5 Most Popular Revenue Models
Your product is ready to be sold. However, to ensure it goes into the hands of the right customer, there are countless factors that have to be taken into account to ensure your product can be bought out into the market. For example, the industry you are in, whether you are selling a web-based product or physical hardware, the channels you use to attract your customers, etc. One of these factors is picking the best revenue model that fits perfectly into your business.
What is a revenue model? A revenue model is a framework used by businesses to generate income from sales. A company’s revenue model determines everything from their value proposition, which revenue source to prioritize, and how to price their products. Revenue models help business owners manage their income stream and are key to a complete business model. Without a good business model, your business will incur costs it cannot sustain. The different types of revenue models are
- Subscription Business Model
Subscription business models are based on the idea of selling a product or service to receive monthly or yearly recurring subscription revenue. The best way to describe a subscription model is when customers will only keep paying for your products as long as they see value in the products your company provides them. This model leads to higher revenues and stronger customer relationships. Through subscription, customers become more valuable as long as they keep using your product.
Some tips for having a good subscription model are
- Determine your goals early — Adopting this business model requires you to define these goals early on. This helps ensure you are building the best pricing strategy possible for your specific goals. These goals will then help you define how you build your buyer personas and structure your pricing tiers.
- Boost acquisition with a better experience — Provide an amazing customer service. It will improve your customer acquisitions over time. A key metric to focus on is the onboarding journey.
Advantages of the subscription model include high predictability. The company’s income can be easily predicted on a month-to-month basis. It is easy to bring in disruptive innovation. Netflix disrupted the DVD renting industry by bringing in their subscription model. It also allows you to have a bigger budget for customer procurement. You can be a little more singularly focused on targeting certain audiences and building a customer base as you begin your subscription service.
The biggest risk of having a subscription service is a cancellation. It is very difficult to maintain value. This is a hurdle that subscription service business owners should anticipate. If your product gets old or can be replaced by something cheaper and easier, the novelty will wear off. You may also run into some big problems if there is a glitch in your monthly payment cycle. It is important to anticipate and have a plan for any potential problems that could cause things to snowball. London Tea Club, for example, stays on top of monthly billing by using MoonClerk.
This picture shows the subscription model of Netflix over the years and how they price their services on the features they have provided.
2. Affiliate Business Model
This model works by promoting referral links to relevant products and collecting commission on any subsequent sales of those products. Essentially you resell items from other retailers on your site. You are then rewarded for driving new customers to the merchant who is selling the item. There are a number of different payment methods associated with affiliate
- Pay Per Click (PPC)– Affiliate gets paid whenever the affiliate link is clicked.
2. Pay Per Impression (PPI)– Affiliate is paid when someone lands on the merchant’s site.
3. Pay Per Lead — Affiliate is paid when someone clicks on the affiliate link and takes an action.
4. Pay Per Sale (PPS)– Affiliate is paid when a sale is made. Affiliate receives a percentage cost of the item.
Being a startup, you own the business and build a network of affiliates who promote the product and receive a huge % of each sale they deliver to you. This helps you increase your market reach and appeal to niche markets, by carefully selecting affiliates.
A downside is a question of loyalty. When you are in a new space or market, there will be a lot of curiosity which will bring affiliates to your market. However, a new competitor may come along and a large number of your affiliates will move away to the next big thing.
3. Transactional Business Model
The transactional business model is an online business model where users engage in transactions and revenue is generated by charging these users a fee or commission on each successful transaction. This model was popularized by eBay and Amazon, which pushed the rise of the gig economy and has since been utilized by many companies to disrupt a wide array of industries. The transactional model is very direct. You have to sell services and products to generate revenue.
A disadvantage of transactional model is its tendency to be reactive rather than proactive. With no input from consumer interaction, the company is unaware of product trends or changes in consumer preferences that are trending. Rather than driving innovation and developing a reputation for being an industry leader, which can be used as powerful marketing tools, transactional marketing analyzes data and does not react until the results have been processed.
