backgrounds as industry practitioners and past engagements to develop practical and achievable strategies based on rigorous analysis, breakthrough insights, and a collaborative approach. To learn more, please visit denneen.com.
For any questions on this piece or if you’d like to learn more about how your company can identify and access new revenue streams, please reach out to Phil Ryan and Mike Gill to learn more.
Sources: McKinsey & Company, Forbes, Finmark, Macrotrends, Corporate Finance Group, Statista, Investopedia, TechCrunch, Visual Capitalist