Where revenue and cost come from

Reading a business before reading its numbers

Modules 8 to 10 analyse one company, Tamarack Outfitters Inc., a TSX-listed retailer of outdoor equipment with stores across Ontario and an online shop. Before any ratio is computed, an analyst wants to know how the business makes money — because a margin is only good or bad relative to the model that produced it. The tool for that is the business model canvas, nine blocks that together describe any business on one page.

The nine blocks, filled for Tamarack

1. Customer segments — who is served. Tamarack serves weekend campers and a smaller, higher-spending segment of backcountry and climbing enthusiasts.
2. Value propositions — why they buy. Curated gear, staff who use it, free fitting and a no-questions return policy.
3. Channels — how the value reaches them. Twenty-two stores and the online shop; the stores also act as pick-up points.
4. Customer relationships — what kind of bond. A loyalty programme, in-store clinics, and an email list that drives the spring and fall seasons.
5. Revenue streams — how money comes in. Product sales at a mark-up, plus a small stream from repair services.
6. Key resources — what the business must own or control. Store leases, inventory, the brand, trained staff.
7. Key activities — what it must do well. Buying (choosing and negotiating the assortment), merchandising, and managing inventory through two sharp seasons.
8. Key partners — who it depends on. Gear manufacturers, a logistics provider, and the landlords of its twenty-two stores.
9. Cost structure — what it costs. Cost of goods sold is the largest line (60 % of revenue in 2025), then store wages and rent, then marketing and depreciation.

The canvas is descriptive, not a formula: its use is to make you ask which block a change in the numbers came from. When Tamarack’s gross margin rises, the answer lives in blocks 5 and 9 (pricing and buying); when customer acquisition cost rises, in blocks 3 and 4.

Transactional versus recurring revenue

Tamarack’s revenue is almost entirely transactional: a customer walks in, buys a tent, and may never return. Each dollar must be re-won. Management is considering a gear-rental subscription — $29 a month for access to a rotating kit of tents, packs and stoves. That would be recurring revenue: contracted in advance, predictable month to month, and lost only when a subscriber cancels.

Investors pay more for a dollar of recurring revenue than for a dollar of transactional revenue — a higher multiple — for three reasons: it is more predictable (next year’s revenue is largely this year’s subscribers), it is cheaper to keep a customer than to win one, and it lets the company plan inventory and staffing against a known base. The exam’s favourite trap is the reverse claim: that recurring revenue is riskier because customers can cancel. Cancellation is a risk, but a subscriber who has not cancelled is far more likely to pay next month than a walk-in customer is to walk in again.

A warranty renewal, a software licence billed annually, a gym membership: recurring. A one-off repair, a tent sold at full price, a clearance sale: transactional. The test is whether the customer has made a forward commitment.