what is revenue model in business plan

Revenue models: 11 types and how to pick the right one

Finding the right revenue model for your company and products is an incredibly important part of starting and expanding your business. It's a key part of building a brand. Explore popular revenue models and how to choose the right one.

What is a revenue model?

• 11 different types of revenue models

Costs associated with revenue models 

How to choose your revenue model.

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In one of the most famous lines from the 1941 classic Citizen Kane , Mr. Bernstein proclaims: “ It's no trick to make an awful lot of money... if what you want is to do is make a lot of money .” If only that statement were as true as it seemed. It's probably more accurate to say, “There are a lot of ways to make a lot of money.”

That’s particularly true for software businesses, with the rise of the mobile internet stimulating an explosion in the number of viable revenue models. Choosing which revenue model works best for your SaaS business, though, is not easy (even if that's all you want to do is choose a revenue model for your SaaS business). Your choice will help determine your sales strategy , and from there the growth rates, the amount of money you’ll need to invest initially, and the kind of relationship you’re likely to build with your customers. More than that — the choice determines the future of your business. Let’s take a look at some of the most popular revenue models used today — why they’re popular, why they work, and why they will (or won’t) work for you.

A revenue model is the income generating framework that is part of a company’s business model. Common revenue models include subscription, licensing and markup. The revenue model helps businesses determine their revenue generation strategies such as: which revenue source to prioritize, understanding target customers, and how to price their products.

Revenue models often get conflated with revenue streams, probably because each is a single revenue generation source. They are also confused with business models, of which revenue models are a part. Revenue models help business owners determine how to manage their revenue streams and are required to complete a business model.

Without a considered revenue model, your business will incur costs it cannot sustain. With a revenue model, you can set, track, and forecast business growth based on specific customer segments.

11 different types of revenue models 

There is no such thing as a perfect revenue model, but the popularity of some of the methods below suggests that many of them are well-tailored for the current state of the market. Here we’ll walk through each type of revenue model and when they may be most beneficial and applicable.

1. Subscription

The  subscription model  is the “vanilla” SaaS revenue model, not that there’s anything boring about a well-worked subscription plan. Businesses charge a customer every month or year for use of a product or service. All revenue is deferred and then fulfilled in installments. The subscription model is perhaps the most popular among SaaS companies because of its versatility, promise of  recurring revenue , and high value:customer lifetime balance.  Done right it's a one-way-ticket to sustainable growth .

Companies working with recurring revenue models, such as  subscription or licensing , see more value from a customer across a given customer lifetime. Being able to offer a variety of value options means your company can respond to more than one set of customer needs, expanding your appeal. Hubstaff’s subscription plan, seen below, is a classic of the genre:

Hubstaff’s various plans are distinct from one another in price and feature. This flexibility in the subscription model means that tentative or lower-budgeted customers can still get what they need, all the while maintaining visibility of what extra they could get for a few dollars more a month.

The freemium model is often described as a subscription revenue model, but in fact it’s an acquisition model, not a revenue model. Freemium involves giving users free access to an app and then selling subscriptions for a premium tier that includes more features.

Markup is a very common revenue model for buyer companies (i.e., companies that buy the products they sell). It’s as simple as can be: Take the cost of goods you just bought, mark it up X%, and make a profit margin on the original purchase. There are various subgenres of the markup model, including the following:

• Wholesale: Sale of goods or merchandise to retailers, business users, or other wholesalers
• Retail: Identification of demand, and satisfaction of it through a supply chain via a number of possible outlets, including physical and ecommercial ones

Markup is particularly used by mediators like ecommerce marketplaces — Amazon, for example. On average, Amazon charges a seller who uses their site 15% of the sale, plus  FBA fees  (including storage, pick & pack, shipping).

5. Pay-Per-User

One of the most enduring legacies of SaaS in the world of business is the introduction of pay-per-user (PPU). It involves giving a customer potentially unlimited to access to a range of features while charging them only for the services they use. At the dawn of SaaS, as the software required no physical delivery and deployed so quickly and cheaply, PPU appeared to be the most sensible revenue model. However, as natural as it seemed back in the day,  pay-per-user is not popular  anymore. Ascribing value to your product is one of the key considerations of your revenue model, and that includes demonstrating why it’s worth your target customers’ valuable dollars, not just making everything so cheap and easy that they can’t refuse. The issue with PPU, then, is that it’s rarely where value is ascribed to your product. Moreover, PPU kills your Monthly Active User metric. The per-user metric is not the most useful to customers in terms of deriving value — its take-it-or-leave-it approach actively works against your Daily Active Users number, and thus contributes to your churn rate.

6. Donation

As evidenced by the rise and rise of  Kickstarter - and  Patreon -based ventures, altruism is, if unpredictable, a pretty effective revenue model by itself. Relying on the donations of regular users is a common revenue model for nonprofits, online media (i.e., YouTubers) and independent news outlets.

7. Affiliate

What is  affiliate marketing ? This new, popular model works by promoting referral links to relevant products and collecting commission on any subsequent sales of those products. Leverage your product’s synergy with another product in an adjacent space and you both stand to gain. The affiliate model can be as simple as including in an article an outlink to a book or other product mentioned or offering your customers specialized recommendations relative to purchase history (again, Amazon is a master of this art). Some companies, such as Etsy, even have a  specific program  for their affiliates, where other companies can earn a commission on qualifying sales that result from featuring links to Etsy products and services. The affiliate revenue model is increasingly popular, owing to the way it dovetails effectively with other revenue models, particularly ad-based models.

8. Arbitrage

Applicable mainly to sellers or marketplace-oriented companies, the arbitrage revenue model uses the price difference in two different markets of the same good/service to make a profit. You buy in one market (a security/currency/commodity) and simultaneously sell in another market, at a higher price, what you just bought, pocketing the temporary price difference. Arbitrage is popular with  affiliate marketers , as well as with many cryptocurrency firms, SFOX being a prime example.

9. Commission

This transactional revenue model involves a middleman charging commission for each transaction it handles between two parties or for any lead it provides to the other party. It’s particularly popular with online marketplaces and aggregators, as well as businesses like independent music distributors. It’s particularly easy to get up and running with a commission-based business model because you’re working off of existing products. However, unless your field is well-conditioned for a monopoly, and unless your company is (or can become) that monopoly, you’ll find the commission model  very tough to scale .

10. Data Sales

Ever heard the phrase, “If you can’t see how the money’s made, you’re the product”? That’s data-selling in action. Many companies  selling digital goods  and services could not exist without core underlying data assets. In the data sale revenue model, this data is sold directly to a consumer or business customer. While certain companies will use data sale as their primary revenue model, the use of  data sales  to augment another revenue model is virtually ubiquitous. While some are using it as an  entrepreneurial venture , it is also the subject of considerable justified  public concern  and should be handled with care in the event you decide to go with it as your revenue model.

11. Web/Direct Sales

The old-fashioned revenue model made new, web sales and direct sales involve payment for goods or services through a digital medium. Web sales involve a customer finding your product via outbound marketing (or a web search) and can used for software, hardware, and subscription-based offerings. Direct sales revolve around inbound marketing and is good for handling multiple buyers and influencers in big-ticket markets.

A good revenue model is not just about squeezing as much revenue possible out of a sales cycle; it’s also about balancing your ambitions in the market with your resourcing requirements. A startup revenue model may be significantly different than one for an established business because their resources are vastly different. When choosing your model, factoring in costs is paramount to ensure profitability.

Cost of revenue

The first cost you’ll be likely to factor in is your cost of goods — how much it costs to produce the goods or service that you then sell. For hardware, this can comprise testing and manufacture; for software, it’ll include the whole development cycle. Regardless of what you produce, administrative overheads will also apply. You will find cost of goods a considerably less comprehensive metric than cost of revenue, which is the total cost of manufacturing and delivering a product or service to consumers. That includes everything we’ve just covered, plus distribution and marketing costs. Cost of revenue is more often used in SaaS and other service-oriented industries because it makes the many costs incurred outside of production in SaaS easier to track.

Prototyping costs

Prototyping is a fundamental aspect of any production cycle and, unfortunately, is one of the most expensive. While testing prototypes or beta versions of your new product, even the smallest revisions can necessitate costly changes to your production/development process. This usually comprises a base-level cost, plus iteration costs on top of that. When forecasting prototyping costs, it’s wise to plan for several iterations; it’s highly unlikely you’ll get everything right the first time around, especially if your product is innovative or is composed of a number of features.

Equipment costs

One of the beautiful things about being a SaaS company is that there are no production lines to run. Nevertheless, equipment costs still factor into the bottom line. Firmware,  app development tools , server rental, plus any other administrative services bought on subscription (e.g. Slack or Hubstaff) will play a part in your equipment costs, but, generally, equipment costs should be the easiest of all to forecast.

Labor costs

An underpaid workforce is an unhappy workforce (if it’s a workforce at all); wage costs come out of your bottom line. Based on the interaction of salary and commission in your  compensation plan , as well as the type of commission you offer (entirely open-ended or capped? Will there be accelerators/decelerators involved?), you will have to plan for your expenditure on labor costs differently.

Advertising & marketing costs

Your advertising and marketing costs will be determined by the following:

• The size of your respective advertising and marketing teams
• The scale of exposure you’re shooting for
• Your method of approach to advertising and marketing: undefinedundefinedundefined

With all of those options, how could you possibly be expected to choose? The answer is in your product itself.

Know your market

Where are your customers? How are they accessible to you? If your buyer personas are mainly single customers, address subscription options to them that are expertly targeted to their needs and  how your product can fulfill them . On the other hand, if you’re looking to sell to larger companies who need a customized version of your core product, consider a licensing-based option that will allow you to establish a solid, high-return relationship that has the legs to run for the long term. Knowing your market also means knowing your competitors. Before choosing a revenue model, make sure you have a firm grasp of industry benchmarks: Where is the baseline value for equivalent products to yours in the market? Where does your product sit? Interrogate your product honestly. Not only will a frank assessment of your product’s value save you the mistake of pricing your product too high (or too low), but it will also show you how to capitalize on its value and where your developmental compass should be pointed. Consider the strength of your connections with compatible peer companies. For instance, if you’re running time-management software and have connections to a neighboring company selling compatible HR software, reach out to them. A strong network connection can be leveraged with an effective affiliate revenue model–based strategy.

Know your product

Knowing your product is every bit as important as knowing your market, if not more so. Sometimes, the nature of a product dictates the best revenue model for it by itself. If you have a suite of products, is it most sensible to have them as a subscription service or as one-off purchased products? The smart money in this case, for the sake of your growth and daily-user figures, would be on the subscription option. Again, evaluate your product’s performance honestly. How does your product perform compared with its competitors? How wide is your feature array compared with the rest? An awareness of your product enables you to choose a revenue model that hits the value/willingness-to-pay sweet spot. Consider your options further if your product is not a straightforward software proposition. For example, if your product is platform-based, investigate your advertising prospects to capitalize on your traffic buzz, and think laterally to find possible partners for an affiliate strategy that will give your revenue an added kick.

Pitchfork’s affiliate program with makers of craft beer can be seen on the leftmost tab. Music blog platform Pitchfork sussed out that the only thing their readers like more than left-field music is craft beer, so they introduced an affiliate feature with brewer’s outlet October. It’s a smart exhibition of affiliate revenue scoring.

Expect the unexpected

As your product line changes and as your company grows, your initial revenue model may change. You may begin with a subscription revenue model that then assimilates aspects from the affiliate, advertising, and data sales models with time and opportunity. You might start off as a fledgling independent blog on donation with a little bit of advertising, then find yourself with an audience big enough that you can shun the advertisers, install a subscription model, and keep the integrity of your writing safeguarded. Alternatively, you may begin with subscription, see only a fraction of your potential success realized, and move to a licensing revenue model. The important thing is to be willing to shift your revenue model or bring in additional models to complement what you already use, if the situation calls for it.

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Your revenue model is unique

So many revenue sources, so many revenue models, so little time. There are some fundamental differences between revenue models. For instance, if you’re a SaaS company producing your own software product, you’re unlikely to get all that far with an arbitrage model. Likewise, if your product is a medium or if you’re a seller, a subscription-based revenue model won’t do the trick. A product with a high ceiling for potential revenue is not best served by a donation model. Nevertheless, the choice of a main revenue model out of the batch that do work for your product, and how you then combine them with appropriate aspects of other models, is yours, and yours only. Your product and the market should be in mind at all times while you’re settling on, adding to, and refining your model. After that, bringing in the revenue itself should be as easy as  Citizen Kane  said.

Related reading

What Is a Revenue Model?

Published: October 06, 2021

Deciding how you’ll generate revenue is one of the most challenging decisions for a business to make, aside from coming up with what you’ll actually sell.

You want to ensure that you’re accounting for production costs, salaries for workers, what your consumers are willing to pay, and that you generate enough to continue business operations. You also want to make sure that your strategy fits with what you’re trying to sell.

Various revenue models will help you set your business on the right path. In this post, we’ll outline what they are and how to choose the right one for your company.

What is a revenue model?

A revenue model dictates how a business will charge customers for a product or service to generate revenue. Revenue models prioritize the most effective ways to make money based on what is offered and who pays for it.

Revenue models are not to be confused with pricing models , which is when a business considers the products’ value and target audience to establish the best possible price for what they are selling to maximize profits. Once the pricing strategy is set, the revenue model will dictate how customers pay that price when they purchase.

RevOps teams also use pricing models to predict and forecast revenue for future business planning. Knowing where your money is coming from and how you’ll get it makes it easier to predict how often it will come in.

There are various revenue models that businesses use, and we’ll cover some below.

Types of Revenue Models

Recurring revenue model.

Recurring revenue model , sometimes called the subscription revenue model, generates revenue by charging customers at specific intervals (monthly, quarterly, annually, etc.) for access to a product or service. Businesses using this model are guaranteed to receive payment at each interval so long as customers don’t cancel their plans.

Recurring Revenue Model Example

Businesses that benefit from recurring revenue models are service-based (like providing software), product-based (like subscription boxes), or content-based (like newspapers or streaming services). Businesses you may be familiar with that use this strategy are Spotify, Amazon, and Hello Fresh.

Affiliate Revenue Model

Businesses using affiliate revenue models generate revenue through commission, as they sell items from other retailers on their site or vice versa.

Sellers work with different businesses to advertise and sell their products, tracking transactions with an affiliate link . When someone makes a purchase, the unique link notes the responsible affiliate, and commission is paid.

Affiliate Revenue Model Example

Businesses you may be familiar with that use the affiliate revenue model include Amazon affiliate links and ticket promoting services. Influencers also use this model to advertise products from businesses and entice users to purchase them through custom links.

Advertising Revenue Model

The advertising revenue model involves selling advertising space to other businesses. This space is sought after because the advertiser (who is selling the space) has high traffic and large audiences that the buyer (who is purchasing the space) wants to benefit from to give their business, product, or service visibility.

Advertising Revenue Model Example

Various types of online businesses use this model, like YouTube and Google, and so do traditional outlets like newspapers and magazines.

Sales Revenue Model

The sales revenue model states that you make money by selling goods and services to consumers, online and in person. Therefore, any business that directly sells products and services uses this model.

Sales Revenue Model Example

Clothing stores that only sell their products in a storefront or business-specific retail website use the sales revenue model as they sell directly to consumers with no third-party involvement.

SaaS Revenue Model

The Software as a Service (SaaS) revenue model is similar to the recurring revenue model as users are charged on an interval basis to use software. Businesses using this model focus on customer retention, as revenue is only guaranteed if you keep your customers. The image below is the HubSpot Marketing Hub pricing page that uses the SaaS recurring subscription model pricing.

SaaS Revenue Model Example

Businesses using this revenue model include video conferencing tool Zoom, communication platform Slack, and Adobe Suite.

How to Choose a Revenue Model

Choosing a revenue model is entirely dependent on your specific business needs and your pricing strategy.

There is no one-size-fits-all solution, and some businesses have multiple revenue streams within their revenue model. For example, if you use a recurring revenue model, you still may sell advertising space on your website to other businesses because you have a high-traffic page.

There are some key factors to keep in mind, though:

1. Understand your audience.

When picking a revenue model, the most important thing to remember is the target market and audience your pricing strategy has identified. You want to understand their pain points and what model makes the most sense for charging them.

For example, if you’re a service that sells meal kits, your target audience is likely busy and wants the convenience of food that is set up and easy to make after a long day. Using the recurring revenue model makes sense, as you’ll automatically charge them on an interval basis, and they won’t have to remember to submit payment — speaking directly to their desire for convenience .

2. Understand your product or service.

It’s also essential to have an in-depth understanding of your product or service and how your audience will use it. For example, if you sell shoes, your audience likely won’t need a new pair every month, so it may make sense to go with the Sales Revenue Model. Instead, your customers can come to you directly every time they need a new pair.

Choose the Model That Best Fits Your Needs

Ultimately, choosing a revenue model is centered around understanding what makes the most sense for what you’re selling and what makes the most sense (and will be most convenient) for the audiences you’re targeting.

Take time to develop your pricing strategy, choose a revenue model aligned with it, and begin generating revenue.

Don't forget to share this post!

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Revenue Models: 17 Types, Examples & Template [2023]

Revenue Models

How does (or will ) your business make money? It sounds almost too simple to ask, but having a clear understanding of your business' revenue model can be one of the most important ways to focus on key activities--and actually move the needles you care about most.

For indie businesses, settling on the right revenue model type rarely happens on first attempt. Instead, it's common to bounce around from subscriptions to digital products, membership communities and affiliate offerings until something finally *clicks* for you and your business.

This revenue models list component and template is intended to help you sort, consider and rank a list of common revenue models. In future, I'll be linking this table to related marketing channels, real data from other indie businesses and related templates--for now, let's take a quick look at the revenue models listed.

17 Common Revenue Model Examples

• Subscription
• Licensing (Digital Prod.)
• Advertising
• Affiliate Commission
• Project-Based Services
• Retainer-Based Services
• Tickets, Events, Workshops
• Manufacture (D2C)
• Library Access
• Community Access
• Marketplace

1. Subscription

The most common revenue model for SaaS and membership-based businesses. Customers pay a recurring fee, typically on a monthly or yearly basis, in exchange for access to your product or service.

Pros of subscription model

• Recurring revenue is more predictable and can be helpful in forecasting
• Can be a great way to build long-term relationships with customers
• Customers who are paying on a recurring basis are typically more engaged and have a higher lifetime value

Cons of subscription model:

• Can be difficult to acquire customers who are willing to pay a recurring fee
• Can be difficult to increase prices without losing customers
• There is always the risk of churn (customers cancelling their subscription)

The markup revenue model is most common in retail and ecommerce businesses, where goods are bought at wholesale prices and then sold to customers at a higher price.

Pros of markup model:

• Can be easier to get started since you don't need to develop a unique product or service
• There is less risk involved since you're not investing in developing or producing a good or service
• Can be easier to scale since you can simply buy more inventory as needed

Cons of markup model:

• Can be difficult to compete on price alone
• You may need to invest in marketing and branding to differentiate your business
• There can be slim margins if you're not careful with your pricing

3. Licensing (Digital Prod.)

The licensing revenue model is most common for digital products, where customers pay a one-time fee for access to your product.

Pros of licensing model:

• Can be a great way to generate one-time revenue from customers
• Customers who pays for a license typically have a higher perceived value of your product
• Can be easier to scale since you're not selling a physical good or service

Cons of licensing model:

• Can be difficult to acquire customers who are willing to pay a one-time fee
• There is always the risk of piracy (customers sharing your product without paying)
• Can be difficult to upsell customers or generate recurring revenue

4. Advertising

The advertising revenue model is most common for online businesses, where businesses sell advertising space on their website or in their email newsletter.

Pros of advertising model:

• Can be a great way to generate revenue from customers who are not ready to buy your product or service
• Advertising can be a complementary revenue stream to other revenue models

Cons of advertising model:

• Advertising can be disruptive to the user experience
• Advertising rates can fluctuate based on market conditions
• You may need to invest in marketing and branding to attract advertisers

5. Donation

The donation revenue model is most common for non-profit organizations, where customers donate money to support the cause or organization.

Pros of donation model:

• Can be a great way to generate revenue from customers who are passionate about your cause
• Donations are typically tax-deductible for the donor
• There is less pressure to generate revenue since donations are not expected to be recurring

Cons of donation model:

• Can be difficult to acquire customers who are willing to donate money
• May need to invest in marketing and branding to attract donors
• Donations can fluctuate based on economic conditions

6. Affiliate commission

The affiliate commission revenue model is another common for online businesses, where businesses pay a commission to affiliates for referring customers.

Pros of affiliate commission model:

• Can be a great way to generate revenue from customers who are already interested in your content
• Affiliates can provide valuable marketing and promotion for your business
• Can be easier to scale since you're not producing all the products you sell

Cons of affiliate commission model:

• Not always easy to find good affiliate programs
• You may need to invest in marketing and branding to attract affiliates, as well as readers
• Commissions can vary based on affiliate performance

7. Sponsors

The sponsorship revenue model is becoming increasingly common for online creators.

Pros of sponsorship model:

• Can be a great way to generate revenue from businesses or individuals who support your cause
• Sponsors typically have a high perceived value of your organization

Cons of sponsorship model:

• Can be difficult to acquire sponsors who are willing to pay
• May need to invest in marketing and branding to attract sponsors
• Sponsorship can fluctuate based on economic conditions

8. Data Sales

The data sales revenue model is most common for online businesses, where businesses sell data that they have collected.

Pros of data sales model:

• Scale advantages
• Data can be a valuable commodity for businesses

Cons of data sales model:

• Difficult to acquire unique data sets
• Longer sales cycle
• Data rates can fluctuate based on market conditions

9. Project-Based Services

The project-based services revenue model is most common for businesses that provide consulting or other services.

Pros of project-based services model:

• Can be a great way to generate revenue from customers who need your services
• Projects can be customized to the customer's needs

Cons of project-based services model:

• Very hands-on
• Need to keep your pipeline filled
• Projects can fluctuate based on economic conditions

10. Retainer-based services

The retainer-based services revenue model is most common recurring stream for businesses that provide consulting or other services.

Pros of retainer-based services model:

• Can be a good way to introduce recurring revenue to a services business
• Customers typically pay upfront for your services

Cons of retainer-based services model:

• Need to find a service that's profitable on retainer;
• Reducing churn;
• Pricing your retainer.

11. Tickets, Events, Workshops

The ticketing revenue model is most common for businesses that host events or workshops.

Pros of ticketing model:

• Can be a great way to generate revenue from customers who are interested in your event
• Tickets can be sold in advance of the event
• Virtual events and workshops can be easier to scale since you're not selling a physical good or service

Cons of ticketing model:

• Need to consistently market events
• Margins need to be high for it to be sustainable
• Often need to pay staff to help facilitate event

12. Royalties

The royalty revenue model is most common for businesses that sell digital content, such as books, music, or software.

Pros of royalty model:

• Royalties can be collected on a per-sale or per-use basis
• Highly asynchronous

Cons of royalty model:

• Can be difficult to track sales and commissions
• Typically low % commission
• Royalties can be volatile from year to year

13. Manufacture (D2C)

The manufacture model, going direct to customer, is probably the most familiar. You make a product and then sell it to the customer, whether that’s through your own store, a third-party retailer, or some other means.

Pros of Manufacture (D2C)

• You have complete control over your product
• You can build your own brand
• You can reach customers directly

Cons of Manufacture (D2C)

• It can be expensive to get started
• You have to invest in marketing and branding
• You have to manage inventory and shipping

14. Library Access

The library access model is common for businesses that offer digital content, such as books, music, or software. Customers can access your content through a subscription or pay-per-use basis.

Pros of Library Access

• Can reach a wide audience of potential customers
• Can generate revenue from customers who are interested in your content

Cons of Library Access

• Possibility of duplicating digital content without license
• Retaining users after they pay for first access
• Offering a unique library

15. Rent/Lease

The rent/lease revenue model is common for businesses that offer physical goods, such as equipment or vehicles. Customers can rent or lease your products on a short-term basis.

Pros of Rent/Lease

• Can generate revenue from customers who need your equipment
• Can be quite 'Passive' income
• Scalable if margins and demand are high enough

Cons of Rent/Lease

• High expenses upfront
• Potential damages costs

16. Community Access

The community access revenue model is common for businesses that offer physical goods or services. Customers can access your product or service through a subscription or pay-per-use basis.

Pros of Community Access

• Compounding as the community grows
• Plenty of online community software and tech popping up

Cons of Community Access

• Difficult to upgrade to a 'paid tier'
• Community moderation can be time-consuming
• Sustaining high community engagement

17. Marketplace

The marketplace revenue model is common for businesses that offer a platform for other businesses to sell their products or services. Customers can access the marketplace through a subscription or pay-per-use basis.

Pros of Marketplace

• Buyers will typically bring their own customers
• Can generate revenue from both sides of the market: buyers and sellers
• Don't need to produce your own products (beyond the marketplace itself)

Cons of Marketplace

• Quality control can be difficult
• Chicken-egg problem: getting your very first buyers and sellers
• Settling disputes and investing in customer support

Choosing A Revenue Model For Your Business

This Notion template database also includes some properties to help you understand more about the various revenue models listed, and how they compare with one another on a few important factors. These are:

• Volume needed;
• Typical Margins;
• Capital needed upfront;
• Relationship to customer (direct or indirect);
• Scalability;
• Revenue model examples; and

Volume Needed

The volume needed property gives an indication (on a scale from 'Very Low' to 'Very High') of how many customers are typically needed for this type of revenue model to work. For example, a subscription revenue model that charges $1.99/month will need a Very High volume of customers in order for the model to work; whereas a high-ticket services business may only need 1 or 2 big clients per year.

Typical Margins

The typical margins property is there to help you understand how profitable this revenue model can be, given the right circumstances, per sale or customer. For example, a business selling digital products will typically have very high margins (if they are priced correctly), whereas a business that relies on advertising as its primary revenue source may have lower margins.

Capital Needed Upfront

The capital needed upfront column describes (loosely) of how much money you will need to spend in order to get the business up-and-running. For example, a subscription business can be started with very little capital as there are no inventory or product development costs; whereas a manufacturing business may need a lot of money to get started as there are significant inventory and product development costs.

Relationship to Customer (Direct or Indirect)

The relationship to customer property gives an indication of whether the revenue model is direct, indirect or two-sided (e.g. marketplaces). A direct revenue model is one where you have a direct relationship with the customer; whereas an indirect revenue model is one where you do not have a direct relationship with the customer.

For example, a subscription business has a direct relationship with the customer as they are paying the business directly for a product/service; whereas an advertising-based revenue model has an indirect relationship with the customer as they are paying the advertiser, not the business.

Scalability

The scalability property gives an indication of how easy it is to scale this type of revenue model. A scalable revenue model is one that can grow without a significant increase in costs; whereas a non-scalable business is one that has fixed costs which limit its growth.

For example, a subscription business is usually more scalable than a manufacturing business as there are no inventory or product development costs; whereas a business that relies on a small number of high-value clients is usually less scalable as it is difficult for you to service more such clients with the same number of hours in a day.

Revenue Model Examples

This column provides an example of a real business that is deploying this revenue model. I've tried to select primarily indie businesses, however this isn't the case for all of the businesses listed (where I couldn't find an indie business, I chose something that may be relevant or a company that I just generally like).

