TRANSACTION, LICENCE AND ADVERTISING FEES: what to look out for when calculating these revenue streams

The commonality between transaction, licence and safekeeping revenue is not obvious, as they represent very different types of business models, but from a financial planning perspective, they include similar types of calculations. The main commonality is that they are dependent on gross billings that are not recognised as revenue, or in the case of safekeeping fees, on a portfolio that is in the customer’s ownership. We have included safekeeping fees in the periodical charges revenue, as they also have strong commonalities with subscription-type revenues.

Advertising fees are quite unique and they can be calculated in very different ways, as an average monthly spending per customer, or based on the increasing advertising capacity of the website.

TRANSACTION FEES

Transaction Fees take place when you sell products or services of third-party providers through your business and it is a revenue model very common among sharing-economy startups or marketplaces. It is worth noting that this applies only in cases when the total value of products sold is not recorded as revenue and instead it takes place when sales can be processed on different payment gateways. This is only an accounting difference, so even if we refer to many marketplaces as earning a transaction fee, this would actually be accounted for as the mark-up or difference between revenue recognised, which equals gross billings, and payments to sellers: in this case please refer to sale of products or services revenue calculations.

Transaction fees revenue occurs when only the transaction fee is recognised as revenue. Here we need the number of active customers to calculate this revenue stream. Calculating transaction fees therefore involves calculating the amount of billings on your platform, unless the entire transaction value is registered as revenue.

The main figures and assumptions needed to calculate transaction fees revenue are:

  1. The portion % of your total active customers that will be involved in making transactions
  2. The average value of a transaction and its increase in value per year, the sum thereof representing the total gross billings
  3. The number of transactions per month/year and its increase per year
  4. The type of fees based on the company’s business model
  5. Customers split % with the portion of customers to whom the fee or fees apply, when there are multiple types. The sum should be at least 100%.
  6. Fee amount % based on the portfolio amount as well as any price inflation over the years

Directs costs to transaction revenue usually include only:

  • other Transaction fees
  • Credit card or payment fees

 

LICENCE FEES

Licence fees are royalties that you receive for the third-party use of your technology, brand or other IP that you own. Licence fees are typically paid on the wholesale value and are based on each end-customer sale. You might want to take into consideration, if the revenue model has not yet been validated, whether licensing the product to others would prevent you from having other revenue streams connected to the IP, as the licence may be exclusive.

It is largely a different business model to transaction fees, as it typically involves a technology or other type of IP, but here we can also calculate the gross value sold by third-party wholesalers to estimate our licence fees.

To calculate this revenue stream you need:

  1. The portion % of your total active customers that will be using your IP and paying a licence fee, provided of course that your customers include wholesalers in this case, and not retailers or end consumers
  2. The average value sold or value of product sold and its increase in value or price per year, the sum thereof representing the total gross billings
  3. The number of transactions per month/year and its increase per year, if we have used product value instead or total value per month in the point above
  4. The type of licence fees based on the company’s business model
  5. Licence Fee amount % based on the total gross value

Directs costs to usually include only:

  • other Transaction fees
  • Credit card or payment fees

 

ADVERTISING FEES

Advertising fees can be complex, as customers and users’ behaviours can flow into the projections, which means that this type of revenue can change from month to month in some cases. It is worth including advertising revenue in the financial plan only when it is a major revenue stream of the company.

The information that you can collect is based on the type of advertising that you receive:

  • Monthly featured content/ sponsorship: Price per month per advertiser, which is the most simple advertising revenue type
  • Pay per view: Price, Website visits, % of users viewing ad, Ad slots
  • Pay per Click/Action: Price, Website visits, Click-Through Rate, Ad slots

The most simple was to include this revenue stream is to select the portion % of active customers that would buy advertising packages in any given period and the amount of monthly spending per customer, including inflation, and in case of multiple types of packages, the spending for each type of package and the customers’ split % for each package. We recommend using this calculation for minor revenue streams, which can also more easily be compared to advertising income per customer of larger social media companies.

We can also carry out more complex calculations by using the website capacity, impressions, clicks, ad slots, which puts an upward limit for advertising based on the number of pages and ad slots, to calculate the price for the advertising packages.

Direct costs for these fees are usually limited to transactions fees and/or credit card fees. Only when these costs are directly linked to revenue items changes, such as volume or value of goods sold, and for the most part change to a similar extent as revenue, they should be included in direct costs.