Business Models and Revenue Streams
Before reading any numbers, understand how a company makes money: who pays, for what, and how often. Meet STU Corp, the company Part 3 follows from start to finish.
The short version
A business model is how a company makes money: what it sells, who pays, and how that turns into profit. Most companies have several revenue streams, and they're rarely equally profitable. Recurring revenue, like subscriptions, is usually more predictable than one-time sales. STU Corp sells water filter systems at a thin profit and earns most of its gross profit on the replacement cartridges that follow, a pattern often called razor and blades. A company's annual report describes its business, and that's the place to start.
By the end of this lesson, you'll be able to
- Describe the common business models and what each depends on
- Tell a company's revenue from where its profit comes from
- Explain why recurring revenue is valued, and what can still go wrong with it
Why this matters
What a Stock Is showed that a share is a small piece of a real business. Part 3 is about understanding that business. Before looking at a single number, it helps to answer a plain question: how does this company make money? Who pays it, for what, and how often? Every number in the financial statements is a result of the answer.
Business models
A Business model. How a company makes money: what it sells, who pays, and how that turns into profit. Glossary is how a company makes money: what it sells, who pays, and how it turns that into profit. The money customers pay is the company's Revenue. The money a company brings in from selling its products and services, before any costs are subtracted. Also called sales, or the top line. Glossary, also called sales. Here are the most common models:
| Model | Who pays, and for what | What it depends on |
|---|---|---|
| Product sales | Customers pay once for each item, like a sofa or a phone | Winning new sales every year, since one sale doesn't guarantee the next |
| Subscriptions | Customers pay regularly for ongoing access, like software or a streaming service | Keeping customers from canceling |
| Fees and commissions | A small cut of each transaction, like a payment processor or an online marketplace | How much money flows through the platform |
| Advertising | Advertisers pay, so users often pay nothing, like a free app | Attention, and advertisers' budgets |
| Licensing and royalties | Others pay to use a brand, an invention, or content | Protecting what's licensed |
| Services | Clients pay for time or expertise, like consulting or repairs | Hiring and keeping skilled people |
| Lending | Borrowers pay interest, like a bank's loan customers | Borrowers repaying, and the gap between the rates it earns and pays |
Many companies combine several of these. Each distinct source of revenue is a Revenue stream. One distinct source of a company's revenue, such as product sales, subscriptions, or fees. Glossary, and the streams are rarely equally profitable.
Meet STU Corp
Earlier lessons used STU Corp for quick examples. From here on it becomes a complete company, with its own business and its own financial statements, and Part 3 follows it from start to finish. Its numbers replace the quick examples from before. It's still fictional.
STU Corp makes home water filters: countertop and under-sink filter systems, and the replacement cartridges they need. It sells through retail chains and online marketplaces, and directly through its own website, where customers can subscribe to automatic cartridge deliveries. That gives it three revenue streams.
| This year, $ millions | Revenue | Share of revenue | Gross profit | Share of gross profit |
|---|---|---|---|---|
| Filter systems | 160 | 40% | 40 | 20% |
| Cartridges in stores and marketplaces | 140 | 35% | 91 | 45.5% |
| Cartridge subscriptions | 100 | 25% | 69 | 34.5% |
| Total | 400 | 100% | 200 | 100% |
Gross profit. Revenue minus the cost of goods sold: what's left after the direct cost of making or buying what was sold. Glossary is revenue minus the direct cost of making what was sold. The next lesson covers it properly. Systems bring in 40% of STU Corp's revenue but only 20% of its gross profit. Cartridges bring in 60% of revenue and 80% of gross profit.
This pattern is often called razor and blades: sell the device at a thin profit, then earn most of the money on the refills it needs for years. For STU Corp, the systems matter mainly because every one installed creates a customer for cartridges.
A customer buys one STU Corp system for $100 and subscribes to cartridges at $160 a year. STU Corp keeps 25% of system revenue as gross profit and 69% of subscription revenue.
| Revenue | Gross profit | |
|---|---|---|
| The system | $100 | $100 × 25% = $25 |
| Three years of cartridges | 3 × $160 = $480 | $480 × 69% = $331.20 |
| Total | $580 | $356.20 |
The first sale earns $25. The relationship that follows earns more than 13 times as much. That's why a company like this cares so much about keeping customers, and why a cheaper cartridge from a competitor is a serious threat.
Recurring revenue
Recurring revenue. Revenue that repeats on a regular schedule, such as subscription payments, instead of coming from one-time sales. Glossary repeats on a schedule, like STU Corp's subscriptions, instead of starting from zero each year. It's usually more predictable, which is why investors tend to value it. But it isn't guaranteed. Subscribers can cancel, and the share who cancel over a period is called Churn. The share of customers or subscribers who cancel during a period. Glossary. A subscription business with high churn has to keep replacing customers just to stand still.
Where to find this for a real company
Public companies describe their business in their annual report to the SEC, called the 10-K. The annual report a public company files with the SEC. It describes the business and its risks, and includes audited financial statements. Glossary. Its first section, "Business," covers the company's main products and services, its markets, and often its competition. The SEC calls it a good place to start to understand how a company operates.1 SEC rules also ask companies to describe, where it matters, any dependence on key products, services, or customers.2 SEC Filings: 10-K, 10-Q, and 8-K in Part 4 covers these reports in detail.
Key takeaways
- A business model is how a company makes money: what it sells, who pays, and how that becomes profit.
- Most companies have several revenue streams, and some are far more profitable than others.
- STU Corp gets 40% of its revenue from filter systems but 80% of its gross profit from cartridges.
- Recurring revenue is more predictable than one-time sales, but customers can still cancel.
- The Business section of a company's 10-K is the place to start.
Check your understanding
A competitor starts selling cartridges that fit STU Corp's systems for half the price. Which of STU Corp's revenue streams is most directly at risk?
Cheaper compatible cartridges attack exactly where STU Corp earns 80% of its gross profit. Customers might even keep buying STU Corp systems, which is the low-profit part, while buying their refills elsewhere.
Two companies each brought in $12 million this year. One sells $1,000 machines. The other sells a $100-a-month subscription. What's the most reasonable comparison?
The machine maker has to win all its sales again next year. The subscription company starts next year with most of its revenue already in place, as long as customers don't cancel in large numbers.
What's next
Revenue is only the start. The next lesson, Costs, Margins, and Profitability, follows STU Corp's $400 million down to the profit it actually keeps.
Go deeper
- Software and Subscription MetricsFinancial Statement Analysis in Depth (depth track)
- Revenue RecognitionFinancial Statement Analysis in Depth (depth track)
- Segment ReportingFinancial Statement Analysis in Depth (depth track)
Learn more
- How to Read a 10-K/10-QInvestor.gov, U.S. Securities and Exchange Commission
Notes and sources
- U.S. Securities and Exchange Commission, Office of Investor Education and Advocacy. Investor Bulletin: How to Read a 10-K. Checked 2026-10-11. Back to text
- Legal Information Institute, Cornell Law School. 17 CFR 229.101 (Item 101 of Regulation S-K): Description of business. Checked 2026-09-30. Back to text