It's also worth noting that many of the businesses listed under a certain revenue model type employ multiple revenue models, alongside the stream that they're listed under. This is quite common for indie businesses (to have multiple revenue streams) and can be a good hedge against any single revenue stream going dry.

As you look through the list of possible revenue models, you can give each a ranking and sort the list based on those that are best suited.  

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Maximizing Profitability: Explore Effective Revenue Models for Your Business

Choosing the right revenue model can help you earn more and create an effective pricing strategy. Explore the different types of revenue models here.

Imagine you're walking down the street on a hot summer day and see the neighborhood kids setting up a lemonade stand. Nothing sounds better on a day like this than an ice-cold lemonade. You approach their stand and find the price is $2 for a cup. While you know it wouldn't cost $2 to make just a glass of lemonade at home, you are willing to pay this price because you are thirsty and also want to support the kids.

From a business perspective, these kids are making a good amount of profit from their lemonade stand. They're actually using a markup revenue model where they increase the price of a cup of lemonade to account for their operating costs. It seems like the perfect model for making money. However, this might not be the case in every business situation. Depending on the scale and complexity of your business model , you need to consider different methods of developing revenue streams.

There are various revenue models implemented by businesses across the board. Many business models are far more complex than a simple lemonade stand and thus require a different revenue model strategy. There are subscription-based, advertising, and commission-based models, to name a few—but what is a revenue model, and how do you choose one?

If you're considering which revenue model to incorporate into your business strategy, keep reading to learn more.

What is a revenue model?

A revenue model is a blueprint for how a company produces income from its services or products. Simply put, it outlines the methods through which a business makes money. There are several components within a revenue model, including how you price your products and which sales channels you choose. A revenue model is established to answer how a company plans to financially optimize its business model.

Revenue models can be seen as roadmaps for understanding how your business will operate financially. They define how a company generates revenue, covers costs, and eventually turns a profit. A revenue model should outline the various sources of income to help guide decision-making related to the overall business strategy.

Benefits of implementing revenue models

Developing a revenue model is an essential step for growing your business. Here are some of the main benefits of implementing revenue models:

Financial sustainability

An effective revenue model establishes consistent income streams, providing financial security and sustainability. Your revenue model should help you understand how much revenue to expect so you can properly plan expenses, growth, and investments.

Pricing strategy

Factors such as market demand, competition, and product costs are considered within a revenue model. Each of these factors can inform your pricing strategy. Based on the revenue model, you can determine which prices maximize revenue while remaining appealing to customers.

Profitability analysis

Revenue models show how your business generates revenue. Understanding the costs incurred by creating your products or services, along with the generated revenue, allows you to analyze the profit margin of your business. Subsequently, you can make informed decisions to improve your resource allocation and pricing strategy.

Scalability

Growth is key to your business revenue model thriving. Implementing a revenue model provides insight into the scalability potential of your business. You can easily assess potential revenue growth by attracting more customers and introducing new products or services. Knowledge is power—the more information you have about how your business operates, the better you can plan for the future and make smarter investments.

Decision-making

A sound revenue model produces meaningful insights to influence strategic decision-making. Your revenue model indicates which products or services generate the highest income, enabling you to better allocate resources and focus on areas with the highest profitability potential.

Investor confidence

A smart revenue model will inspire investor and stakeholder confidence. Potential investors will be impressed by a well-defined revenue model that demonstrates a clear plan for generating multiple revenue streams.

Types of revenue models

There are various revenue models that can be implemented based on your specific business operations and needs. Understanding when and how to choose different types of revenue models will help you better calculate revenue growth rates.

Here are just a few revenue model examples:

Advertisement-based

An advertising revenue model is a popular type of revenue model. The main source of income is generated by displaying advertisements. In this model, your company sells advertising space to other businesses or brands who want to advertise with your customer base and users. How your business earns revenue is by charging advertisers for ad placements.

Pros of advertising-based revenue models

• Successful advertisement-based revenue models typically generate significant income.
• An advertising model can greatly boost revenue streams if you have a large user base or a popular platform.
• There's a low barrier to entry, meaning it's relatively easy to set up and requires minimal investment upfront.
• This revenue model also offers flexibility and opportunities for diversification since you can provide many ad types and have a full roster of advertisers.

Cons of advertising-based revenue models

• Advertisers aren't guaranteed.
• You need to attract advertisers who are willing to pay for placements on your platform.
• The advertising market constantly fluctuates, meaning your revenue may fluctuate whenever advertisers reduce their budgets and don't buy ad space.
• You must also consider user experience and how incorporating display ads will impact your engagement.

YouTube is well-known for using an advertising model. Content creators on the platform can monetize their content by displaying ads on their videos. YouTube earns revenue by selling advertising space to companies that want to reach a vast audience. In this case, content creators can also receive a share of the ad revenue based on several metrics, including clicks, view time, and impressions.

The affiliate model is a more common type of revenue model. It's where a company or person makes a profit by promoting and selling products on behalf of another business. In the affiliate revenue model, an affiliate acts as the middleman between potential customers and the products or services.

Pros of affiliate revenue models

• Affiliate models are generally low-risk and cost-effective.
• As an affiliate, you don't need to create your own products, nor do you handle inventory or customer segments.
• It offers the potential for passive income by earning commissions without active involvement.
• You can also generate income from various affiliate partners, making this model great for diversification and scalability.

Cons of affiliate revenue models

• As an affiliate, you have little to no control over the products or services you promote. This means that negative customer experiences may harm your reputation.
• This type of model also creates revenue dependence on partners.
• Generating a profit with affiliate marketing may be easy, but intense competition and market saturation can make it difficult to generate significant income.

Affiliate marketing is a common revenue model. Amazon Associates is an example of an affiliate revenue model that allows individuals or businesses to make money through commissions on Amazon products they promote. Amazon provides unique affiliate links that lead to participants earning a percentage of the sales on products they advertise.

Commission-based

Similar to the affiliate model, commission-based revenue models allow companies to generate revenue by receiving a commission from each transaction it facilitates. Again, the company acts as a mediator between sellers and buyers.

Pros of commission-based revenue models

• The commission-based revenue model can be extremely scalable.
• The more users you gain, the more transactions will occur, leading to an increase in revenue growth.
• Another benefit of this model type is risk-sharing between the company and the sellers.

Cons of commission-based revenue models

• One of the major downsides to this model is dependency on transaction volume. If there are few transactions happening, the opportunities for generating revenue significantly decrease.
• You'll also experience limited control over pricing, which can lead to price competition among sellers and lower commission rates.

Airbnb uses a commission-based model. The platform makes money by connecting individuals with accommodation. Airbnb earns a commission on every booking made on the platform, making the company reliant on users securing lodging through their platform in order to generate revenue.

Another popular revenue model is donation-based. This strategy is implemented by soliciting and accepting voluntary donations instead of selling services or products.

Pros of donation revenue models

• One of the main benefits of a donation revenue model is the flexibility of revenue generation.
• Organizations can receive revenue streams from diverse donors.
• It's one of the most common revenue models implemented by charitable organizations and comes with tax benefits.

Cons of donation revenue models

• The downside of relying on donations is having an unsteady and uncertain revenue stream.
• Organizations are dependent on donors and are also required to spend money and time on fundraising.
• There are certain stipulations associated with receiving donations and how that money can be used

The Red Cross uses a donation revenue model. As a global humanitarian organization, the Red Cross relies on voluntary contributions to fund its services and programs. The Red Cross doesn't sell products, but they provide services for the community. The donation model is used to support the execution of these services.

The markup model entails a pricing strategy of marking up the cost or adding a margin on top to ensure financial viability. This strategy is used to cover expenses and generate profit despite external factors.

Pros of markup revenue models

• A markup revenue model is simple in practice.
• It doesn't require complex calculations and ensures the profit calculation is straightforward and transparent.
• The markup model also offers flexibility in pricing, meaning businesses can adjust the markup percentage depending on market conditions, supply, competition, and more.

Cons of markup revenue models

• The markup model can be difficult to implement in competitive markets.
• Competing while maintaining profit margins can be challenging when competitors implement aggressive pricing.

The retail industry generally relies on the markup model. There are specific production costs associated with making a pair of shoes. Retailers typically purchase the shoes from wholesalers at a fixed price. Then, they add a markup percentage to determine the selling price so it covers operating expenses and allows the retailer to earn money.

An interest revenue model refers to businesses generating income by earning interest. In this case, companies are making money by leveraging interest rates rather than making direct sales.

Pros of interest revenue models

• Interest models allow companies to earn passive income and diversify their revenue streams.
• This revenue model is also highly scalable and can benefit from changes in interest rates, leading to enhanced earning potential.

Cons of interest revenue models

• There's a level of risk associated with the interest revenue model. Risks include borrowers defaulting on loans, interest rate fluctuations, regulatory and compliance laws, and intense market competition.

Credit card companies use the interest operating model. They lend money to borrowers and earn interest back based on interest rates. These companies manage credit and loan portfolios while taking advantage of interest rates to increase profitability.

Subscription

A subscription revenue model relies on customers who subscribe and pay for your products or services. Customers pay fees to access the company's collection of products or services, allowing for steady revenue sources. The subscription-based revenue model allows a company to generate revenue by offering long-term subscriptions, resulting in consistent income such as monthly recurring revenue .

Pros of subscription revenue models

• The subscription model provides a reliable and predictable revenue stream.
• Customers pay in regular installments, allowing businesses to easily forecast finances.
• This revenue model also promotes customer retention and loyalty while lending itself to upselling and cross-selling opportunities.

Cons of subscription revenue models

• Acquiring customers with the subscription model can be challenging, meaning you may need to spend more time and money on marketing and sales.
• Customers can also cancel their subscriptions, leading to an increase in customer turnover.

Netflix is one of the most popular subscription revenue model examples. Users pay a monthly fee to access the streaming platform. Revenue generation results from monthly subscriptions. Not all subscription models are successful, but Netflix is the best example of how a subscription model can succeed in making money.

Which revenue model is right for you?

Choosing which revenue model is right for your business will depend on a variety of factors, such as your target audience, operating costs, and overall business model.

The first step for choosing a revenue model is to understand your market and the needs of your target audience. For example, media organizations will have different audiences than healthcare companies. Conduct market research to understand your customers and their needs, preferences, and pain points. These findings will inform your business strategy and how you decide to conduct business operations.

The next step is to specify your value proposition by clearly defining the unique value of your product or service. Identify key benefits and determine what sets your business apart from the competition. Consider how your business performs in terms of innovation, convenience, and quality. Communicating these benefits clearly and concisely enables your target customers to connect with your company.

Know your product or service inside-out. Understanding how your product functions, what it offers to target customers, and what your mission is will help you determine your company's business model. The ultimate goal is to generate revenue, so the more you understand your product or service, the better you can make sound business decisions.

There are several common revenue models to choose from. Online businesses, such as an e-commerce platform, might consider an advertising revenue model to diversify income streams. A local bakery may opt for other revenue models more suitable for their needs and production model. Select a revenue model after thorough research and consideration to ensure a steady and effective revenue stream.

Grow your profits with the right revenue model

Business models rely on generating income. The best way to grow your profits is to choose a revenue model that fits your company's unique needs. A company's revenue streams are dependent on more than just direct sales. Make sure to consider all different revenue model types when developing your strategy. A smart strategy is essential for a scalable business .

Whether you're just getting started or considering a switch in your revenue model, you can land more sales by leveraging market insights . Unlock your full earning potential by exploring the different tools and resources available for choosing a revenue model and growing your business. Rely on actionable data to make informed business decisions and hit your targets.

The Leading Source of Insights On Business Model Strategy & Tech Business Models

Revenue Models: The Advanced Guide To Revenue Modeling

Revenue modeling is a process of incorporating a sustainable financial model for revenue generation within a business model design. Revenue modeling can help to understand what options make more sense in creating a digital business from scratch; alternatively, it can help in analyzing existing digital businesses and reverse engineer them.

Table of Contents

Myth: A revenue model is a business model

I noticed over the years of research I’ve put into business modeling how pervasive the confusion between revenue and business model is.

In the startup world, those are often used as synonyms.

Which is fine as long as it doesn’t limit the understanding of what you can do within a business model.

Indeed, a revenue model actually does inform the business model, and it often influences it from the foundation.

However, those are not the same. In fact, in many cases, a revenue model and stream are the only building blocks of an overall business model.

Take the case of Netflix, which for years has been running with a subscription business model, and that much much later on (only in 2021), Netflix started to roll out an ad-based revenue model.

Changing a revenue model is not just about changing the way you make money, but it implies changing a set of assumptions within a business model.

Going back to the case of Netflix, adding the ad-supported tier within its business model, requires an understanding of the implications that might carry on the overall business model.

Thus, Netflix is not just about running ads on top of its platform. It’s about understanding how the streaming ad ecosystem works, how to integrate it within its business model, and what consequences that might have on a current subscription model.

That is why, if you’re on Netflix when you start running ads, it’s not just about how and how much money you can make from it; it’s about asking a few fundamental questions about the overall business model, such as:

• What’s the impact of advertising on the overall business model?
• How is advertising different from subscriptions?
• What scalability advertising has vs. subscriptions?
• What margins do we have with advertising vs. subscriptions?
• Is advertising helping us build a better acquisition funnel?
• Who are the key players within the advertising ecosystem?
• How do we build a scalable advertising platform?

In other words, my argument here is if you plug in a new revenue stream, that is not a business model.

And it’s not just about how you make money; that is also about how that stream integrates within the overall business model and how it changes its distribution , marketing , and financial model.

With this holistic understanding, you are not constrained by a narrowed definition.

Revenue modeling as the avenue into the business model

Once you take into account the above, then, of course, you know that revenue modeling can be an avenue into a business model.

Thus, an understanding of the revenue model will help you:

• Reverse engineering any business (by starting the analysis by simply following the money).
• Speed up the experimentation process by plugging in new revenue models for your business.
• Start building or scaling a business model!

What is a business model?

What is a revenue model?

For the sake of this guide, we’ll look at a key distinction: symmetrical vs. asymmetrical in several contexts.

Remember that all classification methods have flaws and we can only take them into account as long as they help us better tune an existing business model .

I decided to use this classification, but any alternative classification works as long as we are able to grasp and understand the possibilities we have in terms of business model design.

Symmetrical vs. Asymmetrical business models

Business models can be of various types.

For that matter, there might be as many business models as the companies we have in the marketplace.

In this guide, we’ll use as reference symmetry vs. asymmetry to distinguish across two main business models categories.

In this particular case, we’ll look at revenue modeling by keeping a key distinction between symmetry and asymmetry from three different perspectives.

Cash: who pays the bill?

In many cases, platform business models success depends upon two key players:

• Users : who don’t pay for some or all the services offered by a platform (on the user-side), but they help the platform build it’s a core asset
• Customers : who pay for the services offered (on the customer-side) to take advantage of the core asset of the platform

In such a business model, the platform assembles the anonymized data of its users who get a free service in exchange.

The assembled data gets processed (by the platform AI and algorithms) and it’s used to scale the platform, build a valuable core asset that can be financed by a set of customers willing to pay for it.

Asymmetrical: users ≠ customers

The asymmetry here stands in the fact that users and customers are two separate entities (asymmetrical cash model: users ≠ customers).

Think of how Google sells ads to companies, while its core products are all free to users.

Symmetrical: users = customers

Thus, in a symmetrical revenue model, users and customers are the same entity (symmetrical cash model: users = customers).

Think of how Netflix’s users are also its customers.

However, it’s worth highlighting how Netflix has now launched an ad-supported version, which starts at $6.99 and is an ad-supported tier.

This is an interesting business model transition. Indeed, for all its life, Netflix has relied on a linear and symmetrical revenue model, where users were also customers.

As of now, that is still true. In fact, in the ad-supported tier, users are still paying customers. However, it’s worth emphasizing that users are now advertisers’ target.

Thus, by October 2022, as Netflix started to roll out its ad-supported plan, the company also started to move into an asymmetrical business model type.

Why is Netflix moving toward an asymmetric business model? The answer is simple: Scale!

To reach a subsequent stage of scale, where the company can successfully reach a billion users, an ad-supported business model can help with that.

Information: does the user know how the platform makes money?

If there is information asymmetry, it means there is one of the parties knows more than the other side.

Asymmetrical: hidden revenue generation

In a hidden revenue generation model , the users of the platform ignore how it makes money while the platform knows a lot about its users.

Symmetrical: revealed revenue generation

In a symmetrical model, revenue generation is revealed, thus enabling the customers to know what they get for the service paid.

Scale: does the platform retain its margins as it scales?

Scale is the ability of a company to grow exponentially while keeping its margins growing with the platform’s revenues.

Symmetrical and Linear: margins tighten as the platform scales

In a linear symmetrical revenue model as the platform scales its margins tighten up, thus reducing the profitability of the platform.

Asymmetrical and Non-linear: margins keep growing as the platform scales

In a non-linear asymmetrical revenue model as the platform scales margins keep growing, thus keeping the platform highly profitable.

Revenue model examples

In this chapter, we’ll see some revenue model examples you can use or borrow to build your business model .

Ad-supported

Subscription-based

Consumption-based

Commission-based

Hidden Revenue

Razor and blade

Hybrid revenue models

A good example of a business model that has different revenue models is Amazon. Based on each side of its business, Amazon has different revenue streams and models:

Within the Amazon core consumer e-commerce platform, there are two main types of revenue streams:

• Amazon-branded products : on those products which are labeled and sourced by Amazon, the company sells them directly to consumers. Therefore, this is part of the revenue model, where Amazon has the highest margins and more control.
• Amazon’s third-parties   products : those are products that  Amazon  hosts on its own e-commerce platform. Those products benefit from Amazon’s e-commerce visibility and sustained traffic. At the same time, Amazon will have the advantage of increasing the variety of products available in its stores, thus making them more appealing to consumers. However, compared to the branded product, Amazon will have less control and reduced margins. Indeed, Amazon will split the revenues with third-party sellers.

To enable more capabilities to third-party e-commerce stores, and at the same time, guarantee a better experience on its e-commerce (and we can argue also to have more control and margins) Amazon introduced over the years the third-party seller services:

• Amazon third-party seller services:  fulfilled by  Amazon , perhaps enables sellers to host their inventories, and deliver with  Amazon , thus collecting a royalty as a result of the sales made on the platform. Here, the revenue model is flipped. Indeed, Amazon will collect most of the revenues coming from the product sales (remember that Amazon also takes care of storing the inventory and fulfilling it to customers) and the seller will collect a royalty, thus a % of the sale.

Other revenue streams comprise:

• Product advertising:  Amazon  is the most popular product search engine. Over the years it gave the options to e-commerce built on top of Amazon, to gain more visibility both on an impression or on a click-through rate basis. This means that Amazon sells advertising with a bidding model (similar to Google Ads) .
• Amazon Prime:  born as an attempt by  Amazon  to increase the repeat business on the e-commerce platform, Prime turned into a real streaming entertaining business, competing with other companies, like Netflix. This revenue stream follows a subscription-based model .
• Amazon AWS:  Amazon  AWS turned into a cloud infrastructure able to support many small, medium, and enterprise customers. The revenue model here runs primarily based on a consumption basis. Therefore, with a logic of pay-as-you-go.

Revenue model vs. cost structure

To complete the picture, it’s critical to trace the difference between the revenue model and cost structure.

And from there, how the two elements come together to help build a viable business model.

The cost structure is tightly connected to the revenue model. Each revenue stream might carry

Remove model and distribution

In many cases, having a more holistic view of how the revenue model and cost structure interact is critical also to assess when a revenue model goes beyond making money alone.

Don’t get me wrong; a revenue model does focus primarily on how to make money for a business.

However, in some cases, a revenue model might bring in the money as a side-effect of building distribution for the business.

Let’s take a few examples.

When you look at Spotify’s business model , there is no doubt that the premium members’ revenue stream (for now) is the one that most contributes to the business.

Above, you can see how the premium membership revenue is many times over that of the ad-supported tier.

And there is more to it.

Even if we look at it from a cost structure standpoint, the premium membership revenue has a much lower cost compared to the ad business.

Indeed, Spotify, in 2021, generated €8.46 billion in revenues from the premium members’ revenue stream.

And of that, an almost 30% gross profit margin.

On the other hand, in the same period, Spotify generated €1.2 billion in revenue from the ad-supported stream at a 20% gross profit margin.

Does that mean the ad-supported revenue stream is not as good as the premium members?

If you look at it from a revenue generation standpoint alone. That is what you can imply.

However, you do understand that the ad-supported side of the business also represents the marketing funnel, which helps Spotify get recognized by hundred of millions of users across the world.

And that many of these free, ad-supported members become, over time, paid subscribers.

You can get a more comprehensive picture.

As the ad-supported side of the business is not only a revenue stream but it’s also a marketing and distribution channel.

In addition, the ad-supported side of the business, if scaled up, can also enable Spotify to generate much more revenues, in the future, at much wider margins.

Indeed, advertising networks, compared to membership networks, work better as they are scaled up!

That is why it’s critical to develop a holistic mindset to grasp the complete picture of how companies’ business models work.

This is the essence of business engineering .

Breaking down the wall between product and distribution

The lesson we learned from the Internet playbook and way of doing business is the aspiration, over time, to break the walls between product and distribution .

In short, the product becomes both a revenue generator and a marketing /distribution channel.

When you combine the two, that is when you’re able to build an incredible growth engine that will enable a company to establish a scalable business model built on solid moats!

Key Highlights:

• Revenue Modeling Defined : Revenue modeling involves creating a sustainable financial plan for generating income within a business model. It aids in analyzing existing digital businesses, reverse engineering them, and designing new digital ventures.
• Distinguishing Revenue Model and Business Model : While often used interchangeably, a revenue model and a business model are not the same. A revenue model is a foundational element within a business model that informs and influences various aspects of the business.
• Netflix Case Study : The example of Netflix demonstrates how changing a revenue model (adding an ad-based tier) impacts the entire business model. This shift requires considerations about the impact on the overall model, differences from subscriptions, scalability, margins, acquisition funnel, ecosystem players, and platform scalability.
• Holistic Approach to Revenue Modeling : Revenue modeling goes beyond just making money; it involves understanding how a new revenue stream integrates with the business model, impacting distribution, marketing , and financial aspects.
• Importance of Asking Fundamental Questions : When introducing a new revenue stream, it’s crucial to address fundamental questions about its effects on the overall business model, differences from existing streams, scalability, margins, and more.
• Avenue into Business Model Design : Revenue modeling serves as an entry point to designing a business model. It helps in reverse engineering businesses, accelerating experimentation with new revenue models, and facilitating the process of building or scaling a business.
• Business Model Defined : A business model is a comprehensive framework that systematically creates long-term value for an organization by delivering value to customers and capturing value through monetization strategies. It guides understanding, design, and testing of business assumptions.
• Revenue Model Defined : A revenue stream is a foundational component of a business model, representing the economic value customers pay for products and services. It influences how a business model functions and delivers value.
• Symmetrical vs. Asymmetrical Business Models : Asymmetrical models don’t directly monetize users but leverage user data and technology, often having a key customer pay to sustain the core asset. Google’s data-driven ad monetization is an example of an asymmetrical model.
• Various Business Model Types : Business models come in different types, such as scalability, incubator, pivot, freemium, open source, seed funding, cash flow, accessibility, blue ocean, churn, evangelist, growth hacking, MVP, leaner MVP, product-market fit, business engineering, and more.
• Transitional Business Models : Transitional models are used to enter markets, gain traction, and shape long-term scalability visions.
• Revenue Streams Matrix : Classification of revenue streams based on customer interactions and ownership of those interactions aids in revenue modeling.
• Pricing Strategies : Developing pricing models that align with customer needs and financial sustainability is an integral aspect of revenue modeling.
• Considerations in Designing Business Models : A holistic understanding of revenue modeling is crucial, as it influences distribution, marketing , financial models, and other key aspects of a business model.
• Applying Holistic Approach to Business Growth : Utilizing revenue modeling for designing innovative revenue strategies contributes to business growth and sustainability.

Other Case Studies

What is revenue and business model?

Most business people tend to confuse the revenue model with the business model . While the revenue model informs a business model, those are two separate things. The revenue model is one of the building blocks of a business model. Yet a business model comprises many other aspects such as distribution, cost structure, financial structure, and more.

What is revenue model example?

Examples of revenue models that work on the Internet are ad-supported, subscription-based, consumption-based, and SaaS. Those revenue models help web companies to grow and scale their business models .

What is the best revenue model?

In the Inernet era, a revenue model that proved quite effective is the ad-supported business model, where companies like Google provide free tools to billions of people across the web. Those free tools are paid for by companies who advertise on Google. Google opened the way for many other companies to use a similar model to finance the web.

Other Key Components of a Business Model

Value Proposition

Cost Structure

Pricing Strategies

Financial Structure

Technological Modeling

Distribution Channels

Marketing Channels

Other Revenue Model Case Studies

BuzzFeed Business Model

Farfetch Business Model

How Does Revolut Make Money

eToro Business Model

Oracle Business Model

Zalando Business Model

How Does E-Trade Make Money

Tinder Business Model

ClassPass Business Model

Reddit Business Model

Read Also: Amazon Business Model , Google Business Model , Netflix Business Model , Airbnb Business Model , Spotify Business Model , Dropbox Business Model .

Other business resources:

• What Is Business Model Innovation
• What Is a Business Model
• What Is A Heuristic
• What Is Bounded Rationality
• What Is Business Development
• What Is Business Strategy
• What is Blitzscaling
• What Is a Value Proposition
• What Is a Lean Startup Canvas
• What Is Market Segmentation
• What Is a Marketing Strategy
• What is Growth Hacking

More Resources

About The Author

Gennaro Cuofano

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What is a Revenue Model? Types of Revenue Models Explained

A company’s revenue model refers to the methods it uses to generate income from its products or services. The revenue model outlines how a business plans to earn money and get paid by its customers. It is a key component of the overall business model.

Understanding different types of revenue models is crucial for entrepreneurs and business owners. The right revenue model aligns with the core value proposition and allows a company to maximize profits.

In this post, we’ll break down what a revenue model is, explain the most common revenue model types with examples, and distinguish between a revenue model and an overall business model.

Let’s dive in!

What is a Revenue Model?

A revenue model refers to the ways a company makes money from the products or services it offers. It details how the business plans to generate revenue streams and get paid by its customers.

In simple terms, the revenue model answers this critical question:

“How does this company make money?”

It encompasses the sales, pricing, and payment methods for exchanging value between a business and its customers.

A good revenue model aligns tightly with the core value proposition offered. It ensures the company can efficiently monetize the value it provides to customers.

The revenue model works in conjunction with other components of the overall business model:

• Value Proposition  – The core products/services offered and the primary customer needs fulfilled
• Revenue Model  – How the company charges customers and earns income from the value proposition
• Cost Structure  – The major costs incurred in operating the business model
• Key Activities & Resources  – The operational elements needed to execute the business model

While the revenue model focuses specifically on how a company makes money, the full business model covers how it creates, delivers, and captures value overall.

Types of Revenue Models

There are various categories and types of revenue models companies can adopt. The most common revenue model examples include:

1. Transactional

In a transactional model, the business earns money each time a customer makes a purchase. Payment is exchanged directly in return for the product or service.

