By Jonathan Darker
There is currently such a buzz around the words “alternate income” and many large corporates, as well as small businesses, are looking at ways to implement it, but so few really understand its meaning and most have very limited knowledge on how to identify it, let alone implement it.
I think the first thing that needs clarification is what alternate income generation is.
Alternate income generation is the generation of profit via alternative means; means that are not necessarily directly related to core business, but usually require the core business to be able to exist. Alternate income generation usually involves innovative and / or creative elements and often exploits existing intellectual property that the business or institution may own. Alternate income generation is usually a supplementary income but often has the potential of outperforming the profit generated by the core business. It also has the potential of generating spinoff ventures that may develop into an empire if they are managed correctly.
Now this all sounds wonderful and it seems to be a no-brainer situation but how do you go about setting it up?
First we need to look at two examples that are well known, but that are often overlooked.
Universities have 3 methods of generating income. The first being through student fees. This is an unreliable method, especially in South Africa, as a large percentage of students don’t pay due to their parents being unemployed, the current socio-economic, or due to a number of other reasons. The second method of generating income, being the greatest income for institutions, is through government subsidies and donations from corporates. As both the aforementioned income generation methods are limited be the economy, institutions have had to move towards generating what is called 3rd stream income methods. 3rd stream income is a common term in universities and really refers to alternate income generation. Universities generate 3rd stream income through contract research, commercialising or selling intellectual property, quality assurance, consulting, and through partnerships with industry. All of these methods exploit surplus assets which the university possesses, the most likely candidate being intellectual property based.
2. Banking Environment
The second example that I want to highlight is the current change and additions to the banking industry over the last 5 years. The most obvious method of alternate income generation in the banking industry has been the addition of being able to buy a smart cellular device from your bank. This on its own seems very simple and has no direct link to the banks’ core business, but once you dig deeper and analyse is, it makes a lot of sense and can be very profitable.
Banks are well geared for this kind of addition. Firstly, is the ability to finance the device directly adding to the banks’ core business – loans. Having the ability to deliver the device and getting you to sign papers is also nothing new to a bank because they deliver bank cards all the time. The sale of the device generates profit in two ways: A profit margin on the sale of the physical device and the cost of and interest charged on the finance solution which they offer the customer.
But there is additional profit generated as well – “non-financial profit”. This is something that is very important when generating alternate income. The bank can use these deals as a marketing tool, they give you access to their services through the addition of an app, and the last “non-financial profit” that they generate is one of the most simple yet most effective. It’s in the small print that you sign. If you make use of this service, you may not close your account with the bank for the entire duration of the agreement! How’s that for customer retention through alternate income generation!
Now that you have had a high level overview of two well-known examples of alternate income generation, I am sure your mind is buzzing with possible ideas that you could implement in your business. But be careful! Make sure you consult someone with experience in alternate income generation. The last thing you want is for some additional income stream venture to take your focus off your core business and subsequently cost you your business. Making sure that your business has the management, financial and quality systems in place is core before implementing alternate income streams.