Entrepreneurship 7: Calculating Revenue

Calculating Revenue

Entrepreneurship 7

Calculating your revenue is one part of earning maximum points in the financial plans line of the rubric. It can also help with setting future goals for your project.

In this lesson, you will…

  • Learn about different ways to make money for your app
  • Calculate how much revenue your business will make over 5 years
  • Use this worksheet to complete your calculations

The revenue model that you’ll develop in this lesson will be necessary for the Senior division to complete their 5-10 page business plan.

Key Terms

  • Revenue - total amount of money your business earns
  • Revenue Model - a plan on how to make money
  • Total Market Size - how many people there are who could download your app or buy your AI invention
  • Market Opportunity - how many people you estimate will actually download your app or buy your AI invention

Revenue Model

At this point, you have a pretty good idea of what your business will be and how you will do some marketing for your product.  Now, it’s time to figure out how your business will make money. Remember, even nonprofits and social enterprises need to make money so that they can pay for all of their expenses.

In this lesson, you’ll calculate your revenue, which is how much money your business earns. In the next entrepreneurship lesson, you will figure out how much it costs to run your business, which is called the operating cost. Then you will calculate your profit, or how much money you have left over once you have paid for all of your expenses. 

[Revenue] - [Operating Costs] = [Profit]

Choosing a revenue model

Revenue is the money that a business earns, usually from selling products and services to customers. For mobile apps, there are three main ways to earn revenue. Keep in mind that you can use a combination of the three, like having in-app ads and paid features.

One-Time Fee

Charge a one time fee to download an app providing a unique service.

Minecraft costs $6.99 to download

Mini Metro game costs $0.99 to download

In-App Purchases and Subscriptions
In-App Ads

For AI inventions, users most likely will have to pay to buy the physical device. If it’s a software solution, you could use a subscription model or have users pay a one-time fee. 

In order to help your team decide which revenue model to use, refer back to your market research from Ideation 7. Think about your users and whether or not they would pay additional money for features in your product. Research how your competitors charge for their products and additional features. 


 

Calculating your revenue

 

1. Calculating your market size

You can complete the activity "Choose a Revenue Model" below as you learn about this information.

To calculate your revenue, you first need to estimate your market size, or how many people could download your app or purchase your AI invention. For example, let’s say we are making an app that will help high school students apply to college in the United States. Our market size would be the number of high school seniors in the United States. We found that 3.1 million students graduated high school in 2019 and around 66% of them went to college. So, our potential market size is huge: 2.05 million students!

3.1 million high school seniors x 66% going to college =  2.05 million potential users

We don’t really expect that 2.05 million students will download our app, and there are many reasons for this. They may not want to use our app, or they may already use one of our competitors. They also won’t know about it, or may not have mobile phones. To determine the number of people who you could reasonably expect to be interested in your app, you’ll need to calculate the market opportunity.

2. Calculating your market opportunity

You can complete the activity "Increasing Revenue over Time" below as you calculate your market opportunity.

The next step is to calculate your market opportunity, or the number of people who you can reasonably expect will download your app or purchase your AI invention.  You may need to do some competitor research online or with user surveys to figure this out. Let's see how our friends at HSBC calculate year to year revenue with our college app:

It may be tempting to overestimate your revenue, but remember that this is not a good way to get people to believe in your product.  Reasonable, well explained, and well researched numbers will help you make a great case for why your product will succeed.

Activity: Choose a Revenue Model

With your team, decide on your which revenue model you want to use to earn money. Carefully consider your users and why they are most likely to pay or not pay for. Ask some of your users through a survey if they would pay for things, and for how much. Don’t be afraid to use a combination of the different revenue models.

Activity: Increasing Revenue over Time

Now that you’ve selected a way to make money from your product, you need to think about how you can get more and more users to use it each year. You want your product to grow and become more popular, so that people will invest in your idea. Here are some guiding questions to help you think about how to get more users to pay for your product each year.

  1. Are you using more money for advertising? 
  2. Are others sharing the product by word of mouth?
  3. Will you build new features that draw more users in?
  4. Are you going to hire more people to become ambassadors for your product?

You should use your revenue model and the explanation in your pitch video and in your business plan, so make sure to write this down somewhere.

Activity: Calculate your Revenue for 5 Years

Now it’s time for some calculations. You already know how your product will make money, and how you will draw in new users each year. It’s time to fill out the revenue part of this worksheet. You will need to calculate how much money you will make each year. If you aren’t sure how to do these calculations, follow the example above. You might need to do some research, or survey some of your users to make the best estimate possible. Remember that you can always add additional other sources of revenue as the years go.

Don’t worry about the operating costs and startup capital sections of this worksheet. You will do these sections in the next entrepreneurship lesson.

Reflection

It may be tempting to say your product will make tons of money but it’s very important to have a well thought-out explanation to go along with your revenue model. This will be an essential part of your pitch and how you get people to believe in your idea. If you are serious about creating a sustainable product and business, you must research and plan how you’ll get  people to download or continue engaging with your product each year.

Keep track of  your revenue model and the explanation in your pitch video and in your business plan, so make sure to write it down somewhere.

Additional Resources: Revenue Models for Nonprofits

If you are a nonprofit, you might not be planning on selling anything. However, you will still need money to develop and upkeep your product. You can still raise money by applying for things like grants or receiving donations. A grant is money that someone gives you that does not need to be repaid. Organizations or governments sometimes give grants to support projects for social good. A donation is similar to a grant but usually given by an individual. 

To apply for a grant, you have to tell the person giving the money what you plan to do with the money and how you will use it. If you do not do what you said, they might take the money back. These grants are often very competitive, so you’ll have to appeal to the funder and make the best case for why they should give the money to you above others. If you are planning on raising your revenue through grants and donations, you will need to tell your funders (who give you the money) what you will do with the money. For example, if your project is a mobile app, you will donate a certain number of downloads to students who would benefit from it but can’t pay for an app, or you will use the money to improve the app and sell it at half price. 

Even if your business is a nonprofit, you can still sell things or earn money through ads or other features. The difference with nonprofits is that you can’t keep the profit like you would with a social enterprise or a for-profit company. What you do with the revenue will be covered in more detail in the next entrepreneurship lesson.