Transactions can be one-time purchases or recurring purchases on a subscription basis. They may involve a simple fixed price or dynamic pricing.

• Retail companies earn revenue from point-of-sale purchases
• SaaS companies earn revenue from recurring subscription fees
• Uber earns revenue per ride provided to the customer

2. Usage-based

In a usage-based model, the customer pays based on how much they utilize a product/service. The revenue earned scales directly with usage volume.

Common usage metrics include minutes used, data consumed, storage space occupied, or seats filled. Usage can be metered and billed at regular intervals or paid on demand.

• Cloud computing services like AWS charge based on compute resources used
• Telecom companies charge per minute and data used
• Airlines earn revenue based on seats flown

3. Advertising

In an advertising model, companies earn revenue by selling ad space to third parties. Ads are displayed alongside the company’s content or services to users.

Various online and offline mediums carry advertising, including search engines, social media, mobile apps, billboards, TV, and radio.

• Facebook and Google earn the most revenue from advertising
• Media companies earn revenues by selling ad placements
• Free apps and sites monetize via ads while users enjoy free content

4. Commission

In a commission model, a business facilitates transactions between two parties and takes a percentage as the fee. Commissions are paid when a transaction is completed.

Common examples include brokers, agents, marketplaces, and advisors. The commission rate varies across industries.

• Real estate brokers take a ~3% commission on home sales
• Insurance agents earn commissions for new policies written
• Travel booking sites charge commissions on hotel/flight bookings

5. Licensing

With licensing, companies earn revenues by granting customers permission to use their intellectual property. Licenses provide rights to intangible assets like brands, content, data, or technology.

Licensing allows the IP owner to retain ownership while monetizing via recurring license fees. Types of licenses include trademarks, patents, copyrights, or franchises.

• Fast food chains license their brand name to franchisees for an ongoing fee
• Entertainment companies license content rights to streaming platforms
• Disney earns revenue by licensing its character IP for toys, games, apparel, and more

Retailers, distributors, and manufacturers earn revenues through price markups applied when goods exchange hands along the supply chain.

Each middleman in the chain adds a markup on top of their costs to cover logistics and profits. Markups result in higher end-user prices.

• Clothing brands mark up wholesale prices 2-3x when selling to retail stores
• Distributors mark up goods from the wholesale price when selling to retailers
• Retail stores mark up goods sold to consumers, on top of distributor & brand markups

7. Service Fees

Companies earn revenues by charging service, support, or consultation fees around a product, service, or asset. Service revenues recur over time, often via subscriptions.

Types of services generating fees include maintenance, tech support, training, consulting, and financial advice. The fee amount varies based on the effort required.

• Plumbers, lawyers, and consultants bill hourly or fixed fees for services
• Robinhood charges monthly fees for premium services to traders
• Investment managers charge recurring fees based on assets under management

In a rental model, companies earn revenues by temporarily renting out physical products, spaces, or other fixed assets to customers at an hourly/daily/monthly rate.

The same assets can generate rental income over extended periods between uses by multiple customers. Rental flexibility often offsets higher costs vs. ownership.

• Car rental companies generate revenues by renting out vehicles
• Equipment rental companies rent out tools, machinery, electronics, furniture, etc
• Venue owners earn revenues by renting out event spaces

With leasing, companies earn revenues by renting products to customers for extended contract periods (typically 2+ years).

At the end of the lease, assets are returned to the owner instead of sold outright. Leasing can enhance product accessibility via lower regular payments spread over time rather than large one-time fees.

• Auto companies lease vehicles to consumers over multi-year contracts
• Airlines and freight carriers lease planes and transport equipment
• Businesses lease computers, servers, printers, and other tech gear

10. Crowdfunding

Crowdfunding platforms help companies or entrepreneurs raise funds from a large pool of backers or investors in exchange for future products, equity, rewards, or repayment.

The platforms facilitate crowdsourced fundraising from the public via websites like Kickstarter, Indiegogo, and GoFundMe. The platforms themselves earn revenues by taking a percentage of funds raised.

• Smartwatch startup Pebble raised over $10M via Kickstarter crowdfunding
• Local concert promoters crowdfund venue rental costs upfront via fan contributions
• Charities crowdfund donations from the public to fund operations and causes

This covers the major types of revenue models leveraged across industries. Companies often utilize hybrid revenue models encompassing two or more streams. The ideal mix aligns with core business operations.

Now let’s distinguish the revenue model from the overarching business model.

Revenue Model vs. Business Model

The revenue model represents just one component of the complete business model. But what exactly is the difference?

The business model is the company’s core logic for creating, delivering, and capturing value. It’s a holistic view of how the entire business works and earns profits.

The business model canvas, pioneered by Alexander Osterwalder, outlines nine interconnected building blocks making up the full business model:

Business Model Canvas template by Alexander Osterwalder

While each component interacts to form the overall model, the revenue model specifically focuses on how a company plans to earn income from the value it provides customers.

The revenue model is just one piece of the broader business model puzzle. But it’s a critical piece, as profits ultimately fuel operations and growth.

Let’s contrast some key differences:

The business model:

• Encompasses all activities related to providing value and earning profit
• Includes pricing but also production, service delivery, internal operations, etc.
• Outlines the complete experience from the customer’s perspective

The revenue model:

• Focuses specifically on how a company charges for value exchanged
• Details just the monetization and payment components
• Defines the financial value exchange from the company’s perspective

In summary, the business model is comprehensive, while the revenue model simply covers pricing and income generation.

However a well-constructed revenue model aligns cleanly with the overall business model. Revenues should stem directly from fulfilling the core value proposition and delivering real customer benefits.

Constructing a Robust Revenue Model

When designing a revenue model, key objectives include:

• Maximizing income  – The model should optimize monetization of the value delivered to customers
• Profitability  – Revenues should surpass operational costs to achieve profitability
• Scalability  – The model should support increased revenues as the business grows
• Sustainability – Income levels must remain relatively stable and predictable from period to period
• Feasibility  – The model should align with capabilities and not create unrealistic operational burdens

Common pitfalls like over complexity, hidden costs, confusing pricing, or inconsistent revenues can undermine the model. Periodic re-evaluation helps keep the model aligned with evolving market dynamics.

Taking the time to engineer an intelligent revenue model directly fuels a company’s chances of success. An ineffective model almost guarantees failure out of the gates.

While on the surface it appears simple, designing a robust revenue model requires deep market analysis and creative thinking. But the effort pays dividends over the long-term life of a business.

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Key Takeaways

• A company’s revenue model outlines how it earns income from the value proposition delivered to customers
• The revenue model details how products and services are monetized through sales, pricing, and payment methods
• It is a key component of the full business model but focuses specifically on revenue generation
• Various revenue models include transactional, usage-based, advertising, commission, licensing, markups, service fees, rental, leasing, and crowdfunding
• The revenue model directly impacts profitability, scalability, sustainability, and operational feasibility
• A well-designed revenue model aligns cleanly with the overall business model and market dynamics

Carefully considering different revenue model types and constructing an optimized model provides a blueprint for monetization as a business scales. Periodic tuning keeps the model aligned as markets evolve.

While just one piece of the overall business puzzle, the revenue engine sits at the core of how companies create value for stakeholders.

Partha Chakraborty

Partha Chakraborty is a venture capitalist turned entrepreneur with 17 years of experience. He has worked across India, China & Singapore. He is the founder of Tactyqal.com, a startup that guides other startup founders to find success. He loves to brainstorm new business ideas, and talk about growth hacking, and venture capital. In his spare time, he mentors young entrepreneurs to build successful startups.

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What Is a Revenue Model and Why Does It Matter?

by William Lieberman | Feb 20, 2024 | Financial Strategy

Your company’s revenue model affects every aspect of your business, including growth, scalability, and value. Whether contemplating a change or selecting a model for the first time, thoughtful planning is critical. As a fractional CFO , I have helped many CEOs choose and refine their revenue models. I will explain what a revenue model is, how it impacts your business, and how to change it when needed.

What is a Revenue Model?

A revenue model is a framework that clarifies how your business will provide or sell its goods or services to generate income. For instance, many software providers use subscription-based revenue models with tiered pricing for individual and corporate subscribers.

The best types of revenue models often involve recurring revenue streams. Businesses with such models are more sustainable and less stressful than those relying on one-time sales. Yet, there is room for creativity, such as mixing and matching models to achieve your goals. For instance, software providers might combine subscription revenue models with one-time implementation services for corporate clients.

Why Does Your Revenue Model Matter?

Your revenue model is critical to your overall business model, the blueprint for running your organization and consistently delivering value to its stakeholders. Besides affecting your longevity, it impacts your cash flow, how others (like lenders or investors) perceive your company’s worth , your ability to plan, and how you market and sell. Therefore, performing market research before selecting a model and revisiting it occasionally is essential to ensure it is appropriate for your needs.

How Revenue Models Impact Planning

Once you choose a revenue model, you can develop other business model aspects, such as your cost structure, pricing strategy, objectives, target customers, and marketing and sales. Then, you can use that insight to build a financial model to analyze cash flow.

If the model shows you will earn a profit within a reasonable timeframe, great. But if you learn that you will likely experience cash-flow issues, your revenue model and cost structure may be incompatible, and you must rethink your plans.

How Models Affect Execution

Another thing to keep in mind is that your revenue model will influence foundational aspects of your business. It affects your marketing materials, the structure of your contracts, invoicing, collection practices, and even compensation packages. It will also help you establish key performance indicators (KPIs) for tracking and reporting results.

In other words, it touches everything. It provides vital information for coordinating efforts and impacts your ability to secure funding or explore opportunities like partnerships or acquisitions. Your revenue model of choice becomes core to how you present yourself as a business.

4 Common Types of Revenue Models

Below are some common revenue model examples grouped by similar characteristics. But please remember that this is just a sampling, and each approach has pros and cons, so the trick is to create the right mix for your environment.

1. Pay-Per-Use Models

Sometimes referred to as transaction revenue models or sales revenue models, pay-per-use involves direct sales to end customers with no guarantee of repeat business.

With some pay-per-use models, vendors determine price by taking the cost of the product or service and adding a margin. Then, they adjust in response to supply and demand trends. That can result in shallow profit margins and unreliable revenue, making this model less stable. Common examples include:

• Markup Revenue Models
• E-commerce Revenue Models

In contrast, sometimes vendors set prices based on the value (or perceived value) of their products and services. They may provide a luxury shopping experience, a superior product, or specialized knowledge or skills. When that is the case, profit margins are more generous. Examples include those above, plus:

• Project-Based Revenue Models
• Commission Revenue Models

Vendors using pay-per-use models typically generate more income in other ways to create stability. Common tactics include upselling, offering complimentary products or services, or encouraging loyalty by making buying easier (i.e., Amazon Prime’s free shipping).

2. Recurring Revenue Models

Any model that delivers a predictable source of income could fall in the recurring revenue category. Investors and lenders prefer these models, but they often involve high upfront costs, so you must be able to show that your cost structure is sound. Getting funding could help you float that investment until you generate revenue, but you need a clear path to a return on the investment. These models include:

• Subscription Revenue Models Customers pay a set fee every month or year. The subscription approach appeals to customers because fees are usually relatively low, and there is less commitment, while sellers like them because of the predictable income stream. Software as a Service (SaaS) revenue models typically fall under this category.
• Consulting Models Many consultants offer services on a retainer basis (a set number of hours or deliverables for a monthly fee). Such arrangements are mutually beneficial. Providers get a steady income, and customers get valuable skills while keeping their headcount low. Like the employer/employee relationship, finding the right fit isn’t easy, but once you do, these arrangements can work well for quite some time.

The trick with recurring revenue models is to make your product “sticky,” so customers stick around, even if their usage ebbs and flows. For instance, one way to make a product sticky is to make the customer’s life increasingly easier, so switching to a competitor is no longer appealing.

3. Advertising Revenue Models

The advertising revenue model often supports news and entertainment-related content and has done so since well before the age of digital media. Content providers sell space to advertisers who want access to their audience in whatever venue they control – streaming services, movie theaters, websites, YouTube, search engines, podcasts, billboards, etc. These models include:

• Pay-Per-Click, View, or Impression Revenue Models Display advertising, where you earn fees based on viewer behavior.
• Affiliate Revenue Models Content providers earn commissions for personally promoting products.

The advertising model is great because you can earn money purely from giving others access to your audience. But first, you must build that audience and earn (and maintain ) their trust. That typically means a significant investment in educational, informative, or entertaining content and a commitment to strict standards.

4. Passive Revenue Models

Another type of revenue model involves creating or acquiring something valuable and allowing others to use or buy it indefinitely. It’s a “passive” revenue model because once you invest, the result is mostly margin, but there will likely be ongoing costs for upkeep. Therefore, like every revenue model, ensure you understand precisely how the business operates before diving in. These models include:

• Royalty Revenue Models Income from the use of intellectual property (manuscripts, designs, or formulas for which you have a copyright, patent, or trademark).
• Digital Product Revenue Models Create courses, eBooks, apps, etc., once, then sell them for as long as you like.
• Membership Revenue Models Provide access to communities, resources, and exclusive opportunities for a fee.
• Rental Revenue Models Buy property, then charge others for using the space.

How to Change Your Revenue Model

Changing your revenue model isn’t easy because it is integral to many aspects of your business, but sometimes it is necessary. For example, perhaps you want to offer new products or services. Or maybe your current model has become less profitable due to technological advancements or customer sentiment changes. When that happens, explore options and develop plans by asking yourself the following questions.

1. Why do we want to make a change?

How will changing your revenue model affect your business? Will it make selling your products or services easier, help you manage costs better, create a new revenue stream, or something else? Consider the risks and opportunities, capture them in writing, and ensure team alignment.

2. How does the proposed approach compare to what our competitors are doing?

Would the change bring you up to speed with what your competitors are doing? If so, it may be unavoidable. If, however, you are considering something unique, you must weigh the costs and benefits. It might become a valuable differentiator, but it could also make it harder to compete in certain situations.

3. What will our customers think of the change?

Will it make your customers’ lives easier, or will they need to adjust their behavior or incur extra costs? Naturally, the latter scenarios are less appealing. If you are unsure how they will respond, consider running surveys so you can make an informed decision.

4. How would external stakeholders (like investors or lenders) view the model?

Sometimes, a change of this nature will result in customer attrition, but you might be ok with that if it will make your company more valuable in the long run. Resurface the financial model we discussed earlier and rerun the numbers to ensure you can defend any proposed changes when speaking with stakeholders.

5. What steps must we take to adopt a new revenue model?

Some changes are simple. For instance, adding a premium offering to your subscription-based service may be manageable, requiring little more than tweaks to your solution, new marketing materials, and small billing changes. However, shifting from a cloud-based to an on-premise solution is likely another ballgame. Still, it might be worthwhile if it will make your business stronger financially.

The Bottom Line

Choosing a revenue model for your business is a big decision with lasting effects, so you are right to be cautious. It impacts every aspect of your organization and its future opportunities. If you would like to discuss your unique situation, please reach out , and I would be happy to talk.

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Mr. Lieberman is the founder and CEO of The CEO’s Right Hand, Inc., a New York-based consulting services firm that provides the full breadth of strategic, financial and operational advice to founders, CEOs and Executive Teams. As an experienced entrepreneur himself, he has served in various C-suite leadership and advisory roles across a wide spectrum of industries.

His first venture was CMR Technologies, a FinTech company based in San Francisco serving the investment management consulting space. From CMR, Mr. Lieberman formed Xtiva Financial Systems, a software company specializing in sales compensation solutions for the financial services industry. Mr. Lieberman served as Xtiva’s CEO, building the company to over $10 million in revenues and 100+ clients. He also served as the President and CFO for Interactive Donor, a New York-based Benefit Corporation which incentivizes charity through rewards.

Mr. Lieberman holds double Masters degrees, one in Business Administration and the other in Computer Science from the University of California at Los Angeles. He completed his Bachelors in Computer Engineering from the University of California at San Diego.

Contact William Lieberman [email protected] 646-277-8728

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How To Pick The Best Revenue Model For Your Startup

Everything seems to evolve and change so quickly these days. Just as you have settled on a particular business strategy, a new one gives you pause for thought. 

But let’s not get distracted. Stick to the main, tried, and tested practices through your startup process, and have a solid foundation to build on. Revenue models are a great example of getting the basics right.

The best, most popular, and most common revenue models for startups in 2022 are not hugely different from the old ones, and there is a reason for that; they work! Let’s take a look at what they are, explore the pros and cons, and help determine the best fit for you.

What Is A Revenue Model?

A revenue model is an important concept in business that can make or break your startup’s success. An efficient revenue model is basically just a solid monetization system for your startup, allowing you to build and manage your company’s revenue streams that are both sustainable and profitable. In simple terms, a revenue model describes the method you employ to bring in revenue for the business. 

But just how important is it? Well, let’s use a simple analogy to nail the point home; If your business’s product or service is the company’s heart, the revenue model would be the circulatory system. The lifeblood. You can’t have one without the other.

Without a proper revenue model in place, you will obviously find it quite a challenge to sustain healthy revenue streams, affecting key aspects of the business such as sales, finance, marketing, and operations

A successful startup revenue model addresses

• Revenue generation techniques
• Offerings of values
• Revenue sources
• Target consumers of the product

10 Most Common Revenue Models

1. services .

A sub-genre of the transactional revenue model, perfect for startups looking to generate revenue by offering services based on their expertise and time. Startups who use this business model charge customers on a project or retained basis. 

Customer relationships are an important aspect of this model. The revenue you generate solely depends on your level of expertise and how well you can meet your client’s needs. 

This model is perfect if you’re a startup offering graphic design or consultation services. It’s a great way to start, but this model alone will not be enough for your startup to grow in the long run.   

• Only minimal investment is needed
• Revenue starts generating immediately
• Scalability issues

The markup model is one of the oldest yet most reliable revenue models. It is commonly used by companies who act as mediators for example Amazon or Ali Baba resellers and vendors etc. Businesses using this model purchase goods or services from a supplier, sell for a higher price, and generate revenue from the profit. 

For example, a product sold by your company for $150 would return a 50% margin, if purchased for $100.

This model can be grouped into 2 sub-genres,

• Retail: Selling of goods to customers through multiple channels to earn profit
• Wholesale: Selling or distributing goods to retailers, other wholesalers, and professional, business, and institutional business users. 
• Helps develop a perfect pricing strategy
• Easy formulation and implementation
• Too much competition makes it difficult to generate revenue

3. Advertising

If your startup gets many visitors on your digital channels, then you can use an ad-based revenue model. Businesses pay to advertise their products and services on high-traffic sites. Provided you have a reasonable amount of traffic, you might be able to monetize through advertising space. It is commonly paired with a service-based and affiliate revenue model.

The 2 most common forms of this model are,

• Cost Per Click (CPC): Revenue is generated when visitors click on ads even if they don’t buy.
• Cost Per Mile (CPM): Also called ‘cost per thousand’. Advertisers pay a fixed price for every 1000 ad impressions. 

You can either work directly with businesses or through third parties like Google Adsense, AdThrive, and Amazon Native Shopping Ads. Blogs and media companies with a huge following profit the most from the advertising revenue model.

• Revenue starts generation automatically once ads are set up
• Fairly simple process with an easy way to increase revenue 
• Fluctuations in revenue

4. Pay Per User (PPU)

PPU is a revenue model from which a startup can benefit and can also seem attractive to potential customers.  

77% of customers  face difficulty in their purchasing decisions. The main reason for this is uncertainty about whether the features of the product/service will satisfy their needs. A PPU-based model will remove purchasing doubt from the equation. Because rather than buying the product, the customers are leasing it. 

Under this model, the business has ownership, and customers only pay for the usage. A simple example of this model can be laundromats. It is commonly used by cloud-based, telecom, and credit card services.

To utilize its full potential, your startup needs to have, 

• Simple distribution and billing processes
• Ability to manage per-use costs
• Low barriers to customer adoption
• Gives startups information regarding how customers use their products/services
• Lowers entry barrier for customers —> increasing startup’s market share
• Guilt on not utilizing overall features causes some customers to exit

5. Subscription 

Also called the recurring revenue model. The subscription model breaks the cost of a startup’s service/product into fixed weekly, monthly, or yearly payments. When a customer subscribes, the revenue is deferred and paid in installments. Revenue accumulates with every new subscriber. Revenue is grown exponentially as long as you gain more customers than lose them.

A simple example of this model can be a gym. While people can opt for a Day Pass, most of them have a fixed monthly or yearly subscription. 

By introducing personalized offers, you can make your product/service seem even more attractive to the customer using this model. Unlike advertising and PPU, the revenue stream for this model is more predictable and stable. 

Netflix, Hull, and Amazon Prime are good examples of well-known subscription-based revenue models.

• Stable recurring revenue in the long term
• More word-of-mouth marketing —> Less marketing costs
• Uncertain revenue in the startup phase

6. Affiliate Revenue Model

This model is one of the easiest ways to make a passive income stream. You can use this model in two ways to generate revenue,

• Promote other’s products/services on your website
• Make others promote your startup’s product/service

When a consumer purchases the product/service you endorse, you receive a commission – either a percentage or a fixed amount. Many e-commerce marketplaces like Etsy and Amazon offer an affiliate program. But your digital platform would need high traffic to be eligible for them. 

When you find individuals or other brands to promote your website, they use your link on their digital platform, providing a great way to market your startup. This is a great way to market your startup. When consumers buy your product/service, a percentage is given as a commission to the promoters. Your business should have high traffic to generate a good amount of revenue.

• No upfront costs
• Profitable in the long run
• Limited to the size of your products, audience, and industry

7. Freemium

You might wonder how platforms such as Spotify, LinkedIn , or Evernote make a profit, given that their standard features are free. 

Through a ‘Freemium’ model, a service is offered free of charge – but the more appealing, popular features are subscription only. It’s an age old model, actually; bring in potential customers without charge, then upsell with better features. 

You must have stumbled upon a person asking how platforms like Spotify, LinkedIn, or Evernote earn when almost all of their features are free. They run on the Freemium revenue model, where most of their product’s features are free, but their upgrades and premium features are paid. 

The main idea behind the Freemium model is to hook customers to their products and services by offering them for free and then converting them to premium paying customers. 

This is a great model for startup companies looking to attract instant volume and gain quick market penetration. Pair with an affiliate or ad-based revenue model for enhanced profits.

• Large user base
• Pressure-free for customers
• It takes time and money to convert free customers to paying ones

8. Licensing

If your startup has a patented product, you can use that to your advantage through the license revenue model. Income is generated by licensing your product to individuals or companies for a fixed term while retaining full copyright control of your product.

Media and software companies commonly exploit this revenue model. Good examples of this model can be seen through TV adverts, when an advertiser has to pay a fee for using an artist’s music, in a commercial. Licensing software like Adobe is another good example. Franchises such as Starbucks are a form of licensing as well. Having to give confidential information and committing to a long term partnership makes customer interactions quite personal.

• Ongoing, repeated revenue
• Easy entry into foreign markets
• Increased risk of IP theft

9. SaaS 

This revenue model has become quite common among ICT and IT startups. It is a delivery method used by software companies to host the application and all of the data on a cloud. Using this model, focus on delivering cost-effective customer value.

It is often paired up with the subscription model or licensing model. Using the SaaS subscription model, you can bill your subscribers periodically. Once billed, subscribers can use your software through an app, web browser, or one-time download. 

• Scalability and ease of distribution
• Continuous and reliable revenue stream
• Longer conversion funnel

10. Pay Per Seat

Last on our list is pay-per-seat. When using this model, customers are charged based on the number of seats they want to buy. You can see this model being implemented in Upscope and most startups’ famous communication platform, Slack.

Pay-per-seat models usually only target a small market segment. But to take it to the next level and attract more businesses, including startups, you can charge based on the number of seats being used. For example, if you have a client with 200 employees, instead of paying for them all, the client can pay for only the active ones. If you’re a B2B startup, then this model is perfect for you! 

• Simple and predictable pricing strategy for customers
• Higher adoption rate
• Value is measured on the number of users and not on your product. 

How To Choose The Right Revenue Model For Your Startup

By now, you probably have gained insights into all the types of revenue models. The next step is identifying the right model for your startup. Choosing the wrong one can result in a waste of your resources. Here’s a quick guide to help you choose the right one,

• Study The Competition: Take a look at how the most successful businesses in your startup industry generate revenue. Think about adopting the same revenue model – but maybe apply a few tweaks to enhance and improve, where possible.
• Test Out Few Models: No model is perfect. It will take time and several tests before you fine-tune the ideal one. Experimenting with different revenue models allows you to learn and eventually find the best one for you. 
• Study Your Past Data: Failure is fine, providing you ‘fail forward’ and learn from it. If a revenue model isn’t working out, determine why and tweak it. Maybe even change it entirely. Study your startup’s data like cash flow, balance sheet, marketing activity, customer satisfaction, etc. 
• Financial Forecasting: This will help you predict future results based on your data. Predicting your startup’s financial future will help you think ahead and strategize how you can achieve profitability. You can use  our financial projection template  to help you forecast future revenue.
• Keep In Mind The Financial Components: Before choosing a revenue model, you need to calculate the cost of making your product and the cost of doing business. Considering these costs can help you choose a revenue model that will balance out these expenses and give you profit. 

KPI Starter Pack: 7 KPIs Your Startup Needs To Track

KPI metrics are milestones that give you a real-time view of how your startup is progressing. There is no ‘one size fits all’ approach to this – a successful model elsewhere might be the perfect fit for your startup. Let’s take a look at the 7 essential KPIs that you need to track,

Cash Runway:

This highlights how much time your startup can survive at a loss before you run out of money.  This can be calculated  by 

Available Cash Balance / Monthly Burn Rate 

If the cash inflow is less than the outflow, that’s a clear sign your current revenue model isn’t working.

Cost Per Acquisition (CPA):

CPA is an important metric that estimates how much one customer costs to win that particular end result of a sale. It helps measure the revenue impact of your marketing campaign. You can calculate CPA by

Total Campaign Cost / Conversions 

Annual Recurring Revenue (ARR) and Monthly Recurring Revenue (MRR) are important metrics in the subscription revenue model. These two metrics tell us how much recurring revenue comes in, yearly and monthly.

MRR = Revenue Per Unit x Number of Subscribers

ARR = 12 x MRR

Cost Per Lead (CPL):

This metric is similar to CPA but applies to leads that are further down the sales funnel . CPL is the amount of money your marketing campaign has to pay when a user (lead) takes action, i.e., fills out a form or gives contact details. 

For example, a prospect will click on your lead magnet and provide valuable data for you to chase down and convert. It is commonly used with subscription revenue models.

Cost Per Click (CPC): 

CPC measures the price for your startup’s marketing campaign. As a startup looking to increase its customer base using ads, this metric can help you determine how much you would need to pay based on the number of clicks your ads will receive. 

Your goal is to maintain a low CPC while still pursuing high-quality clicks. This will allow more clicks on your budget, leading to more potential leads. 

This is a solid baseline metric that you can use to measure your marketing efforts. It will tell you whether your marketing plan is working or not. 

Net Promoter Score (NPS): 

This KPI indicator will tell you customer satisfaction, loyalty, and excitement. It is generally measured by asking customers questions like ‘On a scale of 0 to 10, how likely are you to recommend this company/product to a friend or colleague?’