This picture shows the transactional model of Kickstarter. Kickstarter takes 5% of the money involved to help startups get funding. This money pays for the costs of running the site, advertisement, and employee payment. Startups get a group of backers with an incentive or reward. Kickstarter collects the payments entered by the backers through Amazon, and takes its cut as soon as the goal for funds has been met.
4. Licensing Revenue Model
This revenue model allows technology producers to monetize their technology products by licensing them to other companies so that they may be integrated into the end product. Licensing revenues can be structured in different ways, with upfront payments from the licensee or with payments that are revenue-dependent. Following a licensing, firms increase their number of new patents in specific areas threatened by rivals to ensure they take longer to catch up to their technology.
A licensing contract represents a commercial transaction in which one firm sells and the other buys a technology. Compared to strategic alliances, this significantly reduces the need for coordination between the firms involved. With licensing, firms can promptly tap into and use ready-made external R&D solutions. This approach saves not only time but also the resources that would otherwise have to be committed to the trial-and-error process of developing solutions from scratch.
The trade-off is that patent licensing leads to loss of control (fully) or partially over your invention. You are effectively creating competition for yourself. You may try to limit the scope of the license as much as possible to avoid giving your competitors an unnecessary advantage in the marketplace.
You may choose white labelling. This model is often used for mass-produced generic products including electronics, consumer products, and software packages such as DVD players, televisions, and web applications. Some examples are Payrix, Verrency.
5. Advertising Business Model
Advertising allows any platform that courts a significant amount of traffic to turn that traffic directly into revenue. You have seen it on your favorite blog, media site, and social media platform (think Google, Facebook, and LinkedIn): The popularity of the medium is valued, and advertisers pay to feature their product somewhere on it (known as display advertising) in order to co-opt a percentage of that site’s user base.
This is an in-depth formula calculator of how much Google Ads cost. To go in-depth with how Google calculates your ad price, you can click here.
If you offer free content, and it captures a target market, sponsors will be willing to pay more. Ad revenue also allows you to profit from offering solutions that have limited demand from paying customers.
The major disadvantage is that you incur costs of production with no guarantee of revenue, and click-through ratios are extremely low, which contributes to falling ad prices. Also, traffic may remain steady, but advertisers may come and go based on economic and industry factors.
Some Tips on Choosing Your Revenue Model
- Know Your Market
If your buyer persona is mainly single customers, address subscription options to them that are expertly targeted to their needs and how your product can fulfill them.
2. Know Your Product
Knowing your product is every bit as important. If you have many products lined up, a subscription model is your best bet. It would be easier to track growth figures. If your product is platform-based, investigate your advertising prospects to capitalize on your traffic buzz and find partners for an affiliate strategy that will give your revenue an added kick.
3. Keep Adapting
When your company keeps growing, your initial revenue model may change. You might start with a subscription model and then combine aspects from the affiliate advertising and data sales model with time and opportunity. You may also begin with a subscription, and move to a licensing revenue model. You need to know when it is the right time to move to a new model or bring in additional models to complement what you already use if the situation calls for it.
A great example where a company understood their market, their product, and adapted was Adobe. They transitioned from a licensed software company to a subscription-based cloud SaaS platform. Read about their full journey here.
What we can learn from Adobe is
- Do not rush the transition. Adobe Creative Cloud SaaS platform was originally released in April 2012 and offered its cloud services alongside its traditional software for purchase, an option only removed in 2017.
- Communicate with users and shareholders. Adobe published a letter to users, letting them know about the coming changes.
- Set realistic goals. Adobe created a new set of metrics for its subscription service, educated stakeholders about them, and kept its promises along the way. These goals included “markers” such as 4 million subscribers by 2015 and increased Annualized Recurring Revenue (ARR).
- Keep creating value during the transition. Adobe’s newly reinvented cloud products were able to appeal to new consumers, as well as transition many of the old.
Their revenue tripled after their transition to a subscription but as you can see, it was a slow change.
So, we have demonstrated some popular revenue models for startups. It will take some time, dedication in choosing the right one for you. One revenue model may work or multiple models may be required to run your business. Do the research and look at other examples from startups in the same line to understand their revenue model to take inspiration or make something unique out of your own.
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