Organic Search Reach: 

Reports how many visitors visited a website through organic search results. Organic Search Reach helps to keep track of your SEO performance. 

Revenue Model Template

Revenue model templates can complement any presentation or report that analyzes the sources of cash flows. It helps present the current revenue model’s effects on your startup growth and various sources of income and devise which sources to follow. Following are some great revenue model templates used by thousands of successful startups.

• Powerslide Revenue Model Template:  This template consists of four templates with various infographics. It’s the perfect template to prepare a report on your new product launch and analyze the potential sales market.  
• Sketch Bubble:  The template was made by combining multiple templates creating one that seamlessly explains the topic. The template is quite simple and designed so that you can explain everything about the topic in a crisp and faster manner.
• Slide Kit:  Their editable revenue model templates offer different themes and vector icons, making it easier for you to showcase them.

When combining one of these with a seamless financial projection template, you can easily verify business models and determine which one to choose based on your future revenue forecasts.

Before choosing a revenue model, remember to do your research and study your startup’s financial data. It will help you understand which revenue models are best for your startup. We didn’t cover every revenue model, but we have highlighted the most popular, tried, and tested revenue models that will get your business generating revenue and reaching the big leagues in no time!

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Revenue Model Types in Software Business: Examples and Model Choice

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• Last updated: 28 Dec, 2022
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Here's our video breakdown of revenue models

For those exploring the world of business strategy planning, we’ll elaborate on the definition of the revenue model, and the correlation between business models and revenue streams. We’ll also analyze different types of revenue models and look at some examples to scrutinize the pros and cons of each approach. Finally, we’ll reflect on how to choose or develop a model for your business.

What is a revenue model?

A revenue model is a plan for earning revenue from a business or project. It explains different mechanisms of revenue generation and its sources. Since selling software products is an online business, a plan for making money from it is also called an eCommerce revenue model. The simplest example of a revenue model is a high-traffic blog that places ads to make money. Web resources that present content, e.g., news (value), to the public will make use of its traffic (audience) to place ads. The ads in turn will generate revenue that a website will use to cover its maintenance costs and staff salaries, leaving the profit. Revenue models are often confused with business models and revenue streams. To avoid any misinterpretations, let’s quickly define these three terms that form a business strategy.

Revenue model vs business model

A business model (BM) is a broad term outlining everything concerning the main aspects of the business, all of which are contained in the answers to the following questions.

• What value will we create?
• How will we deliver it?
• How will we bring in revenue?
• How will we earn profit?

Numerous forms of business models can’t be classified in a single list because each part is highly individual to the industry, type of product/service, audience, or profitability. Business models are often depicted strategically on a business model canvas . This is a compound representation of all the key elements of a BM.

A  business model canvas template by AltexSoft

So the BM describes how a business will work from the standpoint of value generation. Revenue models, on the other hand, are a part of the business model used to describe how the company gets gross sales.

Revenue model vs revenue stream

A revenue model is used to manage a company’s revenue streams, predict income, and modify revenue strategy. The revenue itself is one of the main KPIs for a business. Measuring it annually or quarterly allows you to understand how your business operates in general and whether you should change the way you sell the products or charge for them. But what are revenue streams ? A revenue stream is a single source of revenue that a business has. There can be many of them. Streams are often divided by customer segments that bring revenue via a given method. The two terms – revenue stream and revenue model – are often used interchangeably, since, from a business perspective, the subscription revenue model will have a revenue stream coming from subscriptions. However, models can name multiple streams divided into customer segments, while the principle of revenue generation (subscription) will remain the same.

Revenue model types

Any start-up, tech company, or digital business may combine different revenue models. The revenue model will look different depending on the industry and the product/service type. Here we will pay more attention to the most common revenue models used in the software industry and online business.

Transaction-based revenue model

A transaction-based model is a classic way a business can earn money. The revenue is generated by directly selling an item or a service to a customer. The customer can be another company (B2B) or a consumer (B2C). The price of the product or service constitutes the production costs and margin. By increasing the margin, the business can generate more income from sales. Selling products or services entails using different pricing tactics. While some of them may be considered separate revenue models, these tactics are often used in pairs. Because pricing tactics can be seen as pricing plans in a software business, we can clearly define the following types. Licensing/one-time purchase. This entails selling a software product by license that can be used by a single user or a group of users. The general idea is to offer a product that requires making only one payment for it, e.g., Microsoft Windows, Apache Server, and some video games. Subscription/recurring payment. Unlike licensing, a user receives access to the software by paying a subscription fee on a monthly/annual basis, e.g., Netflix, Spotify, and Adobe products. Pay-per-use. This pricing tactic is mostly used by different cloud-based products and services that charge you for the computing powers/memory/resources/time used. Examples are Amazon Web Services and Google Cloud Platform. Freemium/upselling. Freemium is a type of app monetization in which a user may access the main product for free, but will be charged for additional functions, services, bonuses, plugins, or extensions, e.g., Skype, Evernote, LinkedIn, and many video games. Hybrid pricing. Sometimes pricing plans are a mixture of more than one. So that freemium plan might morph into some form of pay-per-use tiered plan. After passing some limit in computation or resources, a user can be forced to use or offered another type of pricing. Examples are Mailchimp, Amazon Web Services, and SalesForce. Various combinations of pricing tactics can be used simultaneously, which is more often seen in cloud-based products that offer multiple payment options at once. The revenue model in this case remains based on the transaction and purchases made by the customers. The difference in pricing tactics will modify how the revenue is generated and basically depends on the type of product/service you sell. The pros. You have full control over the pricing strategy. The cons. The cons will depend on the industry/product type and pricing tactics, as the model itself imposes a constant generation of sales with the help of advertising and marketing strategies. The only con we might mention here is the financial burden connected with sales you will carry on your own. Transaction-based revenue model examples. Nearly any company that produces and sells its products uses this type of revenue model. Examples are Samsung, Rolls Royce, Nike, Microsoft, Apple, Boeing, and McDonald’s, to name a few.

Advertisement-based revenue model

The advertisement-based revenue model is a plan with which businesses make money by selling ad spaces. It is one of the most standard methods of producing top-line growth, and it’s valid both for online and offline businesses. It’s often used by websites/applications/marketplaces or any other web resource that attracts huge amounts of traffic. The pros. Having a high-traffic resource allows you to monetize the ad space nearly instantly. Often, there is a strong demand for advertising space, especially with organic traffic and platforms with the target audience. The cons. Running advertising campaigns to gain web visibility on various platforms like social networks is a standard marketing activity with targeting instruments more precise than ever. However, advertisements are everywhere, so you might think twice about whether you want to distract a user by placing an ad in your app – even if it is a secondary revenue stream. Ad-based revenue model examples. YouTube, Instagram, Facebook, and Google are just a few prominent examples. All these platforms generate revenue by displaying advertisements to users and charging businesses for exposure. In addition to promotion, these platforms may also generate revenue through other sources, such as premium subscriptions or licensing agreements.

Commission-based revenue models

A commission-based revenue model is one of the most common ways businesses make money today. A commission is a sum of money a retailer adds to the total cost of a product or service. A commission may be charged per marketplace or transaction and can be assigned as a

• flat rate, a fixed sum of money for any type of transaction, e.g., a $450/300/1500 transaction is charged with a $20 commission;
• percent of transaction size, e.g., a $100 transaction is charged with a 10 percent commission – $10; or
• tiered commission, a percent or flat rate that grows based on the transaction volume, e.g., 50,000 transactions are charged a 4 percent commission, 150,000 transactions a 7 percent commission.

Marketplaces and eCommerce platforms, in particular, utilize commissions the most. Another large category includes businesses that connect service providers/renters with consumers. Think of any ride-hailing company, food delivery, online travel agency (OTA) , or alternative accommodation services. The pros. Revenue is easily predictable because of the sheer fee. The cons. There are many problems bound to the concept of a commission, but the major one goes to the scalability of a business that’s attached to a transaction size or volume. In general, dependency on the product supplier’s sales makes generating revenue require upfront investments and competitive superiority. Commission-based revenue model examples. Airbnb is a platform that allows individuals to list and rent their homes or apartments as short-term rentals . It generates revenue by charging a commission on each booking made through its platform. The commission is typically a percentage of the total booking cost and is paid by the host (property owner). Other examples are Booking.com, Uber, Lyft, Ticketmaster, Priceline, and Upwork.

Markup revenue model

Markup is the type of revenue model with which you buy a product at a certain cost and then sell it for a higher price: The difference between the two is your profit margin. This model is often used by wholesale, retail, and service-based businesses. For example, a wholesaler may be a bed bank — a B2B company that purchases rooms from accommodation providers in bulk at a discounted, static price for specific dates, and sells them to OTAs , travel agents, destination management companies, airlines, or tour operators. Pros. Markup revenue models are straightforward, allowing businesses to easily calculate their profit margins on each sale. With this approach, businesses can be flexible with their pricing by adjusting the markup to reflect changes in the cost of goods or changes in market conditions. Cons. While markups provide a great deal of flexibility, some organizations may not have enough resources to manage revenue and apply changes to their markup strategy based on the market state. So they set a uniform markup for all of their products or services. This may lead to prices being too low or too high and businesses may not be able to fully capitalize on the value of certain products. Markup revenue model examples. In addition to bed banks, airline consolidators leverage a markup model to earn revenue: They are brokers that book flight seats in bulk at discount rates and then resell them to travel agencies. Examples are Mondee, Picasso Travel, and Centrav.

Affiliate revenue model

The affiliate model is similar to the commission-based model. The main difference is that, with the affiliate model, you do not sell the product or service on your own platform, but rather redirect the customer to the original provider's platform to make the purchase and earn a commission on any resulting sales. An affiliate model is a contract between a supplier of a product/service and a promoter. A promoter can be another business/media resource/blogger that recommends a supplier’s product. The earnings will come as a percentage of sales or fees for the number of registrations done via referral links. Businesses utilizing the affiliate model include metasearch engines as a unique example. Metasearch tools can be found almost everywhere. Their main difference with retailers is that they don’t sell products directly but offer comparison and search as a value. Advertising and affiliate programs are the main revenue models used to get earnings in this case. The pros. Just like the advertisement-based revenue model, once you have a huge traffic resource, you might apply for an affiliate program to earn money. This will bring you income without any investments because you will basically generate traffic and leads for the affiliate program provider. The cons. Unfortunately, the percentage of affiliate programs promised to the promoter is quite low. Sometimes it fluctuates between 1-2 percent and requires a high volume of sales generated through your links. Affiliate revenue model examples. Blogging and event-promoting platforms like Broadway.com or TheaterMania generate revenue using this model. Among other examples are Amazon affiliate websites, e.g., Cloud Living and ThisIsWhyImBroke.

Interest revenue model

An interest or investment revenue model relates to any type of business that generates revenue in the form of interest on their loans or deposit payments. These are most often banking or electronic wallet companies that work with financial operations. The revenue is generated by making a loan to a customer or by a customer depositing or investing money (or other resources) into the business. At the end of a return period, a percentage of the loan sum will return as revenue. Debit/credit money provided with the bank accounts also relates to this model. That’s just one of the ways financial companies can make money, combining it with transaction fees for using their e-wallet/bank account. The pros. The interest rate provides a clear view of what revenue a business will generate, as the percentage stays unchanged until the return period is over. The cons. The regulations of an interest rate impact both the customer and the business. Sometimes it depends on the economic environment. Think of currency rate changes that influence potential and existing borrowers. Interest revenue model examples. Many banks, credit card companies, and other financial institutions use the interest revenue model. For example, peer-to-peer lending platforms, such as LendingClub and Prosper, generate revenue by charging interest on loans funded by investors.

Donation-based or pay-what-you-want revenue models

This is a revenue model based on investments made by businesses or customers on a voluntary basis. The product or service itself is free to use by default, so that’s the primary value a company brings to the customer. The revenue is generated in the form of donations, or sometimes in the form of “pay-what-you-want.” It’s important to mention that there is a difference between a donation-based business and a charity organization. A donation-based company is still required to pay taxes. The pros. Because of the free access to the product, some companies manage to get increasingly popular, resulting in donations becoming a major part of their revenue. The cons. The model is never used on its own and the revenue generated by it remains a secondary source because of its random/unstable nature. Donation-based revenue model examples. AdBlock generates revenue through donations from users who support the development and maintenance of the software. At the same time, AdBlock offers a premium version of the software for a fee, which includes additional features and support. Among other examples is Wikipedia which relies on donations as a significant source of revenue. Additionally, the platform makes money through grants and partnerships. There are many other revenue models, and a business or project may use more than one revenue model. It is important for businesses and projects to carefully consider their revenue model as it can have a significant impact on the overall success of the venture.

How to choose a revenue model for your business?

Before choosing a revenue model, you need a fully developed business strategy that will include a prepared business model with all its key instances. That means you must take a few steps prior to selecting the revenue model. Define your value proposition. Map out your product strategy by describing what the product is and what value it brings to the customer. Not all products can be sold: Can you recall the last time you upgraded your WinRAR to a full license? Also, you can analyze the future traffic for your app to understand if you can use ads in it. Explore the market state and customer groups. This step is to define your user persona and understand how these users usually buy things. Some markets are inclined to purchase just one product, some are inclined to ignore upgrades or in-app purchases. A good example in this field is the death of music-selling platforms that were totally replaced by subscription-based streaming services like YouTube Music, Apple Music, Spotify, and others. You may also explore the techniques on how to market your product in our dedicated article. Analyze competitors and their products. You’ll need to learn what mechanisms and revenue streams your competitors use and how they manage their costs. This information will probably show you the market’s pitfalls and dead ends. Looking at this simple matrix below, we can analyze the capabilities and needs of your company to help you decide the type of revenue model to use.

How to choose a revenue model framewor k

Depending on your business model, the product or service you’re presenting to the user is a subject of exchange. This is your value proposition on the market, so you are in charge of choosing what you want to get back based on the market factors, target audience, etc. Paid value proposition. In most cases, your value proposition costs money to use. Whether it’s a service or a software product, a customer will need to pay in some form to gain access to your value. Your revenue model in this case will be based on transactions. So develop pricing tactics that will depend on the nature of the product, the type of audience you’re trying to reach, the type of deployment, specifics of product usage, etc. Free-to-use value proposition. If the value proposition doesn’t require money to use or you choose it to be free, then you need a third party to generate revenue for you. This could be anything based on the previously mentioned types, whether it’s ad space, donations, affiliate programs, or reselling. The combination of the two will basically present you with the revenue streams that will focus on each of the customer segments. In the case of the paid value proposition, each pricing plan will be a separate revenue stream.

Revenue Climb

Revenue Modeling: A Comprehensive Guide to Growth Planning and Execution

As a business leader, one of your most critical responsibilities is to develop a thoughtful revenue model that projects growth targets and outlines the strategies and resources needed to achieve them. An accurate and well-constructed model provides clarity on the investments required to scale efficiently. It also enables your leadership team to course-correct when projections diverge from actual performance.

This comprehensive guide will provide readers with research-backed best practices, real-world examples, data, and actionable tactics to build a robust revenue model that connects strategic planning to execution.

Why Revenue Modeling Matters

Before diving into the components of an effective revenue model, it's helpful to understand why it's a foundational exercise for any scaling SaaS company. Here are some key reasons:

Capital allocation planning - A revenue model allows you to match expenses to growth targets so you can determine funding requirements. This prevents over- or under-investment.

Capacity planning - By modeling growth against current capabilities, you can identify resource gaps in sales, marketing, product, engineering, support, etc.

Goal setting - Models provide a benchmark for performance goals across the customer journey, from acquisition to renewal.

Risk mitigation - Models surface potential bottlenecks or unrealistic projections, giving you time to course correct.

Investor relations - For startups raising capital, a thoughtful model demonstrates planning rigor and execution readiness.

According to research by Bain & Company, companies that take a strategic approach to revenue modeling grow 19% faster on average and are 29% more profitable compared to peers. The data shows why this exercise is so critical.

Key Components of a Strategic Revenue Model

Now that we've covered why modeling matters, let's explore the key planning elements that compose a comprehensive model.

Growth Target

Every model starts with a growth target which is often represented in revenue or ARR (annual recurring revenue). Common goal timeframes are annual or multi-year. Growth targets are based on assessing market opportunity, competition, current customer traction, and other inputs. Setting an ambitious but achievable target provides focus and orients the remaining model.

Go-to-Market Roadmap

The GTM roadmap outlines the strategies across marketing, sales, and customer success required to hit growth goals. It connects high-level planning to tactical execution across stages:

Top of funnel - The advertising, content marketing, email nurturing, and other programs that generate pipeline

Middle of funnel - The sales development and customer success teams and playbooks that qualify and close new business

Bottom of funnel - The account management, cross-sell, upsell, and renewal tactics that expand existing accounts

Sales Capacity Model

To understand what revenue is possible, you need to model sales team capacity and productivity. Key elements include:

Headcount - How many sales reps and customer success managers needed to hit goals based on market segment specialization

Ramp time - The number of months for reps to ramp up to full quota capacity

Productivity - Revenue targets for each rep mapped to their ramp

Expenses - Cost of expansion factored in, including salaries, commissions, tech stack, and other operational needs

New Customer Acquisition

This section models the strategies that drive new customer growth. Key factors include:

Total addressable market (TAM) - The target market opportunity broken down by customer segment, industry, region, etc.

Target buyer personas - The customer profiles determined to have the highest propensity to buy your product(s)

Sales funnel metrics - Projected lead velocity, sales qualified lead (SQL) conversion rates, opportunity creation, win rates, etc. which contribute to new ARR forecast

Go-to-market costs - The total investment required across marketing, sales, and revenue operations to acquire new customers

Expansion Revenue

To complement new ARR, your model needs to project expansion revenue from your existing customer base through:

Upsells - Adding higher tiered products, premium features, and additional seats/licenses

Cross-sells - Selling complementary products that increase account value

Account-based sales - Strategic sales approaches to grow enterprise and commercial accounts

Customer marketing - Loyalty programs, referrals, and other tactics that generate expansion pipeline

Retention Revenue

Retaining and renewing existing revenue is more cost effective than acquiring net-new ARR. Model out:

Gross revenue retention (GRR) - Total renewal revenue from active contracts

Net revenue retention (NRR) - Renewal revenue minus any lost revenue from churn and downsells

Renewal sales capacity - Customer success and account management resources needed to maximize renewals

Churn risks - Analysis of historical churn causes to inform retention programs

Customer health scoring - Leading indicators to measure renewal propensity and prevent churn

Revenue Waterfall

The revenue waterfall ties everything together into a financial projection based on new business growth, expansion, renewals, and churn. The model flows from the top-level target down through every stage of the customer lifecycle. Graphing the waterfall provides a visual representation of the growth levers and helps identify potential gaps vs. the plan.

Turning Your Model Into Action

An insightful revenue model is useless without consistent tracking and execution. Here are best practices to activate your model:

Establish a revenue rhythm - Hold monthly and quarterly reviews of model projections, surfacing risks and opportunities. Adapt quickly.

Report on metrics - Manage sales, marketing, and customer success to key performance indicators aligned to model assumptions.

Forecast accurately - Build a sales forecasting process and pipeline hygiene discipline tied to the revenue plan.

Resource and invest - Use the model to support budget, headcount, and capacity planning to meet growth.

Iterate annually - Reassess market potential and rebuild the model annually as you expand and conditions change.

Case Study: HubSpot's Revenue Model Evolution

HubSpot, the leading SaaSinbound marketing and sales platform, provides a compelling case study in revenue model maturation. Their ability to accurately model growth and execute led to a highly successful IPO and market leadership. Examining their model evolution shows what's possible.

HubSpot started with a bottoms-up model driven by rep-level productivity assumptions. As they scaled, they strengthened model accuracy by:

Factoring in customer acquisition costs, sales ramps, and churn

Adding functionality to model renewals, upsells, and cross-sells

Incorporating marketing attribution and funnel metrics

Building a specialized SMB vs. Enterprise model

Testing model accuracy quarterly and annually

According to HubSpot, their revenue modeling competence increased overall sales forecast accuracy by up to 10%. The model and rigorous approach to testing assumptions led them from $15M to over $1B in revenue.

Key Takeaways

Strategic revenue modeling addresses the most pressing challenge for SaaS companies - scaling efficiently and predictably. The companies that invest in models and process will compound growth faster. To recap:

Model to match revenue goals to required resources. Avoid over or under investing.

Project new customer acquisition, land & expand, renewals, and churn accurately.

Map modeled growth to sales, marketing, and customer success capacity.

Use the model to guide budgeting and goal setting across the org.

Review model accuracy frequently and iterate annually.

With a rigorous approach to modeling, your leadership team will have the insights required to confidently accelerate growth and gain market share. If you make modeling a competency across your org, it will enable the speed, efficiency and value creation potential of a truly scalable business model.

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4 Most Popular Startup Revenue Models: A Detailed Comparison

For startups at every stage, generating revenue can be a challenge. Even when you have a great idea and an innovative product, it can be difficult to turn those into sustainable revenue streams. The truth is, there’s no one-size-fits-all answer when it comes to startup revenue models. In fact, some of the most successful startups have found creative ways to monetize their products and services. From subscription-based models to freemium strategies, startups are constantly testing and refining their revenue models to find the perfect fit. So, if you’re trying to decide which startup revenue model is right for you, read on. We’ll explore some of the most popular and effective strategies used by startup founders today.

What is a Startup Revenue Model

A startup revenue model is essentially the strategy that a startup uses to generate revenue and sustain its operations. It defines how the startup plans to make money. I also impacts how it will price its products or services, and how it will distribute and sell them. Having a clear understanding of their revenue model is crucial for startup founders. It helps them identify potential revenue streams, understand their costs, and determine their profit margins.

In addition to providing a roadmap for generating revenue, a well-defined revenue model is also important for attracting investors. Investors want to see that a startup has a clear plan for making money and achieving long-term sustainability. They want to see that the startup has a viable business model that can scale and generate ROI. A startup with a clear revenue model is more likely to attract investors and secure funding.

Furthermore, a well-defined revenue model can help startups achieve long-term sustainability. By understanding their revenue streams and profit margins, startups can optimize their operations. This allows them to make informed decisions about pricing, distribution, and marketing. It can help them generate more revenue and reduce their costs, ultimately leading to increased profitability and sustainability.

Overall, having a clear revenue model is essential for startup founders to achieve success. It helps them generate revenue, attract investors, and achieve long-term sustainability. By understanding their revenue model and continually refining it, startups can set themselves up for success and build a strong foundation for growth and expansion.

What’s the Difference: Business Model vs Revenue Model vs Revenue Stream

While often used interchangeably, there are distinct differences between business model, revenue model, and revenue stream:

Business model: A business model is the overall strategy a company uses to create and deliver value to customers while generating revenue and achieving profitability. It encompasses the entire framework of a company’s operations, including its target market, value proposition, pricing strategy, distribution channels, and cost structure. A business model is essentially the blueprint for how a company plans to create and capture value.

Revenue model: A revenue model is the specific strategy a company uses to generate revenue. It focuses solely on the ways a company will generate income, such as through product sales, advertising, licensing, or subscription fees. Revenue models are often closely tied to a company’s business model. However, they are more narrowly focused on the revenue generation aspect.

Revenue stream: A revenue stream is a specific source of revenue within a company’s revenue model. It represents the actual money coming into the company from a particular source, such as sales of a specific product, licensing fees, or advertising revenue. A company may have multiple revenue streams within its overall revenue model.

In summary, a business model is the overarching strategy for creating and capturing value. Conversely, a revenue model is the specific strategy for generating revenue. And a revenue stream is a particular source of revenue within the overall revenue model. Understanding the differences between these concepts is important for startup founders, as it can help them develop a comprehensive strategy for growth and success.

To learn more about startup revenue models, see if you qualify for membership to join Founders Network .

4 Most Popular Revenue Models for Startups

There are several popular revenue models that startups can use to generate income and achieve profitability. In this section, we’ll explore some of the most popular types of revenue models for startups. We’ll also detail how they work, their pros and cons, and provide examples of startups that have successfully implemented them. These revenue models include:

• Subscription-based model
• Freemium model
• Advertising model
• E-commerce model

Each of these models has its own strengths and weaknesses, and the most effective revenue model for a startup will depend on its industry, target market, and product or service offering. By understanding the different types of revenue models available, startup founders can make informed decisions about how to generate revenue and achieve long-term sustainability.

Subscription-based Model

The subscription-based model is a revenue model in which customers pay a recurring fee, typically on a monthly or annual basis, to access a company’s product or service. It differs from a transactional revenue model where customers typically pay for products or services on a one-time basis. This model has become increasingly popular in recent years, particularly in the software and media industries, as it provides a predictable and recurring source of revenue for startups. For example, all new software entrants and 80% of historical vendors are offering subscription-based financial models.

• Provides a recurring and predictable source of revenue, which can be beneficial for startups seeking stability and long-term sustainability.
• Builds customer loyalty and retention, as customers are incentivized to continue paying for the service in order to maintain access.
• Can provide opportunities for upselling and cross-selling additional products or services to existing customers.
• Can be difficult to acquire new customers, as the subscription model requires a higher level of commitment and investment from the customer than a one-time purchase.
• Requires ongoing investment in product development and customer support to maintain customer satisfaction and retain subscribers.
• Can be vulnerable to churn, as customers may cancel their subscriptions if they no longer see value in the service or if a competitor offers a better alternative.

Examples of startups using the subscription model:

Birchbox , a beauty subscription service, delivers a personalized selection of beauty products to customers each month for a recurring fee.

Ruzuku , an online course platform that offers a subscription-based pricing model for access to its course creation and management tools.

Calm , a meditation and relaxation app that offers a premium subscription with access to additional features and content.

Freemium Model

The freemium model is a revenue model in which a basic version of a product or service is offered for free, with the option to upgrade to a premium version for a fee. This model is commonly used by software and app-based startups. However, it can be applied to a wide range of industries. Ideally, freemium conversion rates are between 2-5% , although typically, the conversion rate is around 1%.

• Offers a low barrier to entry for potential customers, allowing startups to reach a wider audience and potentially acquire more users.
• Can build customer loyalty and engagement, as users have the opportunity to try the product or service before committing to a purchase.
• Provides opportunities for upselling and cross-selling premium features or services to existing customers.
• Can be difficult to convert free users to paid customers, as they may be satisfied with the basic version of the product or service and not see the value in upgrading.
• Requires ongoing investment in product development and customer support to maintain customer satisfaction and encourage upgrades.
• Can be vulnerable to churn, as free users may leave if they no longer see value in the basic version or if a competitor offers a better alternative.

Examples of startups using the freemium model:

Hootsuite , a social media management tool, offers a free version with limited functionality, but charges a fee for access to more advanced features and reporting tools.

HubSpot , a marketing and sales platform, offers a free CRM tool as well as paid versions with additional features and capabilities.

Zoom , a video conferencing platform, offers a free version with limitations on call duration and participant numbers, but charges a fee for access to additional features and increased capacity.

Advertising Model

The advertising model is a revenue model in which a company generates income by displaying advertisements to its users or customers. This model is commonly used by media and content-based startups, as well as social media platforms and search engines.

• Can provide a significant source of revenue for startups with a large user base or audience.
• Can provide opportunities for targeted advertising, allowing advertisers to reach specific demographics or interest groups.
• Can be a low barrier to entry for users, as they can access the product or service for free and are only exposed to advertisements.
• Can be disruptive or annoying to users, potentially leading to reduced engagement or usage of the product or service.
• Can be challenging to attract and retain advertisers, particularly for startups with a smaller user base or audience.
• May require ongoing investment in ad technology and infrastructure to effectively monetize user data and deliver targeted advertising.

Examples of startups using the advertising model:

Google , the search engine giant, generates the majority of its revenue through advertising by displaying targeted ads to users based on their search queries and online activity.

Facebook , the social media platform, generates revenue through advertising by displaying ads in users’ news feeds and targeting ads based on user data and interests.

Chegg , a student-focused education technology company, generates revenue through advertising by displaying ads to its users alongside its textbook rental and homework help services.

E-commerce Model

The e-commerce model is a revenue model in which a company generates income by selling products or services online through a website or mobile app. This model is commonly used by retail and consumer goods startups, as well as service-based startups that offer online bookings or subscriptions.

• Provides a direct channel to customers, allowing startups to reach a global audience and potentially increase sales and revenue.
• Can provide opportunities for personalized marketing and product recommendations based on customer data and behavior.
• Can allow for greater flexibility in pricing and promotions, as well as the ability to offer a wider range of products and services.
• Requires ongoing investment in website development, online marketing, and e-commerce technology to effectively monetize online sales.
• Can be vulnerable to fraud and security breaches, potentially leading to financial losses and damage to customer trust.
• Can be highly competitive, particularly in saturated markets or with well-established online retailers.

Examples of startups using the e-commerce model:

Amazon , the world’s largest online retailer, generates revenue by selling a wide range of products directly to customers through its website and mobile app. On average, Amazon charges a seller who uses their site 15% of the sale.

Warby Parker , an online eyewear retailer, generates revenue by selling prescription glasses and sunglasses directly to customers through its website and mobile app.

Freshly , a meal delivery service, generates revenue by selling prepared meals and snacks directly to customers through its website and mobile app.

In-depth Side-by-Side Comparison of Startup Revenue Models  

It’s important to note that no single revenue model is the “right” choice for all startups. The best revenue model for a given startup will depend on its target market, competitive landscape, and overall business strategy.

It’s also worth considering that many successful startups use a combination of revenue models to generate income and build a sustainable business.

Can You Use Multiple Revenue Models?

Combining multiple revenue models can be a smart strategy for startups. It enable them to diversify their income streams and build a more sustainable business over the long term. Look for financial models that work well together and complement each other. For example, a subscription-based business could also offer add-on products or services for one-time purchases. Similarly, an e-commerce business could generate additional revenue  by incorporating an affiliate revenue model. 

When it comes to deciding when to combine revenue models, there’s no one-size-fits-all answer. However, some situations where combining revenue models can be particularly effective include:

When one revenue model alone isn’t enough to generate sustainable revenue: For example, a startup may start with a subscription-based model but later add e-commerce or advertising to supplement its income.

If different revenue models can serve different customer segments: A startup may have a subscription-based model for its core customers, but also offer a pay-per-use option for occasional users.

When expanding into new markets or verticals: A startup may add a new revenue model as it expands into a new market or vertical, in order to better meet the needs of that specific audience.

Examples of startup companies that have successfully combined multiple revenue models include:

Dropbox: A freemium-based model combined with subscription plans and enterprise licensing.

Uber: A pay-per-use model combined with dynamic pricing, surge pricing, and affiliate marketing through partnerships with credit card companies.

The New York Times: A subscription-based model combined with advertising and branded content partnerships.

Amazon: An e-commerce model combined with affiliate marketing, subscription-based services (e.g. Amazon Prime), and advertising through Amazon Advertising.

In each of these cases, the combination of revenue models has allowed these companies to generate diverse income streams and build a more sustainable business over time.

Choosing the Right Revenue Model for Your Startup

Choosing the right revenue model is crucial for the success of any startup. However, it can be a daunting task for many founders. With so many different revenue models to choose from, it can be difficult to know which one is the best fit for your business. Factors such as the nature of your product or service, target market, and competition can all play a role in determining the most effective revenue model. And this can change over time. A startup might start out using a transactional revenue model and shift to a subscription model later on. 

In this section, we will provide tips on how to figure out the right revenue model for your startup. 

Consider your target market and their willingness to pay

Understanding your target market and their willingness to pay is critical when choosing a revenue model for your startup. Without a clear understanding of your market, you may end up choosing a revenue model that doesn’t align with your customers’ needs. This can lead to low adoption rates, low customer retention, and ultimately, low revenue.

To determine the most appropriate revenue model for your target market, here are some steps you can take to research and analyze your market:

Define your target market: Start by defining who your ideal customer is. Consider factors such as age, gender, location, income, interests, and pain points. This will help you narrow down your market and identify the revenue models that are most likely to resonate with your target audience.

Conduct market research: Once you’ve defined your target market, conduct market research to gather insights on their behavior, preferences, and willingness to pay. You can use surveys, focus groups, interviews, and online analytics tools to gather data.

Analyze your competitors: Analyze your competitors’ revenue models and pricing strategies to see what’s working well in your industry. Look for gaps in the market that you can fill with your own revenue model.

Experiment and test: Once you’ve gathered data on your target market and competitors, experiment with different revenue models and pricing strategies to see what resonates best with your audience. Test different pricing levels, features, and messaging to see what drives the most revenue.

Monitor and adjust: Keep an eye on your revenue streams and adjust your revenue model as needed. Monitor customer feedback and make changes to your pricing and features to better align with your customers’ needs and preferences.

Consider the value your product or service provides

When choosing a revenue model for your startup, it’s important to consider the value that your product or service provides to your customers. The value of your offering can impact the pricing strategy you use, the target market you focus on, and the revenue model you ultimately choose.

To determine the value of your product or service, consider the following factors:

Unique selling proposition: What makes your product or service unique? What problem does it solve for your customers? Understanding your unique selling proposition (USP) can help you determine the value your product or service provides to your customers.

Benefits to customers: What benefits do your customers receive from using your product or service? How do these benefits compare to other products or services in the market? Understanding the benefits your offering provides can help you determine the price point and revenue model that will be most effective.

Market demand: How much demand is there for your product or service in the market? How does this demand impact the value of your offering? Understanding the market demand for your offering can help you determine the appropriate revenue model to use.

Once you’ve determined the value of your offering, you can use this information to choose the most appropriate revenue model. For example, if your product or service provides high value and is in high demand, you may consider using a premium pricing model or a subscription-based model to capture the most revenue. If your product or service provides lower value or is in a competitive market, you may consider using a freemium or advertising model to generate revenue.

Consider the costs associated with each revenue model

When choosing a revenue model for your startup, it’s important to consider the costs associated with each revenue model. Understanding the costs can help you determine the most effective revenue model to use and ensure that you are generating a profit.

To calculate the costs of each revenue model, consider the following factors:

Development costs: How much does it cost to develop and maintain your product or service? This includes costs such as research and development, software development, and marketing expenses.

Operating costs: What are the ongoing operating costs associated with your revenue model? For example, if you are using a subscription-based model, you will need to consider the costs of customer support, server maintenance, and billing.

Transaction costs: What are the transaction costs associated with each revenue model? This includes costs such as credit card processing fees, shipping costs, and commissions paid to third-party providers. 

Once you’ve calculated the costs associated with each revenue model, you can determine the most effective revenue model to use. For example, if you have high development costs and low operating costs, a one-time purchase model may be the most effective revenue model. If you have high operating costs and low transaction costs, a subscription-based model may be the most effective revenue model.

It’s important to note that the costs associated with each revenue model can impact your overall revenue. For example, if you choose a revenue model with high transaction costs, such as a marketplace model, your profit margins may be lower. On the other hand, if you choose a revenue model with low operating costs, such as a freemium model, you may be able to generate higher profits over time.

Test and experiment with different revenue models

Testing and experimenting with different revenue models is crucial for determining the most effective model for your startup. It allows you to gather data and insights to make informed decisions about which revenue model will generate the most revenue and profit for your business.

Here are some tips and strategies for testing and experimenting with revenue models:

Conduct customer research: Ask your customers what they are willing to pay for your product or service, and which revenue model they prefer. You can use surveys or focus groups to gather this information.

Start small: Test out different revenue models on a small scale before fully implementing them. For example, you can offer a limited-time discount for a subscription-based model to see if customers are interested in paying for your product or service on a recurring basis.

Monitor key metrics: Track key metrics such as revenue, customer acquisition cost, customer lifetime value, and churn rate for each revenue model you test. This will help you evaluate the effectiveness of each model and make informed decisions.

A/B testing: Use A/B testing to compare different revenue models. For example, you can offer a one-time purchase option and a subscription-based model to different groups of customers to see which generates more revenue.

Iterate and optimize: Use the data and insights you gather from testing and experimenting to iterate and optimize your revenue model. Continuously improve your revenue model to ensure that it is generating the most revenue and profit for your business.

It’s important to note that testing and experimenting with revenue models can take time and resources. However, the insights and data you gather will be invaluable in helping you make informed decisions about which revenue model to use for your startup.

FAQs About Startup Revenue Models

How do i properly price my products or services for maximum profitability.

Pricing your products or services for maximum profitability can be a complex process. Here are some steps to help you:

Understand your costs: Before you can price your products or services, you need to know your costs. This includes the cost of materials, labor, overhead, and any other expenses associated with producing or delivering your product or service.

Research your market: Understand your competitors and the market demand for your product or service. Analyze their pricing strategies and determine how you can differentiate yourself to stand out.

Determine your value proposition: Identify the unique value that your product or service provides to customers. This can include features, quality, convenience, or any other aspect that sets you apart from your competitors.

Consider your target customer: Understand your target customer and what they are willing to pay for your product or service. Conduct customer research to determine their preferences, buying behavior, and price sensitivity.

Develop pricing strategies: Once you have a clear understanding of your costs, market, value proposition, and target customer, you can develop pricing strategies that align with your business goals. Some common pricing strategies include cost-plus pricing, value-based pricing, and dynamic pricing.

Test and optimize: Test your pricing strategies to see how customers respond. Monitor key metrics such as sales volume, revenue, and profit margins, and optimize your pricing based on the results.

Continuously evaluate and adjust: Pricing is not a one-time decision. Continuously evaluate your pricing strategy and adjust it as necessary to ensure maximum profitability.

How can I forecast and track my startup’s revenue over time?

Forecasting and tracking your startup’s revenue over time is crucial to understanding the health and growth of your business. Here are some steps to help you forecast and track your startup’s revenue:

Define your revenue streams: Identify all of the ways in which your startup generates revenue. This could include sales of products or services, advertising revenue, subscription revenue, or any other revenue streams.

Estimate revenue for each stream: For each revenue stream, estimate how much revenue you expect to generate. Use historical data, market research, and other relevant information to inform your estimates.

Create a revenue forecast: Once you have estimated revenue for each stream, create a revenue forecast that projects revenue over a specific period of time (e.g., monthly, quarterly, or annually). Use a spreadsheet or other tool to create the forecast, and update it regularly based on actual results and changes to your business.

Track actual revenue: Track your actual revenue over time, and compare it to your revenue forecast. Use this information to identify areas where your revenue forecast may be inaccurate, and adjust your forecast accordingly.

Analyze revenue trends: Analyze revenue trends over time to identify patterns and opportunities for growth. Look for changes in revenue from each stream, as well as changes in overall revenue.

Use key performance indicators (KPIs): Use KPIs such as customer acquisition cost, customer lifetime value, and revenue per customer to track the effectiveness of your revenue generation efforts.

Iterate and adjust: Use the insights you gain from forecasting and tracking your revenue to make adjustments to your business strategy, revenue streams, and pricing strategies. Continuously iterate and adjust your revenue model to maximize revenue and profitability.

Can I pivot my revenue model if it’s not working as expected?

Yes, you can pivot your revenue model if it’s not working as expected. In fact, many startups pivot their revenue model as they evolve and learn more about their market and customers.

However, it’s important to approach a revenue model pivot with caution and careful planning.

Overall, pivoting your revenue model can be a complex and challenging process. However, it can also be a necessary step in ensuring the long-term success and sustainability of your startup. With careful planning, research, and testing, you can pivot your revenue model effectively and position your business for growth and profitability.

How can I scale my revenue model as my startup grows?

Scaling your revenue model is an important consideration as your startup grows. Here are some strategies to help you scale your revenue model:

Focus on customer acquisition: As your startup grows, you’ll need to acquire new customers to maintain revenue growth. Consider investing in marketing and advertising to reach new audiences and expand your customer base.

Increase pricing: As your product or service gains more market traction and provides more value to your customers, you may be able to increase your prices. This can help you maintain or even increase revenue while also positioning your startup as a more premium offering.

Diversify revenue streams: Consider adding additional revenue streams to your business model as your startup grows. This can include offering complementary products or services, expanding into new markets or geographies, or developing new revenue models altogether.

Improve operational efficiency: Look for ways to improve the efficiency of your operations to reduce costs and increase revenue. This can include automating processes, streamlining supply chain management, and improving customer service.

Invest in technology: As your startup grows, technology can help you scale your revenue model more effectively. Consider investing in tools and platforms that can help you automate processes, improve customer engagement, and streamline operations.

Continuously monitor and optimize: Continuously monitor and optimize your revenue model as your startup grows. Regularly analyze metrics such as customer acquisition cost, customer lifetime value, and revenue per user to identify areas for improvement and fine-tune your revenue model accordingly.

How do I handle seasonal fluctuations in revenue?

Handling seasonal fluctuations in revenue can be challenging. Here are several strategies that can help:

Plan ahead: Analyze historical data to identify patterns in revenue fluctuations and plan ahead for seasonal changes. This can include adjusting inventory levels, staffing, and marketing efforts to align with seasonal trends.

Diversify revenue streams: Consider diversifying your revenue streams to minimize the impact of seasonal fluctuations. This can include offering complementary products or services that are in demand during different seasons. It can also include expanding into new markets or geographies that have different seasonal patterns.

Develop promotions and sales: Consider developing promotions and sales that align with seasonal trends to encourage customers to make purchases during slower periods. This can include holiday-themed promotions, special offers for off-season products or services, or bundled packages that offer savings during slower periods.

Focus on customer retention: During slower periods, it’s important to focus on retaining existing customers. Consider offering loyalty programs, personalized promotions, and excellent customer service to build loyalty and encourage repeat business.

Maintain cash reserves: Maintaining sufficient cash reserves can help your startup weather seasonal fluctuations in revenue. This can include setting aside a portion of profits during high revenue periods or securing a line of credit to help cover expenses during slower periods.

How can I use data to optimize and improve my startup’s revenue model?

Using data to optimize and improve your startup’s revenue model can be a powerful way to drive growth and increase profitability. Here are some steps you can take to use data effectively:

Collect and analyze data: Start by collecting data on your customers, sales, and revenue. Use tools like Google Analytics, customer relationship management (CRM) software, and accounting software to track key metrics and identify trends.

Identify opportunities for improvement: Analyze the data you collect to identify opportunities for improvement. Look for trends and patterns that can help you identify areas where you can increase revenue, reduce costs, or improve customer satisfaction.

Test and experiment: Use A/B testing and experimentation to test different revenue models, pricing strategies, and marketing tactics. This can help you identify what works best for your business and optimize your revenue model over time.

Use predictive analytics: Use predictive analytics to forecast future revenue and identify potential opportunities or challenges. This can help you plan ahead and make strategic decisions to optimize revenue.

Continuously monitor and adjust: Continuously monitor your revenue and use the data you collect to adjust your revenue model as needed. Regularly review your revenue metrics and make adjustments to pricing, marketing, and other factors to optimize revenue.

How can I effectively communicate my revenue model to potential investors and partners?

Effectively communicating your revenue model is essential when seeking investment or partnership opportunities. Here are some tips on how to do it effectively:

Keep it simple: Start by keeping your explanation of your revenue model simple and concise. Avoid using technical jargon or complex terms that may be difficult to understand.

Use visuals: Visual aids such as charts and graphs can help make your revenue model more understandable and memorable. Use these tools to illustrate your revenue streams, pricing strategy, and customer acquisition costs.

Provide examples: Use real-world examples to help investors or partners understand how your revenue model works. Use case studies or customer success stories to demonstrate how your revenue model has worked in the past.

Highlight scalability: Emphasize how your revenue model is scalable and can grow as your business expands. Highlight potential growth opportunities and how your revenue model can be adapted to accommodate them.

Address potential challenges: Be transparent about any potential challenges or risks associated with your revenue model. Explain how you plan to address these challenges and mitigate risk over time.

Be confident: Finally, be confident when presenting your revenue model. Show investors and partners that you believe in your business and revenue model and that you are committed to making it a success.

What is a good revenue model for a startup school?

A revenue model for a startup school would depend on the specific services offered and the target market. However, here are a few potential revenue models that may be effective:

Tuition-based model: The most straightforward revenue model for a startup school is to charge tuition fees for students. This can be done on a per-course basis, per semester, or as a flat rate for the entire program. This model is best suited for schools that offer formal, structured programs.

Membership-based model: Another option is to charge membership fees for access to a range of resources and services, such as online courses, workshops, mentorship, and networking events. This model is best suited for schools that offer a variety of services to entrepreneurs and startup founders.

Commission-based model: A commission-based model involves taking a percentage of the revenue generated by startups that are incubated or accelerated by the school. This model is best suited for schools that offer more hands-on support, such as mentorship, networking, and funding connections.

Corporate partnership model: A school could also partner with corporations and charge for services such as customized training programs, hackathons, or innovation challenges. This model is best suited for schools that have established relationships with large corporations or have a niche focus in a specific industry.

How and when should startups validate their revenue model(s)?

Startups should validate their revenue model as early as possible, preferably during the idea validation stage. Validating the revenue model means determining whether customers are willing to pay for the product or service and whether the revenue generated will be sufficient to sustain the business.

There are several methods that startups can use to validate their revenue model:

Conducting customer interviews: Startups can conduct customer interviews to understand their needs and willingness to pay for the product or service. This can provide valuable insights into the target market and help determine the most effective revenue model.

Creating a minimum viable product (MVP): An MVP is a simplified version of the product or service that allows startups to test the market and get feedback from customers. By launching an MVP and measuring customer response, startups can validate their revenue model and make any necessary adjustments.

Conducting A/B testing: A/B testing involves creating two versions of the product or service and testing them with different groups of customers. This allows startups to determine which version generates more revenue and optimize the revenue model accordingly.

Running pilot tests: Startups can run pilot tests with a small group of customers to validate their revenue model. This can involve offering a free trial or discounted pricing to attract customers and measure their response.

It’s important for startups to validate their revenue model as early as possible to avoid wasting resources. By using these methods to validate the revenue model, startups can increase their chances of success.

What are some of the best revenue models for app-based startups?

App-based startups have a unique advantage of being able to leverage various revenue models due to the nature of their platform. Here are some of the best revenue models for app-based startups:

In-app Advertising: This revenue model involves displaying ads within the app to generate revenue. App developers can earn money either through click-throughs or impressions. Examples of apps that use this revenue model are Instagram and Snapchat.

In-app Purchases: This revenue model involves offering users the ability to purchase digital or physical goods within the app. Examples of apps that use this revenue model are gaming apps like Clash of Clans and Candy Crush.

Subscription-based: This revenue model involves charging users a monthly or yearly fee for access to premium content or features. Examples of apps that use this revenue model are Spotify and Netflix.

Freemium: This revenue model offers a basic version of the app for free, but charges for access to premium features. Examples of apps that use this revenue model are Dropbox and LinkedIn.

Sponsorship: This revenue model involves partnering with brands to promote their products or services within the app. Examples of apps that use this revenue model are Nike Training Club and McDonald’s Happy Studio.

What are the most unusual but effective revenue models used by internet startups?

There have been some creative and unusual revenue models that internet startups have employed over the years. Here are a few examples:

Affiliate revenue model: Some startups earn revenue by promoting other companies’ products and earning a commission for each sale they generate.

Pay-what-you-want: This model allows customers to pay what they think a product or service is worth, rather than a fixed price.

Donation-based: Some startups rely on donations from users or supporters to fund their operations.

Commission-based: Some startups act as intermediaries between buyers and sellers and take a commission for each transaction they facilitate.

Crowdfunding: This model allows startups to raise capital by soliciting small contributions from a large number of individuals.

Freemium with a twist: Some startups offer a free version of their product, but instead of charging for premium features, they ask users to donate to a charitable cause.

Which Startup Revenue Model is Right for You?

In conclusion, having a clear and effective revenue model is essential for the success of any startup. It helps founders to generate revenue, attract investors, and achieve long-term sustainability. Choosing the right revenue model requires careful consideration of factors such as the target market, the value proposition of the product or service, and the associated costs. It is also important to continuously seek out new revenue streams and experiment with different revenue models.

As a startup founder, you can benefit from joining communities such as Founder’s Network , where you can connect with other founders and gain mentorship. By leveraging the knowledge and experience of others, you can gain valuable insights into revenue models and improve your chances of success. Keep in mind that validating your revenue model early on and tracking revenue over time can also help you make informed decisions about the direction of your startup.

In today’s highly competitive business landscape, having a well-defined revenue model is more critical than ever. By selecting the right revenue model and continuously seeking out new revenue streams, you can ensure the long-term success of your startup.

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Revenue Models

Table of Contents

What are revenue models.

Revenue models are the strategies businesses use to generate revenue . They are a critical component of any business plan, as they detail how the company will earn money and how it plans to sustain its financial growth.

A company’s revenue model is closely tied to its pricing strategy — it encompasses how and when a business charges its customers, as well as the type of service or product offered. It also determines how much money a company makes from each sale, as well as what types of customer segments to target for certain products or services.

In that sense, the revenue model (or revenue models) a company uses to monetize underscores its ability to deliver value to its customers.

• Business revenue models
• Sales revenue models
• SaaS revenue models

Revenue Model vs. Business Model

While “revenue model” and “business model” are sometimes used interchangeably, the former is a subset of the latter. While a revenue model is an integral part of a company’s financial strategy, a business model provides a holistic view of its approach to achieving its objectives.

A business model is a comprehensive view of an organization’s strategy, including its value proposition , target market, competitive advantage, key resources, and operational processes.

While the revenue model focuses on generating income, the business model addresses how the company creates, delivers, and captures value for its customers and stakeholders.

While revenue models play a role, a business model also includes elements such as branding, marketing, customer experience , and product development.

Revenue Model vs. Revenue Stream

A revenue stream is a specific source of income, such as customer purchases or subscription fees. A revenue model describes the way in which multiple revenue streams are combined to generate overall company revenue.

For example, a B2B software company might have three distinct sources of revenue:

• One-time purchases
• Recurring subscriptions
• Additional services like training or consulting

Its overall revenue model would include details on how the company plans to price and sell these services for revenue optimization .

Types of Revenue Models with Examples

To better understand the concept, it helps to look at revenue model examples. Here are the most common ways businesses find potential customers and generate income:

Recurring Revenue Model

A recurring revenue model — also called a subscription revenue model — involves customers paying regularly (i.e., monthly, quarterly, or yearly) for access to a service or product.

Technology companies, streaming services, subscription boxes, and other organizations that provide ongoing value to buyers often use it because it provides a consistent income stream.

Netflix is one example of a company that uses recurring revenue . It charges users a monthly subscription fee for access to its streaming library and exclusive content.

Since recurring models generate predictable revenue , they’re often seen as the most reliable and scalable monetization strategy.

SaaS Revenue Model

A SaaS revenue model is a special type of subscription model specifically meant to address the nuances of Software-as-a-Service (SaaS) businesses.

The two main components of SaaS revenue models are the platform itself and its microservices and add-ons.

Rather than charging customers a flat subscription fee, SaaS platforms often use pricing tiers based on usage and features. They do this to target a larger pool of potential buyers — they offer a cost-effective solution to buyers who don’t need all the software’s features, then scale the product to its full potential for larger or more intricate companies.

Microservices and add-ons build on a platform’s core capabilities, and customers can access them for an extra charge. They fit right in with the software’s main components but aren’t essential for its functionality.

SemRush embodies the SaaS revenue model in its entirety — its SEO and keyword research platform is available to individuals, small businesses, agencies, and enterprises at varied price tiers, while add-ons like content creation and social media marketing are available for added fees.

Service-Based Revenue Model

Service-based revenue models encompass everything a service-based business may use as a source of revenue

Common revenue models for professional services businesses include the following:

• Individual projects. Agencies and consultants often charge customers for one-off projects, like website design or user research.
• Monthly retainers. Professional service providers who want the reliability of monthly recurring revenue (MRR) offer clients the option to pay a flat monthly fee for ongoing support or services.
• Hourly rates. Businesses selling services that are hard to quantify or scale charge based on the number of hours worked on an individual project.

In some cases, service businesses offer all three. Digital marketing agencies are a great example of this — they generally offer ad hoc consulting, sell monthly retainers, and are willing to make exceptions for long-term engagements or large-scale projects.

Transaction Revenue Model

Businesses use the transaction revenue model when they need to charge customers each time they access a service or use a product (or if their products only require one-time purchases).

For example, an ecommerce store that sells physical goods or digital products uses the transaction revenue model by charging buyers each time they make a purchase.

Transaction-based businesses also often set up subscriptions or memberships for additional benefits, such as free shipping or early access to new products in their catalog.

Some software licenses are available transactional, such as music production software, media libraries, and design tools. But have switched to monthly and annual recurring revenue to maximize their income.

Affiliate Revenue Model

Affiliate revenue is revenue generated from promoting another business’s products or services. Affiliate programs are a way to share revenue growth with partners who help drive sales and leads.

By joining an affiliate program, businesses can make money through referral fees and commissions when customers purchase the affiliated company’s products.

Affiliate revenue models are popular among bloggers, social media influencers, and other content creators who use their platforms to drive sales for partner companies.

Some businesses monetize entirely from affiliate revenue while others use it as a portion of their overall revenue strategy . Crazy Egg, Neil Patel’s web analytics software company, has a popular blog that performs well on search engines.

Although the company’s main goal is to sell its software product, its blog (which contains affiliate products throughout) is a way to boost the brand’s credibility while creating new revenue sources from each article.

Ad-Based Revenue Model

Ad-based revenue is a different type of revenue model — it’s based on providing companies with access to an audience in return for a fee.

This model generally works like this: A business will place ads on another company’s website, and the publisher (the owner of the website) will get paid each time someone clicks on or views the ad.

Ad revenue is typically performance-based, but can also be transactional.

• Performance-based advertising: When a business wants to advertise on social media, search engines, or websites, they generally pay for performance. This means that the publisher will be paid a certain amount for each click (cost-per-click, or CPC) or impression (cost-per-mille, or CPM).
• Transactional advertising: Alternatively, some businesses use a flat fee to secure ad space (such as on national TV). Publishers and advertisers negotiate the details of the agreement, including how long the ad will run for and what type of content it should contain.

Google Adsense is one of the most popular ad-based revenue models — businesses can join the program, create ads, and place them on websites that are part of the Google Network. Publishers then receive a portion of the ad revenue each time someone clicks or views an ad.

Usage-Based Revenue Model

There are a few types of businesses that use usage-based pricing (UBP) :

• Cloud computing

In a UBP model, businesses charge customers based on how much of the service they’re using.

For example, telecoms charge customers for the amount of data used each month. Utilities companies may also use a usage-based revenue model to bill customers for their water or energy consumption.

Some companies adopt a usage-based volumetric model — that is, they charge the customer upfront based on expected usage and have a set limit before they start charging extra fees (or overage).

Cloud computing and SaaS companies often use a hybrid UBP model — customers can access certain features for free, but must pay to access additional resources or unlock advanced features.

Ecommerce Revenue Model

Since ecommerce sales account for 15.1% of all retail sales and a quickly growing proportion of software sales , the ecommerce revenue model is far more abstract than most.

At its core, the premise of an ecommerce revenue model is simple: Sell online.

How exactly a business chooses to do this is often the difference between success and failure.

Some busiensses use the ecommerce marketplace model (like Amazon or eBay) — where they operate as a third party that facilitates the exchange of goods or services between two parties — or provide customers with an end-to-end ecommerce experience by creating their own website (like Shopify and BigCommerce).

Individual vendors and retailers also use a combination of the two models, where they operate an online store and have products listed on ecommerce marketplaces.

Licensing Revenue Model

Licensing is when a company pays another business for the rights to use their intellectual property or brand.

This is used in a variety of industries differently:

• Entertainment. Television shows, movies, video games, and music are all sold as licenses.
• Software. Software companies also use licensing models to monetize their products. Companies like Adobe offer monthly subscription-based software licenses that give customers access to the software’s most current features.
• Resellers. Some companies take this a step further by bringing on value-added resellers (VARs) , which are organizations that purchase a certain number of licenses from the original vendor and resell them to customers (or pay a licensing fee to the parent company each time they make a sale).
• Internal assets. Businesses can also use a license to create resalable assets, such as stock images and videos. These assets are then sold at a fraction of their original cost — allowing the business who created them to generate additional revenue streams without having to recreate new assets each time.

Freemium Model

The freemium model is a strategy businesses use to attract a larger target audience, some of whom will hopefully convert to paying users.

The idea behind freemium pricing is users with simple needs can enjoy a minimalist product without charge, while customers with more complex needs will pay for access to additional features and services.

The freemium model is popular in the tech industry, where companies use it to attract new users and convert them into paid customers.

Dropbox offers both free and premium versions of its file-sharing app. The free version has limited storage space while the paid version offers unlimited. Some users will never need more than the free version’s capacity, but scaling companies already familiar with Dropbox’s services will eventually upgrade and pay for the advanced features.

How to Determine Which Revenue Model to Use

Your revenue model is an opportunity for product differentiation and value creation. There are four key questions you should ask yourself when deciding which model makes the most sense for your business:

• What does your ideal customer profile (ICP) look like? Defining your ICP is a critical first step in understanding how your target buyers will respond to different revenue strategies.
• How do your products/services compare to others in your vertical? Every business has competitors, so you need to look carefully at how the nuances of your offerings could justify a similar or different revenue model.
• How can you capture value through your revenue model? Ultimately, your main goal should be to make your customers’ lives easier. Consider how well-defined revenue models within your specific market are and how they benefit the end-user.
• Are there additional opportunities to capture revenue? Aside from selling a product or service, there are usually other opportunities to capture additional revenue. The Hundreds has been a popular streetwear brand for decades, well-known for manufacturing and printing all their clothes in-house. Now, its competitors use the brand’s facility for screenprinting and embroidering services.

In some industries, the best revenue model to use will already be clear. B2B SaaS vendors, for instance, already maximize revenue by charging by the month or year compared to one-time license sales, and buyers find the predictable monthly cost easy to budget for.

What isn’t well defined for B2B SaaS vendors, however, is the product offering. Companies need to decide which features should be included in each subscription tier and how much those tiers should cost — something that’s more about trial and error more than an exact science.

Technology Trends to Execute Complex Revenue Models

Subscription management.

Recurring revenue businesses need to use subscription management software when setting up their billing plans. Typical features of subscription management tools include:

• Subscription onboarding and customization tools
• Automated billing and invoicing
• Dunning management
• Contract renewal workflows
• Reporting on customer revenue and churn
• Accounting integration for reporting
• Customer self-service portals

A subscription management platform puts subscriber relationship management on autopilot. By automating the most tedious processes associated with the subscription business model , companies can streamline their customer experience and increase retention.

Configure, Price, Quote (CPQ)

CPQ software is a combination of several technology tools that simplify the pricing and quoting process. It helps businesses create accurate quotes quickly and easily, which can help them stand out among competitors.

CPQ includes the following:

• Comprehensive catalogs of products/services with up-to-date pricing information
• Dynamic product recommendations based on customer preferences
• Quote, proposal, and contract generation and management
• Real-time order validation
• Configurable pricing rules
• Integration with ecommerce platforms and digital self-service
• Continuous data flow between ERP (products) and CRM (customers)

CPQ enables businesses to respond quickly and accurately to customer requests. It also allows sales team members to focus on other tasks like relationship building, instead of generating quotes all the time.

A billing platform helps businesses manage the revenue cycle from start to finish — by automating billing, collections, and payment processes. Typical features of a billing platform include:

• Automatic invoicing and payments
• Multi-currency support
• Discounts and promotions
• Recurring/subscription billing setup and management
• Fraud prevention tools
• Integrations with accounting systems

Billing platforms cover the accounting and invoicing side of the revenue cycle, and they can be integrated with subscription management or ecommerce platforms to completely streamline revenue operations .

Revenue Management Software

Revenue management software automates the internal processes a business needs to carry out to run revenue. It includes features like:

• Revenue forecasting capabilities to predict future revenue
• Data collection tools to track financial performance
• Analytics dashboards for tracking KPIs
• Price elasticity research and testing
• Tools for creating promotional campaigns
• Real-time monitoring of customer demand patterns
• Optimization of sales prices based on market conditions

The main benefit of revenue management software is it improves a company’s revenue intelligence . This lessens their workload while helping them analyze their financial health more accurately.

People Also Ask

What are the key components of a revenue model.

The key components of a company’s revenue model are its product catalog, value proposition, pricing strategy, the target customer, customer lifetime value (CLV), and additional monetization strategies that complement the core offering.

What are the 5 drivers of revenue?

The main drivers of revenue for businesses are its products, sales and marketing activities, customer relationships, customer experience, and pricing.

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• Glossary: Revenue Drivers
• Glossary: SaaS Revenue Model
• Glossary: Revenue Transformation
• Glossary: Revenue Generation
• Glossary: Predictable Revenue

• SaaS Database
• Business Software
• Customer Experience
• Data/Analytics
• Industry Solutions
• Productivity

15 Most Popular Revenue Models in 2022 [w/ Tips & Examples]

Simply put, your company’s revenue model defines how your business will generate income.

For this reason, choosing the right revenue model for your business is key to running a successful business.

Many companies, however, struggle to find the revenue model that works for their business – and in some cases, using a revenue model that doesn’t work can even lead to bankruptcy.

So, if you’re after the best revenue model for your business, look no further.

In this article, we will cover everything you should know about revenue models, including:

What is a Revenue Model?

10 most popular revenue models in 2022, 5 emerging revenue models (starting to get traction), how to choose the right revenue model.

Table of Contents

As mentioned above, a revenue model is a framework that a company uses for generating revenue.

As such, your company’s revenue model identifies the strategy your business uses to generate income, which helps you to determine:

• Your revenue streams
• Your target customers
• Your product pricing

In general, using a revenue model can help your company to plan and manage your revenue as well as track and predict your business growth.

You should also keep in mind that, although revenue models are often confused with business models, these terms shouldn’t be used interchangeably – in fact, revenue models are a core component of your company’s business model.

Many founders stick to the same pricing model for many years without stepping back to consider if they’re leaving money on the table.

Here are some additional revenue models you should consider to increase cash in your bank account.

#1. Recurring Subscription Revenue Model

The recurring subscription revenue model works for physical products like Harry Razors and digital software products like Slack .

Actually, many analysts say that the recurring subscription model is the best revenue model.

That’s because the customer pays every month and, as long as you’re delivering value, keeps paying for a very long time – in fact, many SaaS companies have customers who have paid every month for 3+ years.

To make the most out of the recurring subscription revenue model, consider making your cheapest plan one that is easy for new users to get started on.

Your middle plan and the most expensive plan should have obvious additional features or usage-based milestones (6 razors per month instead of 3) that drive customers to upgrade to a higher price.

Here’s an example of HubSpot ’s CMS subscription plans that offer more features with each tier:

By offering multiple subscription plans at different price points and with distinct features, HubSpot’s customers can see exactly what they’re getting – and missing out on – with each plan.

Here are some other examples of companies that use the recurring subscription model:

SEMRush broke $100m in revenues in 2019 selling subscription plans to 47,000 customers who pay on average $130+/mo. Customers use them to do search engine marketing and optimization research.

Wistia hit $40m in revenues in 2019 and almost $6m in free cash flow by helping over 50,000 customers host and manage video content. They build their plans around the number of videos, channels, and certain features.

Jivochat hit $8m in revenues without raising money by selling customers a live chat solution for their websites. Over 37,000 customers pay $18/mo to use the tool.

#2. Transactional (take a %) Type of Revenue Model

If you’re processing payments for your subscribers or helping them manage money in any way, consider the transactional revenue model.

Back Office , for example, helps businesses manage their finances and payroll.

They started by selling a recurring subscription model and hit $80,000 per month in revenue in under 18 months.

Then they realized they were helping customers bill their customers millions of dollars each month.

Using this transaction model, Back Office now takes a small percentage (<3%) of each sale to help its customers with payment processing:

If Back Office hits $10m/mo in processing, they’d be making an additional $300k/mo if they charged a 3% transaction fee.

Here are two more companies that use the transactional revenue model:

• Printful was founded in 2014 and has helped creators sell over $540m in gross merchandise volume (GMV) through its platform in total. In 2019 the company made $100m in revenues on about $300m in total GMV. The company takes an average of 30% on each order.
• Argentina-based PopMyAds makes money by charging 8% of total ads placed through its system. This transaction fee – sometimes called the “ad tax” in the advertising world – is very popular among SaaS companies that help brands place ad spend.

#3. Usage-based Revenue Model

With the usage-based revenue model, your company only charges customers based on how much they use your products.

However, many founders mess up their business plans because they think customers use them for one thing when actually their customers value something different.

So, when you charge customers based on usage, make sure you are tracking real usage metrics from your tool and price against the usage metric customers value most.

For example, if you sell customer relationship management (CRM) software, you might price against the number of contacts.

If you help customers write proposals, on the other hand, your usage-based metric might be the number of proposals sent each month.

One of the companies that effectively use the usage-based revenue model is Snowflake .

Here’s an example of Snowflake’s pricing:

Basically, Snowflake’s pricing includes two elements:

• Cost of storage. Customers can choose either on-demand storage (paid for monthly) or capacity storage (paid for upfront). Whichever option they choose, the customers are only charged for the terabytes they use.
• Cost of computing resources. Snowflake measures the compute resources used to perform services (e.g. data loading) by credits. Customers are charged based on their actual usage of computing resources per second.

Here are some other companies that use the usage-based revenue model:

• Proposify charges based on the number of contracts per month.
• CloudCheckr charges based on the percentage of cloud spend.
• SEMRush charges based on the number of keyword searches you do per month.

#4. Pay Per-Seat

When a customer recommends your product to one of their co-workers, it means you’re doing a great job delivering value.

So, when you see this sort of pattern, consider a pay per-seat model.

With this revenue model, customers pay you based on how many seats they’re using.

Most commonly, the pay per-seat revenue model works best for B2B companies.

If you have 3 people from a company using your product, for example, use LinkedIn to check the company’s total number of employees so that you can see if it’s worth it to try and get their entire team signed up.

Upscope, for example, tried 7 revenue models before sticking with the pay-per-seat model that doubled their revenue .

Here’s what their pay per-seat pricing looks like:

#5. Ad-based Revenue Model

Ad-based revenue models are becoming less popular because users can easily spot ads and find them annoying, which is why the best ads are the ones that don’t look like ads at all.

That being said, if you’ve built a blog, podcast, or email list and attracted a large following, monetizing with ads is a great idea.

If you’ve built a large audience and can’t seem to attract advertisers, however, one revenue model you should consider is the affiliate model. Check if the products you already use and love have an affiliate program where they’d pay you to mention their goods or services.

Clowdways, for example, has an affiliate program with multiple commission payout models that you can choose from:

Here are some other ad-based revenue model examples:

• Email newsletters like Morning Brew generate over $18m/year by sending one email per day and selling ads in that email. They’ve been at it for many years and now have over 1,600,000 readers of their Morning Brew newsletter.
• Podcast hosts like Tim Ferriss are able to charge $56,000 for a 60-second message at the beginning of their podcast episode because they’ve built a massive audience of listeners.
• Web properties like Forbes and Entrepreneur sell ads on their websites using Google Adsense and other marketplaces which bring in $10m+ in revenue annually.

If you’re an E-Commerce company that spends a lot on ads to generate new customers, though, finding the right outlets that already serve your desired customers can be tricky.

What might help you is running small tests under $5k and then doubling down once you find an email list, website, podcast, or other property that helps you get customers at a low customer acquisition cost (CAC) .

#6. Freemium Model

To acquire more customers, companies often offer some of their products with basic or limited features for free, whereas advanced features come at a price – and that’s what the freemium model essentially is.

Here’s an example of Trello’s freemium model:

As you see, Trello offers a wide array of features for free, while additional features cost $5 and more per month.

The goal of using the freemium model is, of course, to convert free users into paying customers by offering advanced features for a price.

Nonetheless, you should keep in mind that this model typically works well in very specific situations.

When you’re buying groceries and a server has a “free sample” booth set up in front of a Hamburger brand, for example, they give you a free bite of the hamburger because they know if they do that 10 times, 1 person will buy the $15.99 pack of 12 hamburger patties.

The 10 samples they gave out cost them a total of $1 (marketing) and the product cost of goods sold (COGS) is $4, generating a profit of $10.99.

Having said that, freemium models can be dangerous if you don’t know how much “free” you have to give out to convert 1 new customer, which is why it’s important to know your conversion metrics.

After all, if you give away products or tools for free and these free ideas cost you a lot of money, freemium models can drive your business bankrupt.

#7. Marketplaces

To put it simply, marketplaces connect buyers and sellers and make money by sitting in the middle.

However, the sales cycle in marketplaces can be tricky because you have to sell 2 people at once: the buyer and the seller.

So, who should you focus on getting on your marketplace first – the buyers or the sellers?

If you want to start generating cash flow, you have to go after both target customers at once.

A key piece of your intellectual property then becomes your network of buyers and sellers.

Airbnb, for example, connects travelers who are looking for accommodation with hosts and typically split their service fees between hosts and guests:

Airbnb’s service fees can vary – in this case, for example, the guest service fee is just over 17% of their booking subtotal (nightly price – early bird discount + cleaning fee). Hosts, on the other hand, are usually charged a 3% fee.

Here are some more examples of businesses that use the marketplace revenue model:

• Google helps publishers connect with brands that want to reach those publisher audiences. With $50b+ in annual revenues, Google is the best model.
• Amazon connects the maker of a widget to a buyer who just searched for that widget and takes 30% in between.
• Apple’s app store connects gamers with game app developers and takes 30% on each $4.99 sale.
• Fiverr connects a writer in Europe to someone who needs blog content in California and takes a small cut in between .

Other examples of marketplaces include Uber, TopTal , and the car-buying marketplace Shift.

#8. Data Sales

Using the data sales revenue model, your company is selling data directly to customers.

While most companies use this revenue model as an additional revenue stream, some businesses, such as UpLead , use data sales as their company’s primary revenue model:

Although selling data can be tricky, it can also be highly lucrative when done right.

Second Measure, for example, has built relationships with many firms that touch transactional credit card data.

Those firms anonymize the data and share it back to Second Measure.

Second Measure then cleans and organizes the data and enables customers to sort, filter, and pull insights from this credit card data.

Other firms that sell data include ZoomInfo , Crunchbase , and Gartner.

#9. Markup Revenue Model

The markup revenue model is one of the most common revenue models across companies today.

The idea is simple: buy or create a product, increase its price by X% and sell it to make a profit.

For example, you may decide that every time you sell a product, you want to make a 50% markup. Meaning if it cost you $10 to buy or create, you want to sell it for a minimum of $15 so you pocket $5 per sale in gross profit.

While some small businesses that use the markup revenue model make direct sales to customers through social media and search engines, others use dropshipping, middlemen like eBay, Shopify , or retail stores like Walmart to sell their products.

For example, many independent sellers and small businesses use Etsy to sell their handmade goods:

Nonetheless, regardless of how you sell your product, make sure you’re making enough margin on the sale to make it worth your energy.

Using the markup revenue model makes calculating profits very simple, which is why this revenue model is so popular among businesses.

#10. Service-based Revenue Model

If you have plenty of time and specific skills or expertise, the service-based revenue model is one of the easiest startup revenue models to start your business with, especially if you don’t have a lot of money.

With the service-based revenue model, you’re essentially selling your time, labor, and/or expertise to deliver services to your clients.

Helios HR, for example, offers HR services and charge their customers an hourly rate based on expertise:

One thing to keep in mind, however, is that most founders that start off selling services realize that it’s very hard to scale past $1m in annual revenue because you only have so much time.

So, they often start to build an agency where they sell other people’s time and then realize that it’s also hard to scale – once you get new customers, you always have to go hire more people to service those customers.

At this point, most agencies start to look at more profitable revenue models, such as the recurring subscriptions revenue model, or invent their own products and use their agencies to sell the product.

#1. Markup + Subscription

Many brands that sell to consumers are starting to do this, after only using the markup model selling razors to consumers.

It cost them $1 to make the razor and they sold each for $5 for a $4 gross profit. They got sick of paying Walmart for shelf space and of paying Amazon a 30% cut, so they launched their own website and sold directly to consumers.

They started seeing many customers come back and buy every other month, so they launched a subscription plan: 3 razors per month for just $12.

This is the path DollarShaveClub took before it sold to Unilever for $1b in cash in July of 2016 . I expect you’ll see many more brands go down this path combining the markup revenue model with subscriptions over the next few years.

#2. Marketplace + % of GMV

You really want to help stay-at-home moms find flexible work, so you launch a site where they can list their talents.

In the first year, you sign up 1,000 moms who list things like “I write blog posts” or “I’ll edit your podcast.”

In your second year, you finally see companies hiring these moms to do tasks. You charge companies $50/mo to use your platform to find moms ready to work.

By year 3, you’re processing 10,000 jobs per month equalling over $5m in total jobs completed (gross merchandise volume, GMV). You’re making $50/mo from 2,500 companies paying to get access to your mom network, a total of $125,000 per month.

You start to realize you could charge a small percentage of each job to keep for yourself. You launch new pricing stating you’ll keep 3% of each job. 3% of $5m/mo is approximately $150k/mo in new revenue. You just doubled your business.

Many marketplaces are going through this change right now. I expect you’ll see this combination of business models continue to become popular over the next 5 years.

SimpliShip helps freight forwarders sell ocean and air transportation space to brands like Adidas who need to ship products. The company makes money by taking 2% of space booked on the ocean side and 5% on the airside. In 2019, the company processed $15m in total freight spend (75% ocean, 25% air), making about $1m in revenues. They plan to do $300m in volume in 2020 and make $10m in revenues.

Freightos is another example of this same model in the transportation space. The company passed $18m in revenues in 2019.

New brands like LeafLink help cannabis brands like Dixie in Colorado connect with retailers who can sell their products like Medicine Man in Denver. LeafLink has 1300 brands like Dixie on the platform and 3400 retailers like Medicine Mane. In April of 2019, the platform processed $123m in gross merchandise volume (GMV).

Leaflink has 3 revenue models. They made $6m in 2019. 60% came from charging 1300 brands like Dixie for $399-1500/mo subscription plans. 5% came from transaction fees where LeafLink charged 3% on total bought through their platform of $2.25m. The last 15% came from letting brands like Dixie buy ad space in their marketplace. This is a great example of using multiple revenue streams to scale.

#3. Hardware (IoT) + Software

Many companies build hardware that enables their software to work. They’ve realized that once a customer installs the hardware, they will be way more likely to keep paying the subscription fee for long periods of time.

SensaNetworks helps companies like Walmart manage their waste. SensaNetworks ships hardware devices to brick and mortar shops to install on their dumpsters. These devices tell trash pickup when the dumpster is full.

It costs SensaNetworks $900 to build each piece of hardware. They sell this to customers for $2400 one time, or $90/mo rental. 60% of customers buy and 40% rent. They then upsell the software package for $34/location.

#4. Subscription + Services

These are like two twins that can’t seem to get along. Many entrepreneurs start off selling their time by selling services. They get tired of selling their time, morph into an agency, and then that agency develops a subscription software product.

This is where the conflict begins. How many of your agency members should you have focused on building the software? When should you shut down the agency and focus only on the higher-margin software?

In some cases, the software takes off and the company goes on to raise venture capital. The investors hate the services revenue because it “doesn’t scale” and “has low margins.” Most software margins are above 75% while services margins tend to be around 40%.

After the subscription company reaches $5m or so in revenues and 1,000 customers, the founders start thinking: “Wow, we could upsell services to some of these customers and get them more addicted to our software.” Typically, you see these companies focus on launching a services plan again, going back to their roots.

Ultimately, the most successful software companies sell software and upsell significant services to get customers onboarded, activated, and sticky. Do both!

Clucth.io , for example, started as an agency in 2007, when the founder was 19. The agency grew to 40-50 people in 2019 and revenues hit $5m, but the work was exhausting. The founders tried to sell the agency and got an offer for 1x revenues of about $5m.

One of the founders wanted to spin out a valuable piece of code that allows companies to drag and drop together applications and websites without having to code. That founder was paid 50% from the sale of the agency, or $2.5m, and then used $600k to buy out the code from his old agency. Today, that subscription software company has launched named Clutch.io.

#5. Subscription + % of GMV

Companies like Workaxle help businesses easily schedule paid meetings. Companies pay a fixed fee of $1000 each month to use the software on a subscription basis and Workaxle takes 1.5% of the total value of appointments booked through their platform. This tool is for industries that charge for appointments (salons, coaches, etc).

With so many revenue models out there, it can be difficult to choose the right revenue model for your business.

However, having a good understanding of your product, your market, and staying flexible can help you make the right decision for your company.

Understand Your Product

If you want to make sure you are choosing the right revenue model for your business, you need to first consider your product.

In some cases, your product can give you a clue about the revenue model that would work best for your business.

For example, if you have a set of products that come with different features, chances are you’d be best off choosing the recurring subscription revenue model. This way, you can make sure you’ll get a consistent stream of revenue each month, which can promote your business growth.

Now, if your product doesn’t dictate the revenue model by itself, you might want to consider different options, such as joining affiliate programs to get an additional revenue source.

Understand Your Market

Having a clear understanding of your market can help you choose the best revenue model.

As such, you need to consider the following:

• Your target customers. Knowing your customers and what their needs are can help you define your revenue model. For example, if your customers are large businesses, your business might do well using the pay-per-seat revenue model.
• Your competitors. Analyzing your direct competitors can help you to evaluate your product and its value, which can in turn help you choose the right pricing. Also, you can get an idea of which revenue model would work for your business by examining what works for your competitors, which revenue models they’ve tried in the past, etc.

Moreover, you can reach out to other similar companies for networking, advertising, and other business opportunities that could potentially help you generate more income.

Stay Flexible

Perhaps the most important part of choosing your revenue model is to stay flexible.

As your business grows, chances are your revenue model will change as well.

Sometimes, choosing the right revenue model can be a matter of trial-and-error – it’s important, however, to quickly note when a revenue model doesn’t work and make the necessary changes.

You may, for example, think that your business would do best with the recurring subscription revenue model only to find out that, in fact, your business does much better with the usage-based revenue model.

Or, you might eventually add advertising or data sales as an additional revenue stream to your primary revenue model.

Whatever the case may be, it’s important that you stay open and flexible to changes – this way, you will eventually figure out a unique revenue model that works best for your company.

Key Takeaways

And there you have it – now you should be ready to choose the right revenue model for your business.

Before you do so, though, let’s go over some of the key points of this article:

• Revenue models help companies to figure out their target customers, product pricing, and revenue streams by outlining their income generation process.
• There are many different revenue models businesses can choose from, including markup, recurring subscription, and usage-based revenue models. Many businesses, however, have a primary revenue model and look for additional revenue streams.
• Tracking your conversion metrics is vital if you’re planning to use the freemium model.
• Service-based revenue models are one of the easiest to start with, yet often they don’t have much room for business growth.
• The key to choosing the best revenue model for your business is to consider your product, market, and stay flexible since your revenue model will likely change over time.

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Revenue Model: Understanding its Structure and Role in Business Success

✅ All InspiredEconomist articles and guides have been fact-checked and reviewed for accuracy. Please refer to our editorial policy for additional information.

Revenue Model Definition

A revenue model is a strategic framework that outlines the methods a business uses to generate income from its products, services, or content. It is an integral part of a company’s business model, providing insight into the monetization strategy and the process by which the company turns its products or services into profits.

Types of Revenue Models

Starting with the Sales Revenue Model , it primarily revolves around selling either tangible goods or intangible services directly to customers. The revenue is generated through the pricing of these goods or services, and often includes a mark-up on the cost of production. A typical example is retail businesses, where the customer pays to acquire a product.

The License/Fee Revenue Model is mainly used by companies that create software or other types of proprietary technology. Here, users must pay a license or fee in order to legally utilize the product or service. This fee might be a one-time charge, or it could be a recurring cost, such as a yearly license renewal.

Next, is the Subscription Revenue Model , which involves charging customers a recurring fee to access a product or service. This model is typically used by media outlets, software as a service (SaaS) companies, and fitness clubs among others. The defining feature of this model is the continuous payment plan, providing a predictable and steady income stream to the companies.

Then, there’s the Transaction Fee Model that involves earning revenue from every transaction facilitated by a company’s platform. This model is often utilized by payment processors, online marketplaces, or auction sites where the company levies a charge on the transferring parties as a fee for their service.

Finally, the Advertising Revenue Model generates earnings through selling advertising space. Companies that have high levels of website traffic or strong media presence can benefit from this model, charging other businesses or entities for visibility on their platforms, such as search engines and social media sites.

Additionally, there are other revenue models including Freemium , where basic services are offered for free, while more advanced features need to be paid for, and Affiliate Marketing , wherein a company receives a commission for referring new customers to another business.

These are broad categories that form the majority of revenue models. Each model has its unique characteristics that make it suitable for specific types of businesses. It’s also important to note that the chosen revenue model must align with the overall business model and strategy in order to be truly effective.

Choosing the Right Revenue Model

Customer preferences.

As any effective business strategy puts the customer at its core, understanding your customer’s preferences is a critical factor when deciding on your revenue model. Consider what forms of payment your customers are most comfortable with or what payment structures align with their purchasing behavior. For instance, if you’re selling high-cost items, customers may prefer installment payments to a one-off large payment, suggesting a subscription model may work best.

Product Nature

The nature of your product or service also plays an integral role in shaping your revenue model. For example, if your product is a one-time purchase, a direct sales model may be the best fit. However, if your product entails regular updates or maintenance, a subscription model could be more appropriate. The goal is to choose a revenue model that aligns with the way customers use your product.

Industry Norms

While innovation is a key driver of business success, it’s also essential to recognize the importance of industry norms. Analyze the revenue models of successful competitors in your industry. Doing so can provide useful insights and help you avoid pitfalls. It’s also vital to understand what your customers will expect based on general industry standards.

Strategic Objectives

The chosen revenue model must align with your company’s strategic objectives. If your goal is rapid growth, for instance, you may want to consider a freemium model to attract a large user base quickly. Conversely, if your focus is on long-term customer relationships, a subscription model might be preferable due to its ability to provide ongoing value and foster stronger customer relationships. Remember, what works for one company may not work for yours. It’s vital to consider your unique situation and goals.

Revenue Model and Business Strategy

Understanding the importance of an agreement between a firm’s revenue model and its overall business strategy is an integral part of any successful business management. The revenue model, providing a blueprint of income generation, should ideally fall in line with the strategy designed to navigate the company towards its long-term objectives.

Interplay Between Revenue Model and Business Strategy

The impact of this alignment is far-reaching and touches virtually every aspect of the company’s operations. Being in sync means the company’s financial resources are directed towards the said strategy in a manner that optimizes revenue generation and profit margins. The revenue model acts as the driving force that propels the strategic decisions of top management.

Impact on Financial Performance

A well-aligned business strategy and revenue model can significantly improve a company’s financial performance. For instance, if a firm’s strategy revolves around market penetration and the revenue model is focused on low price, high turnover – there’s harmony. This congruence prompts cost efficiencies, maximizes revenues, and enhances financial performance.

Influence on Competitiveness

Competition in any industry is intense. Firms that fail to align the revenue model with the business strategy could lose competitive edge. If the strategy is to offer unique, high-quality products but the revenue model is based on volume sales, the discord creates inefficiencies; potentially leading to quality compromise or reduced profitability. Ensuring alignment bolsters the firm’s ability to fulfill its value proposition and uphold its competitive position.

Sustainability and Long-Term Success

In the long run, a company’s sustainability hinges heavily on the synergistic working of the revenue model and business strategy. An organization must consistently innovate and update both to keep pace with market evolution. A well-crafted strategy ensures a company stays relevant and valuable to its customers, and a supporting revenue model, tuned to the strategy, enables the company to reap financial benefits of this relevance – a foundation of business sustainability.

Thus, the intertwined fate of the revenue model and business strategy cannot be overlooked – it forms a critical cornerstone of the entire economic structure of a competitive firm.

Revenue Model in a Digital Economy

Focusing on the digital economy, businesses face a unique set of challenges and opportunities when deciding upon a revenue model. The dynamics of business operations have significantly changed due to digitization, thus impacting how companies garner their earnings.

Challenges in a Digital Economy

The digital economy is characterized by its fluid nature and fast-paced changes, which can make it challenging for firms to select an appropriate revenue model. Identifying the right pricing strategy can become complex with several options at disposal, such as freemium, pay-per-use, subscription, and others. Furthermore, managing digital goods with almost-zero replication and distribution costs can also confuse traditional pricing notions.

Digital businesses face high customer acquisition costs owing to increasing competition. The challenge here is not just to acquire but to retain these customers, derived from providing consistent value. It becomes paramount to understand customer behavior, preferences, and willingness to pay, which demands substantial time and resources. Also, the global nature of the digital economy requires businesses to consider diverse regulations, tax implications, and currency exchanges in their revenue model.

Opportunities in a Digital Economy

While it comes with its challenges, the digital economy offers vast opportunities for businesses to morph their revenue models creatively. Companies can monetize their offerings in multiple ways – digital ads, commission structure, direct sales, or a blend of these. The global reach of online platforms offers an expanded customer base, increasing potential revenue streams.

The increasing tendency of customers towards subscription services presents another opportunity. As per a report, the subscription e-commerce market has grown by over 100% a year in the last five years. Companies can take advantage of this trend by establishing a recurring revenue model, ensuring dependable income flow.

Similarly, digital content consumption is at an all-time high. Businesses can tap into this trend by adopting an ad-based or a freemium model, wherein users can access content for free, but additional features or ad-free access would come with a fee.

In conclusion, defining a revenue model in the rapidly evolving digital economy presents a fascinating mix of challenges and opportunities. With careful consideration, businesses can select a revenue model that aligns best with their strategic goals, the nature of their offering, and their customer preferences. Staying abreast of trends such as growing preference for subscription and high digital content consumption can guide companies in this process

Revenue Model and Price Determination

The critical role of a revenue model resides in its capacity to establish a connection between product or service price and the value that the customer perceives. Essentially, the model helps to identify and define the approach for charging for a product or service, which significantly influences the customer’s impression of the product’s worth.

Customer Perception of Value

The choice of revenue model plays a significant role in consumer perception. For instance, a subscription model may create an impression of long-term value; the customer is investing in the benefits derived over a period, be it monthly, quarterly, or annually. In contrast, a pay-per-use model emphasizes an immediate return on investment, with each usage perceived as a unique value point. Thus, the revenue model can directly shape how attractive the product appears to the customer, impacting their willingness to pay and influencing their perceived value.

Implicate on Demand

Once the revenue model shapes the customer’s perceived value, demand for the product or service inevitably follows. A revenue model that successfully convinces customers of tangible benefits, whether short-term or long-term, will spur them towards consumption, thus driving up demand. Conversely, a model that fails to do so will struggle to generate interest, let alone demand.

Influence on Firm Profitability

Ultimately, the profitability of the firm rests heavily upon the revenue model chosen. An effective revenue model results in a strong relationship between the price of a product or service and consumer’s perceived value. This relationship directly impacts demand, revenue inflows, and subsequently, profitability.

Price Determination

Price determination is a complex process involving operational costs, market conditions, competition, and margins. The revenue model is critical as it gives strategic direction in setting the price. For instance, a freemium model may permit lower initial prices (or even free services) to attract customers, with revenues generated from subsequent upgrades or premium services. By influencing the price, the model also has indirect control over profitability, thus underscoring its importance.

In sum, the revenue model serves as a vital link between price, customer value perception, demand, and profitability. The choice and execution of the model play a defining role in a firm’s success.

Revenue Model Adaptation and Evolution

The ability for a firm to skillfully adapt its revenue model to changing circumstances is an often underappreciated key to success. The market dynamics do not remain static; they are in a constant state of flux. Changes in consumer behavior, emerging market trends, and fluctuations in the economic landscape necessitate continuous updates to retain relevance and maintain profitability.

Alterations following Market Dynamics

Consequently, the need to adapt the revenue model becomes quintessential in response to shifting market dynamics. A firm may find itself in a situation where its current offerings no longer resonate with its customer base. Alternatively, an entirely new market segment may emerge due to societal changes or shifts in demand. Adapting the revenue model in these instances could involve diversifying the product portfolio, price adjustment, tapping into new distribution channels, among others. A failure to do so could mean a significant drop in revenues, or worse, risks obsolescence.

Tech-Driven Adaptations

The rapid pace of technological advancements also challenge firms to constantly revamp their revenue models. For instance, companies that relied heavily on brick-and-mortar stores have had to rethink their strategies due to the surge in e-commerce and digital based transactions. These companies have had to adjust by integrating elements of subscriptions, advertising and transaction fees, leveraging digital platforms’ versatility.

Navigating Competitive Pressures

Robust competition also frequently necessitates the modification of revenue models. Competitors may introduce a disruptive innovation or a highly effective go-to-market strategy that necessitates a reaction. In extreme cases, a competitor’s action may challenge the viability of a firm’s core business model, necessitating a broader strategic shift.

Although this process can seem daunting, it is critical to remember that the successful adaptation of a revenue model can often lead to periods of increased growth and profitability. By staying abreast of market dynamics, harnessing the power of technological advancements, and carefully navigating competitive pressures, firms not only survive but thrive amidst changes.

Impact of Revenue Model on Stakeholders

The revenue model of a company holds significant implications for various stakeholders. These stakeholders include investors, employees, customers, and society at large.

Impact on Investors

Investors, both potential and existing ones, base their decision to invest on a company’s revenue model. A robust and sustainable revenue model suggests that the company can generate consistent income, creating a level of security for investors. Conversely, a weak or unpredictable revenue model can be a red flag, dissuading potential investors and worrying those who have already invested.

Impact on Employees

The revenue model also impacts an organization’s employees. The resolution of an organization to ensure stability and profitability directly impacts the job security of its employees. Moreover, organizations that generate substantial revenue are in a position to offer benefits, competitive salaries, and growth opportunities, thereby fostering a stable and conducive work environment.

Impact on Customers

Customers are also significant stakeholders. An organization’s revenue model can influence the price of products or services, the quality delivered, and even the level of customer service received. A company operating on a freemium model, for instance, may offer basic services at no cost to the consumer, while offering more advanced or specialized features at a premium. This availability and price variation can affect a customer’s purchasing decisions.

Impact on Society

On a broader scale, companies and their revenue models can have significant societal impacts. For instance, a firm with high revenue and profitability may contribute to economic growth through taxes, job creation, and local investments. On the downside, businesses with a single-minded pursuit of revenue may make decisions that are detrimental to the environment or society at large, such as unsafe labor practices, pollution, or causing local gentrification.

Role of CSR in Revenue Model Formulation

The increasing significance of Corporate Social Responsibility (CSR) also plays a key role in shaping the revenue model of a firm. Companies are not just expected to make a profit, but to do so in a manner that is ethically sound and socially responsible. Firms are acknowledging that aligning their revenue models with their social responsibility goals can boost their reputation and customer base and ultimately contribute to long-term revenue growth. For instance, many companies are shifting towards a shared value model, where they create revenue-making business models that also have positive societal impacts.

In conclusion, the revenue model can influence multiple facets of a business and its interactions with its stakeholders. As businesses grow and evolve, understanding these impacts is of paramount importance.

Revenue Model Risks and Mitigation

Regulatory changes.

Businesses often face the risk of changes in regulatory requirements, which can significantly impact the existing revenue model. For instance, new laws may prohibit certain practices, or impose additional costs that may undermine the revenue model’s viability. Therefore, businesses need to be proactively aware of any impending regulatory changes, and devise strategies to adapt their revenue models accordingly. This could involve lobbying against proposed laws, researching alternative practices, or re-strategising their revenue model for compliance with the new regulations.

Market Volatility

Revenue models are also susceptible to threats from market volatility. Changes in customer requirements, economic downturns, or competitive displacement can destabilize the revenue model. Therefore, to mitigate the impact of market dynamics, businesses should diversify their revenue streams. Diversification results in reduced vulnerability to changes in any one market domain. In addition, businesses should frequently reassess market conditions and adjust their strategies accordingly.

Technological Disruption

In today’s rapidly evolving technological landscape, technological invention or innovation can disrupt established revenue models. A novel technology might render a company’s offering obsolete or introduce more cost-effective substitutes. To mitigate this risk, companies should continuously invest in research and development, periodically update their products or services, and adapt their revenue models to harness new technologies.

Customer Churn

Customers are at the core of any revenue model. Therefore, a decrease in customer retention can have a detrimental impact on the revenue model. This could result from several factors, ranging from poor product quality to weak customer relationships. Businesses must focus on customer satisfaction and maintain avenues for customer feedback to mitigate this risk. Striving to create a strong customer experience can help increase customer retention and ensure the stability of the revenue model.

Competitive Pressure

In any industry, there are always threats posed by existing and new competitors. If competitors offer better products, lower prices, or improved customer experience, they can shrink a firm’s customer base. Businesses need to continuously innovate and improve their value proposition to withstand this pressure. Regular market research, competitor analysis, and agile adaptation can enable businesses to stay ahead of the competition.

Risk management forms a crucial part of maintaining a robust revenue model. By identifying and strategically mitigating these potential risks, businesses can ensure the stability and resilience of their revenue model.

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How Companies Make Money

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What Is a Business Model?

Understanding business models, evaluating successful business models, how to create a business model.

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Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

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The term business model refers to a company's plan for making a profit . It identifies the products or services the business plans to sell, its identified target market , and any anticipated expenses . Business models are important for both new and established businesses. They help companies attract investment, recruit talent, and motivate management and staff.

Businesses should regularly update their business model or they'll fail to anticipate trends and challenges ahead. Business models also help investors to evaluate companies that interest them and employees to understand the future of a company they may aspire to join.

Key Takeaways

• A business model is a company's core strategy for profitably doing business.
• Models generally include information like products or services the business plans to sell, target markets, and any anticipated expenses.
• The two levers of a business model are pricing and costs.
• A business model should be periodically revised to make sure it still reflects the business environment and customer demands.
• Analysts and investors often look at a company's gross profit to evaluate the success of a business model.

Investopedia / Laura Porter

A business model is a high-level plan for profitably operating a business in a specific marketplace. This plan helps the company to identify the best way to go about doing its business while also serving to attract investors and talent.

A primary component of the business model is the value proposition . This is a description of the goods or services that a company offers and why they are desirable to customers or clients; it should ideally be stated in a way that differentiates the product or service from its competitors.

A new enterprise's business model should also cover projected startup costs and financing sources, the target customer base for the business, marketing strategy , a review of the competition, and projections of revenues and expenses. The plan may also define opportunities in which the business can partner with other established companies. For example, the business model for an advertising business may identify benefits from an arrangement for referrals to and from a printing company.

Successful businesses have business models that allow them to fulfill client needs at a competitive price and a sustainable cost. And they are subject to change. Many businesses revise their business models periodically to reflect changing business environments and market demand .

Investors and Business Models

When evaluating a company as a possible investment, the investor should find out exactly how it makes its money. This means looking through the company's business model. Fortunately, it's not hard to find. Most companies outline their business model on their website and in their annual reports .

Admittedly, the business model may not tell you everything about a company's prospects. Investors need to fill in the blanks, look beyond the sales pitch, and recognize that sensitive information or any flouting of rules of ethics to gain an advantage won't be mentioned. The investor who understands the business model, even on a basic level, can make better sense of the financial data.

A common mistake many companies make when they create their business models is to underestimate the costs of funding the business until it becomes profitable. Counting costs up to the introduction of a product is not enough. A company has to keep the business running until its revenues exceed its expenses.

One way analysts and investors evaluate the success of a business model is by looking at the company's gross profit . Gross profit is a company's total revenue minus the cost of goods sold (COGS) . Comparing a company's gross profit to that of its main competitor or its industry sheds light on the efficiency and effectiveness of its business model. Gross profit alone can be misleading, however. Analysts also want to see cash flow or net income —that is, gross profit minus operating expenses, which is an indication of just how much real profit the business is generating.

The two primary levers of a company's business model are pricing and costs. A company can raise prices, and it can find inventory at reduced costs. Both actions increase gross profit.

Many analysts consider gross profit to be more important in evaluating a business plan. A good gross profit suggests a sound business plan. In that case, if expenses are out of control, the management team could be at fault, and the problems are correctable. As this suggests, many analysts believe that companies that run on the best business models can run themselves.

When evaluating a company as a possible investment, find out exactly how it makes its money—not just what it sells but how it sells it. That's the company's business model.

Types of Business Models

There isn't one type of business model. Not all companies are the same and each has different ways of making money. Business models can vary considerably. An aerospace company such as Boeing, for example, may operate similarly to a peer such as Airbus but won't share much in common in terms of how it makes money with, say, a shoe store or bar.

Direct sales, franchising , advertising-based, and brick-and-mortar stores are all examples of traditional business models. There are hybrid models as well, such as businesses that combine internet retail with brick-and-mortar stores or with sporting organizations like the NBA .

Below are some common types of business models; note that the examples given may fall into multiple categories.

One of the more common business models most people interact with regularly is the retailer model. A retailer is the last entity along a supply chain. They often buy finished goods from manufacturers or distributors and interface directly with customers.

Example: Costco Wholesale

Manufacturer

A manufacturer is responsible for sourcing raw materials and producing finished products by leveraging internal labor, machinery, and equipment. A manufacturer may make custom goods or highly replicated, mass-produced products and can sell what it makes to distributors, retailers, or directly to customers.

Example: Ford Motor Company

Fee-for-Service

Instead of selling products, fee-for-service business models are centered around labor and providing services. A fee-for-service business model may charge an hourly rate or a fixed cost for a specific agreement. Fee-for-service companies are often specialized, offering insight that may not be common knowledge or may require specific training.

Example: DLA Piper LLP

Subscription

Subscription-based business models strive to attract clients in the hopes of luring them into long-time, loyal patrons. This is done by offering a product that requires ongoing payment, usually in return for a fixed duration of benefit. Though largely offered by digital companies for access to software, subscription business models are also popular for physical goods such as monthly reoccurring agriculture/produce subscription box deliveries.

Example: Spotify

Freemium business models attract customers by introducing them to basic, limited-scope products. Then, with the client using their service, the company attempts to convert them to a more premium, advance product that requires payment. Although a customer may theoretically stay on freemium forever, a company tries to show the benefit of becoming an upgraded member.

Example: LinkedIn/LinkedIn Premium

Some companies can reside within multiple business model types at the same time for the same product. For example, Spotify (a subscription-based model) also offers a free version and a premium version.

If a company is concerned about the cost of attracting a single customer, it may attempt to bundle products to sell multiple goods to a single client. Bundling capitalizes on existing customers by attempting to sell them different products. This can be incentivized by offering pricing discounts for buying multiple products.

Example: AT&T

Marketplace

Marketplaces receive compensation for hosting a platform for business to be conducted. Although transactions could occur without a marketplace, this business model attempts to make transacting easier, safer, and faster.

Example: eBay

Affiliate business models are based on marketing and the broad reach of a specific entity or person's platform. Companies pay an entity to promote a good, and that entity often receives compensation in exchange for their promotion. That compensation may be a fixed payment, a percentage of sales derived from their promotion, or both.

Example: social media influencers such as Lele Pons, Zach King, or Chiara Ferragni

Razor Blade

Aptly named after the product that invented the model, this business model aims to sell a durable product below cost to then generate high-margin sales of a disposable component needed to use that product. Also referred to as the " razor and blade model ", razor blade companies may give away expensive blade handles with the premise that consumers need to continually buy razor blades in the long run.

Example: HP (printers and ink)

"Tying" is an illegal razor blade model strategy that requires the purchase of an unrelated good prior to being able to buy a different (and often required) good. For example, imagine Gillette released a line of lotion and required all customers to buy three bottles before they were allowed to purchase disposable razor blades.

Reverse Razor Blade

Instead of relying on high-margin companion products, a reverse razor blade business model tries to sell a high-margin product upfront. Then, to use the product, low or free companion products are provided. This model aims to promote that upfront sale, as further use of the product is not highly profitable.

Example: Apple (iPhones + applications)

The franchise business model leverages existing business plans to expand and reproduce a company at a different location. Often food, hardware, or fitness companies, franchisers work with incoming franchisees to finance the business, promote the new location, and oversee operations. In return, the franchisor receives a percentage of earnings from the franchisee.

Example: Domino's Pizza

Pay-As-You-Go

Instead of charging a fixed fee, some companies may implement a pay-as-you-go business model where the amount charged depends on how much of the product or service was used. The company may charge a fixed fee for offering the service in addition to an amount that changes each month based on what was consumed.

Example: Utility companies

A brokerage business model connects buyers and sellers without directly selling a good themselves. Brokerage companies often receive a percentage of the amount paid when a deal is finalized. Most common in real estate, brokers are also prominent in construction/development and freight.

Example: Re/Max

There is no "one size fits all" when making a business model. Different professionals may suggest taking different steps when creating a business and planning your business model. Here are some broad steps someone can take to create a plan:

• Identify your audience : Most business model plans will start with either defining the problem or identifying your audience and target market . A strong business model will reflect who you are trying to target so you can craft your product, messaging, and approach to connecting with that audience.
• Define the problem : In addition to understanding your audience, you must know what problem you are trying to solve. A hardware company sells products for home repairs. A restaurant feeds the community. Without a problem or a need that creates demand for your services or products, your business may struggle to find its footing.
• Understand your offerings : With your audience and problem in mind, consider what you are able to offer. What products are you interested in selling, and how does your expertise match that product? In this stage of the business model, the product is tweaked to adapt to what the market needs and what you're able to provide.
• Document your needs : With your product selected, consider the hurdles your company will face. This includes product-specific challenges as well as operational difficulties. Make sure to document each of these needs to assess whether you are ready to launch in the future.
• Find key partners : Most businesses will leverage other partners in driving company success. For example, a wedding planner may forge relationships with venues, caterers, florists, and tailors to enhance their offering. For manufacturers, consider who will provide your materials and how critical your relationship with that provider will be.
• Set monetization solutions : A business model isn't complete until it identifies how the company will make money and turn a profit. This includes selecting the strategy or strategies laid out in the business model types section above.
• Test your model : When your full plan is in place, perform test surveys or soft launches. Ask how people would feel paying your prices for your services. Offer discounts to new customers in exchange for reviews and feedback. You can always adjust your business model, but you should always consider leveraging direct feedback from the market when doing so.

Instead of reinventing the wheel, consider what competing companies are doing and how you can position yourself in the market. You may be able to easily spot gaps in the business model of others.

Criticism of Business Models

Joan Magretta, the former editor of the Harvard Business Review , suggests there are two critical factors in sizing up business models. When business models don't work, she states, it's because the story doesn't make sense and/or the numbers just don't add up to profits.

Complicated business models can put off investors and hinder a company's growth. People are less eager to invest in a company they don't understand. Moreover, some business models can be less profitable and at risk of being compromised. What works one year, isn't guaranteed to continue doing so in the future.

Take the airline industry. For years, major carriers such as American Airlines, Delta, and Continental built their businesses around a hub-and-spoke structure , in which all flights were routed through a handful of major airports. By ensuring that most seats were filled most of the time, the business model produced big profits.

However, a competing business model arose that made the strength of the major carriers a burden. Carriers like Southwest and JetBlue shuttled planes between smaller airports at a lower cost. They avoided some of the operational inefficiencies of the hub-and-spoke model while forcing labor costs down. That allowed them to cut prices, increasing demand for short flights between cities.

As these newer competitors drew more customers away, the old carriers were left to support their large, extended networks with fewer passengers. The problem became even worse when traffic fell sharply following the September 11 terrorist attacks in 2001 . To fill seats, these airlines had to offer more discounts at even deeper levels. The hub-and-spoke business model no longer made sense.

Example of Business Models

Consider the vast portfolio of Microsoft. Over the past several decades, the company has expanded its product line across digital services, software, gaming, and more. Various business models, all within Microsoft, include but are not limited to:

• Productivity and business processes : Microsoft offers subscriptions to Office products and LinkedIn. These subscriptions may be based on product usage (i.e. the amount of data being uploaded to SharePoint).
• Intelligent cloud : Microsoft offers server products and cloud services for a subscription.
• Personal computing : Microsoft sells the Windows operating system as well as physically manufactured products such as Surface, PC components, and Xbox hardware. Residual Xbox sales include content, services, subscriptions, royalties, and advertising revenue.

A business model is a strategic plan of how a company will make money. The model describes the way a business will take its product, offer it to the market, and drive sales. A business model determines what products make sense for a company to sell, how it wants to promote its products, what type of people it should try to cater to, and what revenue streams it may expect.

What Is an Example of a Business Model?

Best Buy, Target, and Walmart are some of the largest examples of retail companies. These companies acquire goods from manufacturers or distributors to sell directly to the public. Retailers interface with their clients and sell goods, though retailers may or may not make the actual goods they sell.

What Are the Main Types of Business Models?

There are various types of business models. Examples include subscription models, bundling, and franchising. Business models can sometimes also be loosely defined by industry. For example, manufacturers produce their own goods and may or may not sell them directly to the public, whereas retailers buy goods to later resell to the public.

How Do I Build a Business Model?

There are many steps to building a business model, and there is no single consistent process among business experts. In general, a business model should identify your customers, understand the problem you are trying to solve, select a business model type to determine how your clients will buy your product, and determine the ways your company will make money. It is also important to periodically review your business model; once you've launched, evaluate your plan and adjust your target audience, product line, or pricing as needed.

A company isn't just an entity that sells goods. It's an ecosystem that must have a plan on who to sell to, what to sell, what to charge, and what value it is creating. A business model describes what an organization does to make a profit. After building a business model, a company should have a stronger direction on how it wants to operate and what its financial future appears to be.

U.S. Federal Trade Commission. " Tying the Sale of Two Products ."

Harvard Business Review. " Why Business Models Matter ."

Bureau of Transportation Statistics. " Airline Travel Since 9/11 ."

Microsoft. " Segment Information ."

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8 Top Common Business Revenue Models: Which Is Best?

We start businesses for various reasons. At the core of all the different reasons is a solution to a real problem that customers face. One popular checklist to use if you want to start a business is;

• Which problem are you trying to solve?
• Is there money in that problem?
• Can you scale the solution?

Once your idea meets these three conditions, then the chances are high that your business will succeed . All companies need to make money, not only to enrich the investors but, more importantly, for sustainability purposes. This is key in the early days when challenges are aplenty, and resources are required to bail you out of challenging situations.

Let us take a minute to focus on the second question above, as it defines what a revenue model is. Do not start a business and hope to make money, as it can determine if you succeed or not. We will dive deep into revenue modeling for businesses and highlight a few popular ones in this piece.

What is a Revenue Model?

This is a framework businesses use to generate income. It helps companies identify where they are supposed to make money, which is vital for sustaining the business. The model gives business leaders a clear sight of their revenue generation strategies and fits into the larger business model. It is deeply tied to the niche the business operates in and the type of products and services it offers to customers. Companies can have multiple intertwined revenue models, especially if they provide various products and services. Regardless of the number of models, the individual ones tied to specific products and services should be easily identifiable.

How is a Revenue Model Different from a Business Model?

It is easy to confuse the two, especially when you find people using the two terms interchangeably. A business model is a holistic way to describe the way a company generates value for its customers.

A revenue model is a subset of the business model and focuses on how the company gets the money. Customer segments can have multiple revenue models.

The critical difference between the two lies in the terms “value” and “money.” Note that value is not always tied to money in some applications, especially if you consider some of the activities that a business engages in that do not directly affect revenue.

An example to differentiate the two is Uber . The business model here is arranging carpooling opportunities without owning any cars. People who own cars and those looking for a ride meet on this platform. Billing is done on the app based on multiple metrics such as the distance, cost of fuel, car, and location, and the passenger picks a payment method. It is automatically debited once they get to their destination. The driver has to register with Uber, subject to a couple of requirements to uphold the quality of drivers and cars.

The revenue model is viewed in the context of this larger business model, which is broken down. The company charges a basic fare plus an amount per kilometer and an additional amount per minute. The different price models come in with the cars’ variations, i.e. UberX, UberBlack, and UberVan. Note that these variations change from country to country, depending on the most common mode of transport used there. In addition, the company offers additional services such as UberEATs, UberCargo, and UberRideshare, among others. These outline the services that form the supplementary revenue models. 20 percent of the fare goes to Uber, and they are kept fluid and can increase when the demand is high.

The business model is holistic and contains aspects such as the key partners who are the drivers, technology enablers, and investors. Key resources are the skilled drivers and their platform. The value proposition to customers is minimum waiting time, lesser taxi fees, cashless rides, and transparency to see the price and route beforehand. The value proposition to drivers is an additional source of income, flexible working hours, easy payment procedure, and prompt payments. Customer relationship is done through social media, customer support, and review system. The customer segments are the drivers and users.

From this example, it is evident that the business model is a more extensive framework onto which the revenue model is a part. It is critical to understand how these two intermarry to each other, as it helps avoid confusion and make the right decisions. While a revenue model is important, it should not be king, as the business model is the bigger thing. All the different parts of a business model have a role to play and always approach them correctly if you want to succeed.

Why is a Revenue Model Important?

A revenue model is just a part of the whole business model, but why is it so hyped. Well, one can argue that if a business gets other things right, customers will buy.

This model gives a focused view of the activities that help generate income. Most of the other aspects of the business model take away money from the accounts in a business. The customers are the ones who only bring in money. If you separate the business model components such as marketing, resources, legal, IT, and corporate affairs in two columns depending on which ones bring in money and which ones take out, you will see the point. Sales might be the only side that brings in money.

Since the revenue model is probably the only one with a credit entry in the business model, it helps pay extra attention. The growth of many businesses relies on the revenue it brings, amongst other factors. The more money, the easier it is to get the best IT systems, hire the best personnel, and get a more extensive distribution network, to mention a few.

All the activities and processes of a revenue model should be singled out to help the business understand the crucial factors that feed into the model. In some cases, the model might not be working optimally due to internal and external factors, and some work should be done to improve them.

Lastly, a clear revenue model helps control any unnecessary costs that can limit business growth, especially for startups.

Top Business Revenue Models

Subscription.

Here, a business charges a recurring fee for its products and services. The charges can be on a monthly or annual basis. It is popular among SaaS companies, thanks to its versatility and “guarantee” of recurring revenue plus high value. Note “guarantee” is singled out since it is not always the case. Done well, this model can be an excellent way to build sustainable growth, as one can easily forecast revenues in a financial year based on the number of active subscriptions.

In legacy business models, revenue flows from marketing to sales and then finance. However, the flow is different in subscription models. All the other units still hold their roles, but implications on interactions with customers are felt. Customers do not need to be “won’ once, but through all the different billing cycles. With the right plan, businesses can lock in customers to lengthy billing cycles which “guarantees” incomes.

The advantages of the subscription revenue model include easier forecasting and better revenue expansion opportunities. A good example is Netflix, where the business can easily predict income based on past customer behavior and the probability of churning the service. Once a customer is locked into a basic plan, you get the chance to showcase the value and up-sell the package for more revenue. That way, you can get additional income from a customer without spending on acquisition. Lastly, subscription models foster better customer relationships since there is a loyalty aspect to them. A customer will have a positive brand affinity to one they’ve subscribed to and continue to get value from.

One downside of the subscription model is the increased competition and uncertainty in the opening phases. The increased competition can increase customer churn rate since they are spoilt for choice and can easily switch to the competition. As a result, businesses now have to demonstrate value to keep customers constantly.

This is a straightforward business model where a company buys products at price X and sells them at a higher price Y. The difference between X and Y should be enough to cater to costs and return a sustainable profit. It can be applied to both products and services, and you will find multiple variations of it today.

The most common difference between markup models is the wholesale and retail versions. For wholesale, the business sells to retailers, business users, or other wholesalers. It can be supplied to other companies in bulk, often at a lower markup due to the volumes involved. The retail version involves identifying demand and satisfying it through a set distribution channel.

Succeeding in the markup model goes down to a delicate balance needed to get the correct markup. If it is too high, the chances are high the competition will opt for other players offering goods at a lower price. If it’s too low, your costs will eat up into most of the markup, making your business hard to sustain. This way, always do your homework to determine what markup is perfect depending on your costs, niche, and competition.

Advertising

This model allows businesses that can reach customers to leverage that and make money from it. Online advertising has burst this scene opens, and today, even small companies that operate in other niches can leverage some of their channels to make money from advertising. A good example is the Google Development Network , which places advertisements on multiple websites and sites like YouTube, and the returns are split between the owner of the video or website and YouTube.

Some traditional advertising agencies owned spaces in strategic places such as billboards, digital signage, and display screens. Other companies can rent the space to showcase what they have to offer.

Advertising is a considerable facet of marketing, and the demand for spaces where businesses can reach customers is high. As long as you can show how much reach and the type of engagement your channels have, you are almost guaranteed of getting people to rent these channels. Some businesses run advertising as their primary revenue models, such as online and offline media houses, content sites, and influencer-led pages. Others use advertising as a way of complementing their primary revenue model, where they have other products and services but still use their channels for advertising other products.

The advantage of this model is that online marketing has made it accessible to just about any business, and with the right plan, a business can reap huge rewards from it. The downside is that the competition is increasing, and businesses that are not traditional advertising houses face tough times deciding if the people offering to rent their channels can negatively impact their brand. If a customer had a bad experience with a brand and saw their advertisement on your channel, they can extend the experience to yours, even if you had nothing to do with it.

This is a traditional revenue model that can have different twists to it. Here, the business creates a product or service and then sells it to the customers. An example is a company that produces soft drinks by sourcing the raw materials, running them in a factory, packaging, and selling the drinks to customers. Note that customers can be other businesses or regular customers at a retail level.

The two different types of the production revenue model are the manufacturing and construction types. Manufacturing has been mentioned above, where a company produces finished goods using labor, materials, and equipment. Revenue is generated by selling the finished products to other manufacturers, wholesalers, or retailers. Manufacturers can sell goods directly to end-users but generally do not, as managing the supply chain is a whole different thing, and they prefer to specialize.

The construction model is the other twist to the production model, and here, it involves making real estate. It differs from the manufacturing model since it involves making a structure in a specified location for a known client or speculatively for the real estate market.

One advantage of this model applies if you invest deeper down the value chain. Production is no easy fit, as you rely on external forces that control the raw materials. If you can get down the value chain, where you own the raw materials, it gives you a considerable advantage over the competition.

The downside is that running this model is a bit capital intensive.

This revenue model allows a business to generate income by allowing it’s copyrighted or patented material to be used by another company. Some standard products include songs, images, or technology. The seller retains complete control of the copyright of the product and service. It is commonly confused with the subscription business model, but they are different.

The main difference between the two is that subscription runs for a fixed period, whereas licensing runs in perpetuity until one party terminates it. A typical example is computer software, where companies enter into licensing agreements with the owners to use them.

A key component of licensing is the agreement which outlines the terms under which a party might use the property owned by the other one. The term property can refer to multiple things, but here, it leans towards intellectual property such as patents and trademarks for this context. The agreement specifies all the granular details under which the licensing parties may use properties.

Licensing revenue model is a great way to commercialize inventions and excellent products, provided they can offer value to customers.

This is a model where a business acts as a middleman between the seller and buyer and earns a cut of the amount sold. It applies both in traditional and online business models, with the latter becoming very popular.

The middleman helps to get the word out about the product and service, using their resources and claims a percentage of the amount once someone in their network makes a purchase. Traditionally, it was used by real estate agencies that connected buyers and sellers. Here, a seller would list their property with the agency and then pay them a percentage when someone buys it. Here, the model made financial sense since the transactions were few and involved large amounts of money.

In the online world, commission revenue models can be applied to products that do not cost a lot of money, and businesses can try to move large volumes for them to get a sustainable amount of money. The marketplace model is another twist to the commission revenue model, where sellers list their goods and services, and the marketplace owners get a percentage of the amount sold.

The advantage of the commission model is that businesses can attract more suppliers and connect them to potential buyers. As long as the platform is well maintained, the business makes money without producing anything.

The downside is the value perception of the buyer and seller. The seller knows they will make less selling through the commission business, and if you do not offer them enough value, they can find a way to interact independently and complete the transaction. As a result, commission-based businesses should always find a way to give value to both parties to keep them from leaving.

This is a model where a business offers both free and premium models. It is challenging to work with since the premium features should be alluring, and the free ones should be good enough to convince customers to upscale.

An example is Dropbox , which offers free resources and requires you to pay for additional ones if you wish to upgrade.

One advantage of this model is that the free features are catchy and grab the user’s attention at first glance. You can leverage them to build a steady customer base and gain trust.

The challenge, however, is to convert the free to premium users. You need to strike a balance between giving them just enough to upgrade to the premium plan. Giving out abundant resources for the free plan will keep users happy in that tier and keep them from upgrading to the paid ones.

This revenue model is on the rise, thanks to the online community that continues to appreciate value. It is common for nonprofits, independent news outlets, and online media, among others. Here, the entity offers value for interested audiences and, rather than charge them for it, asks for them to donate and support operations.

Some companies using this model incentivize donations by making members who donate part of an exclusive club where they receive additional exclusive content. This helps to lock in the regular donators, which guarantees the company a small recurring revenue stream.

What Costs are Associated with Revenue Models?

A good revenue model is not about getting the most out of customers but also offering value. This way, the revenue model cannot be unidirectional, as the business has to incur some costs to sustain it. Once you establish all the costs, it is easier to do the mathematics and get an optimal price for your products or services.

Cost of Revenue

This is how much it costs to produce the goods and services. It depends on the revenue model and the type of goods and services sold. It can comprise testing, manufacturing for software; this could be the development cycle, cost to get resources such as cloud storage and hosting environments. Regardless of what you produce, overheads will always come into the picture. The cost of revenue is often confused with the cost of goods, but the former is a comprehensive metric that gives an accurate picture. SaaS companies commonly use it where every other cost outside the traditional production line has to be accounted for.

Labor Costs

You need to hire experts to help you get a product or service to market, which adds to revenue. An underpaid workforce is unhappy and might not go all out to ensure you get the best version of the product or service out there. It all varies on the people involved in different phases of the production period.

Equipment Costs

Traditional production lines have to spend a lot on equipment, compared to modern SaaS companies that can get resources on demand. However, equipment costs still factor in and include app development tools, space on servers, and firmware. Additional services include subscription services bought to manage the production line, such as Slack, Trello, or Hubstaff. These are arguably the most straightforward costs to forecast.

Prototyping Costs

This is a fundamental and expensive part of any production journey. Testing a product or beta version of the software is critical as it can trigger massive changes in the entire production process. Some changes are recorded once significant strides have been made in the process, and reversing this can take a lot of resources. The costs usually include a base level cost and iteration costs. When planning for these costs, it is advisable to plan for several iterations as you won’t get everything right the first time. Customer needs always change and new things always come up, and if you stay rigid, the competition will get ahead of you.

Advertising and Marketing Cost

For any product or service to sell, you need to take it to market. Here is where advertising and marketing costs come in as they raise awareness about the product or service and try to sell the value to customers. These costs vary significantly, with some of the factors that determine how much you will spend here include; the size of the respective teams, the scale of exposure you need, and the method you will employ. A more comprehensive marketing campaign including digital, radio, TV, and print will cost more than a highly targeted digital one.

How to Pick the Best Revenue Model?

The revenue models listed above are by no means exclusive, as new ones keep on coming up. Some businesses combine the defined ones and borrow features to create combinations that work for them as well. It is advisable to stay alive to the changes affecting your revenue model and innovate to either improve or generate new revenue models.

Some things to keep in mind include;

Address Real Painpoints

Think of the solutions you offer customers as either painkillers or vitamins. Painkillers address real pain, whereas vitamins supplement and are nice to have. Assess whether the solution you offer addresses a real customer pain point. This is the only way to build a sustainable revenue model. It is easy to get carried away with your ideas and technological processes and forget the buck starts and ends with the customer. Aim to base your revenue models on customer pains, and you will get good returns from it.

Understand the Market

As a business, you operate in a whole ecosystem with multiple players and do extensive market research. First, establish the profile of your customers and make a revenue model based on what they prefer. Understanding the market also entails looking at the competition as the chances are high that other businesses offer a similar solution to yours. Interrogate your solution objectively and see how it sits within the competition and the whole ecosystem. From here, you will understand the strong points you can leverage and potential loopholes that will derail your revenue model.

Let the Product Lead

In most instances, the product dictates the best revenue model for it. Knowing this is as important as understanding the market. If you have a collection of software products, would opting for the subscription model be the better option. Look at how the product compares to the competition and its feature set, as these are what solve the pain points. For products that are not straightforward, consider partnerships you can take advantage of to bring it to the market.

Be Ready to Change

The business world is changing, and we have witnessed drastic shifts that have forced companies to reinvent their business models, let alone the revenue models. As a result, do not be rigid with the model as the unexpected will always happen. You can start with a subscription model and then see opportunities in the affiliate model, offering additional returns. The bottom line is that you should be ready to shift the revenue model and bring in additional ones that can complement revenue or even change the entire model.

Frequently Asked Questions

Question: what is the difference between revenue and profit.

Answer: Revenue is the total amount of income generated by the sales of goods and services to customers. Think of it as gross income. Profit is the amount of money obtained after deducting costs, debts, and any business expenses.

Question: What does a typical revenue model include?

Answer: A revenue model is a structure that expounds on how the company plans to earn money. It starts by specifying the value proposition to customers, the plan to generate money, the actual sources of this money, and the target customers who will consume the products and services offered.

Question: What is the best revenue model for startups?

Answer: A good revenue model helps your business remain sustainable and leaves some to fund your scale process. As a result, some traditional one like production might be capital intensive in the first few years until you achieve economies of scale. Modern models like affiliate and commission-based are less capital intensive and won’t require much to set up and run.

Some of the standard revenue models are listed here and do some due diligence before selecting one. Note that a revenue model is at the heart of the larger business model and will help you grow or not. Do not be stuck in the past and strive to innovate and improve the model as the competition will do the same, and you do not want to be surpassed.

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Business Model Canvas: Explained with Examples

Got a new business idea, but don’t know how to put it to work? Want to improve your existing business model? Overwhelmed by writing your business plan? There is a one-page technique that can provide you the solution you are looking for, and that’s the business model canvas.

In this guide, you’ll have the Business Model Canvas explained, along with steps on how to create one. All business model canvas examples in the post can be edited online.

What is a Business Model Canvas

A business model is simply a plan describing how a business intends to make money. It explains who your customer base is and how you deliver value to them and the related details of financing. And the business model canvas lets you define these different components on a single page.   

The Business Model Canvas is a strategic management tool that lets you visualize and assess your business idea or concept. It’s a one-page document containing nine boxes that represent different fundamental elements of a business.  

The business model canvas beats the traditional business plan that spans across several pages, by offering a much easier way to understand the different core elements of a business.

The right side of the canvas focuses on the customer or the market (external factors that are not under your control) while the left side of the canvas focuses on the business (internal factors that are mostly under your control). In the middle, you get the value propositions that represent the exchange of value between your business and your customers.

The business model canvas was originally developed by Alex Osterwalder and Yves Pigneur and introduced in their book ‘ Business Model Generation ’ as a visual framework for planning, developing and testing the business model(s) of an organization.

What Are the Benefits of Using a Business Model Canvas

Why do you need a business model canvas? The answer is simple. The business model canvas offers several benefits for businesses and entrepreneurs. It is a valuable tool and provides a visual and structured approach to designing, analyzing, optimizing, and communicating your business model.

• The business model canvas provides a comprehensive overview of a business model’s essential aspects. The BMC provides a quick outline of the business model and is devoid of unnecessary details compared to the traditional business plan.
• The comprehensive overview also ensures that the team considers all required components of their business model and can identify gaps or areas for improvement.
• The BMC allows the team to have a holistic and shared understanding of the business model while enabling them to align and collaborate effectively.
• The visual nature of the business model canvas makes it easier to refer to and understand by anyone. The business model canvas combines all vital business model elements in a single, easy-to-understand canvas.
• The BMC can be considered a strategic analysis tool as it enables you to examine a business model’s strengths, weaknesses, opportunities, and challenges.
• It’s easier to edit and can be easily shared with employees and stakeholders.
• The BMC is a flexible and adaptable tool that can be updated and revised as the business evolves. Keep your business agile and responsive to market changes and customer needs.
• The business model canvas can be used by large corporations and startups with just a few employees.
• The business model canvas effectively facilitates discussions among team members, investors, partners, customers, and other stakeholders. It clarifies how different aspects of the business are related and ensures a shared understanding of the business model.
• You can use a BMC template to facilitate discussions and guide brainstorming brainstorming sessions to generate insights and ideas to refine the business model and make strategic decisions.
• The BMC is action-oriented, encouraging businesses to identify activities and initiatives to improve their business model to drive business growth.
• A business model canvas provides a structured approach for businesses to explore possibilities and experiment with new ideas. This encourages creativity and innovation, which in turn encourages team members to think outside the box.

How to Make a Business Model Canvas

Here’s a step-by-step guide on how to create a business canvas model.

Step 1: Gather your team and the required material Bring a team or a group of people from your company together to collaborate. It is better to bring in a diverse group to cover all aspects.

While you can create a business model canvas with whiteboards, sticky notes, and markers, using an online platform like Creately will ensure that your work can be accessed from anywhere, anytime. Create a workspace in Creately and provide editing/reviewing permission to start.

Step 2: Set the context Clearly define the purpose and the scope of what you want to map out and visualize in the business model canvas. Narrow down the business or idea you want to analyze with the team and its context.

Step 3: Draw the canvas Divide the workspace into nine equal sections to represent the nine building blocks of the business model canvas.

Step 4: Identify the key building blocks Label each section as customer segment, value proposition, channels, customer relationships, revenue streams, key resources, key activities, and cost structure.

Step 5: Fill in the canvas Work with your team to fill in each section of the canvas with relevant information. You can use data, keywords, diagrams, and more to represent ideas and concepts.

Step 6: Analyze and iterate Once your team has filled in the business model canvas, analyze the relationships to identify strengths, weaknesses, opportunities, and challenges. Discuss improvements and make adjustments as necessary.

Step 7: Finalize Finalize and use the model as a visual reference to communicate and align your business model with stakeholders. You can also use the model to make informed and strategic decisions and guide your business.

What are the Key Building Blocks of the Business Model Canvas?

There are nine building blocks in the business model canvas and they are:

Customer Segments

Customer relationships, revenue streams, key activities, key resources, key partners, cost structure.

• Value Proposition

When filling out a Business Model Canvas, you will brainstorm and conduct research on each of these elements. The data you collect can be placed in each relevant section of the canvas. So have a business model canvas ready when you start the exercise.  

Let’s look into what the 9 components of the BMC are in more detail.

These are the groups of people or companies that you are trying to target and sell your product or service to.

Segmenting your customers based on similarities such as geographical area, gender, age, behaviors, interests, etc. gives you the opportunity to better serve their needs, specifically by customizing the solution you are providing them.

After a thorough analysis of your customer segments, you can determine who you should serve and ignore. Then create customer personas for each of the selected customer segments.

There are different customer segments a business model can target and they are;

• Mass market: A business model that focuses on mass markets doesn’t group its customers into segments. Instead, it focuses on the general population or a large group of people with similar needs. For example, a product like a phone.  
• Niche market: Here the focus is centered on a specific group of people with unique needs and traits. Here the value propositions, distribution channels, and customer relationships should be customized to meet their specific requirements. An example would be buyers of sports shoes.
• Segmented: Based on slightly different needs, there could be different groups within the main customer segment. Accordingly, you can create different value propositions, distribution channels, etc. to meet the different needs of these segments.
• Diversified: A diversified market segment includes customers with very different needs.
• Multi-sided markets: this includes interdependent customer segments. For example, a credit card company caters to both their credit card holders as well as merchants who accept those cards.

Use STP Model templates for segmenting your market and developing ideal marketing campaigns

Visualize, assess, and update your business model. Collaborate on brainstorming with your team on your next business model innovation.

In this section, you need to establish the type of relationship you will have with each of your customer segments or how you will interact with them throughout their journey with your company.

There are several types of customer relationships

• Personal assistance: you interact with the customer in person or by email, through phone call or other means.
• Dedicated personal assistance: you assign a dedicated customer representative to an individual customer.  
• Self-service: here you maintain no relationship with the customer, but provides what the customer needs to help themselves.
• Automated services: this includes automated processes or machinery that helps customers perform services themselves.
• Communities: these include online communities where customers can help each other solve their own problems with regard to the product or service.
• Co-creation: here the company allows the customer to get involved in the designing or development of the product. For example, YouTube has given its users the opportunity to create content for its audience.

You can understand the kind of relationship your customer has with your company through a customer journey map . It will help you identify the different stages your customers go through when interacting with your company. And it will help you make sense of how to acquire, retain and grow your customers.

This block is to describe how your company will communicate with and reach out to your customers. Channels are the touchpoints that let your customers connect with your company.

Channels play a role in raising awareness of your product or service among customers and delivering your value propositions to them. Channels can also be used to allow customers the avenue to buy products or services and offer post-purchase support.

There are two types of channels

• Owned channels: company website, social media sites, in-house sales, etc.
• Partner channels: partner-owned websites, wholesale distribution, retail, etc.

Revenues streams are the sources from which a company generates money by selling their product or service to the customers. And in this block, you should describe how you will earn revenue from your value propositions.  

A revenue stream can belong to one of the following revenue models,

• Transaction-based revenue: made from customers who make a one-time payment
• Recurring revenue: made from ongoing payments for continuing services or post-sale services

There are several ways you can generate revenue from

• Asset sales: by selling the rights of ownership for a product to a buyer
• Usage fee: by charging the customer for the use of its product or service
• Subscription fee: by charging the customer for using its product regularly and consistently
• Lending/ leasing/ renting: the customer pays to get exclusive rights to use an asset for a fixed period of time
• Licensing: customer pays to get permission to use the company’s intellectual property
• Brokerage fees: revenue generated by acting as an intermediary between two or more parties
• Advertising: by charging the customer to advertise a product, service or brand using company platforms

What are the activities/ tasks that need to be completed to fulfill your business purpose? In this section, you should list down all the key activities you need to do to make your business model work.

These key activities should focus on fulfilling its value proposition, reaching customer segments and maintaining customer relationships, and generating revenue.

There are 3 categories of key activities;

• Production: designing, manufacturing and delivering a product in significant quantities and/ or of superior quality.
• Problem-solving: finding new solutions to individual problems faced by customers.
• Platform/ network: Creating and maintaining platforms. For example, Microsoft provides a reliable operating system to support third-party software products.

This is where you list down which key resources or the main inputs you need to carry out your key activities in order to create your value proposition.

There are several types of key resources and they are

• Human (employees)
• Financial (cash, lines of credit, etc.)
• Intellectual (brand, patents, IP, copyright)
• Physical (equipment, inventory, buildings)

Key partners are the external companies or suppliers that will help you carry out your key activities. These partnerships are forged in oder to reduce risks and acquire resources.

Types of partnerships are

• Strategic alliance: partnership between non-competitors
• Coopetition: strategic partnership between partners
• Joint ventures: partners developing a new business
• Buyer-supplier relationships: ensure reliable supplies

In this block, you identify all the costs associated with operating your business model.

You’ll need to focus on evaluating the cost of creating and delivering your value propositions, creating revenue streams, and maintaining customer relationships. And this will be easier to do so once you have defined your key resources, activities, and partners.  

Businesses can either be cost-driven (focuses on minimizing costs whenever possible) and value-driven (focuses on providing maximum value to the customer).

Value Propositions

This is the building block that is at the heart of the business model canvas. And it represents your unique solution (product or service) for a problem faced by a customer segment, or that creates value for the customer segment.

A value proposition should be unique or should be different from that of your competitors. If you are offering a new product, it should be innovative and disruptive. And if you are offering a product that already exists in the market, it should stand out with new features and attributes.

Value propositions can be either quantitative (price and speed of service) or qualitative (customer experience or design).

What to Avoid When Creating a Business Model Canvas

One thing to remember when creating a business model canvas is that it is a concise and focused document. It is designed to capture key elements of a business model and, as such, should not include detailed information. Some of the items to avoid include,

• Detailed financial projections such as revenue forecasts, cost breakdowns, and financial ratios. Revenue streams and cost structure should be represented at a high level, providing an overview rather than detailed projections.
• Detailed operational processes such as standard operating procedures of a business. The BMC focuses on the strategic and conceptual aspects.
• Comprehensive marketing or sales strategies. The business model canvas does not provide space for comprehensive marketing or sales strategies. These should be included in marketing or sales plans, which allow you to expand into more details.
• Legal or regulatory details such as intellectual property, licensing agreements, or compliance requirements. As these require more detailed and specialized attention, they are better suited to be addressed in separate legal or regulatory documents.
• Long-term strategic goals or vision statements. While the canvas helps to align the business model with the overall strategy, it should focus on the immediate and tangible aspects.
• Irrelevant or unnecessary information that does not directly relate to the business model. Including extra or unnecessary information can clutter the BMC and make it less effective in communicating the core elements.

What Are Your Thoughts on the Business Model Canvas?

Once you have completed your business model canvas, you can share it with your organization and stakeholders and get their feedback as well. The business model canvas is a living document, therefore after completing it you need to revisit and ensure that it is relevant, updated and accurate.

What best practices do you follow when creating a business model canvas? Do share your tips with us in the comments section below.

Join over thousands of organizations that use Creately to brainstorm, plan, analyze, and execute their projects successfully.

FAQs About the Business Model Canvas

How do i determine my value proposition, how can i build and maintain customer relationships, what should i consider when establishing partnerships in the business model canvas, how can the business model canvas help to analyze and optimize my business model, can i use the business model canvas for different types of businesses, how often should the business canvas model be updated or revised, how can i effectively communicate my business model to stakeholders using the business canvas model.

• Use clear and concise language
• Use visual-aids
• Customize for your audience
• Highlight key insights
• Be open to feedback and discussion

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Amanda Athuraliya is the communication specialist/content writer at Creately, online diagramming and collaboration tool. She is an avid reader, a budding writer and a passionate researcher who loves to write about all kinds of topics.

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How to: build an effective revenue plan to achieve your business goals.

We got hold of ACME’s revenue plan and the step-by-step process of how they built it. Apply the framework to build your own revenue plan.

Introduction

Step 1: identify your revenue goal, step 2: analyze past performance to define benchmarks, step 3: apply benchmarks to your revenue target, step 4: allocate your resources, step 5: build a ramp-up plan, leverage ai for watertight revenue operating plans, table of contents.

Selling and marketing are harder than ever. Old-school tactics are pushing modern buyers away, leaving revenue teams frustrated, inefficient, and unable to compete. In No Forms. No Spam. No Cold Calls , Latané Conant delivers the recipe for scalable, repeatable, data-driven sales and marketing strategies that work today.

In this How-To, we provide a practical, tactical dive into some of the strategies outlined in Chapter 4. 

In her book No Forms. No Spam. No Cold Calls , 6sense CMO Latané Conant outlines her vision for a revolution in sales and marketing. But revolutions aren’t achieved without strong planning and the willingness to adapt. And few things require better planning — and a willingness to adapt — than a company’s revenue plan.

A revenue plan is a framework for how a company expects to make money. A great revenue plan starts with and responds to data.

As Conant writes, “I like to call it a revenue operating model (rather than a revenue model), because this isn’t a set-it-and-forget-it endeavor. What you’re creating is a living, breathing plan. You make assumptions and you operate against those assumptions. So as you learn more and assumptions change, your plan has to adapt accordingly.”

This process begins with a hard look at past performance. Don’t worry if you can’t immediately fill in every metric we’ll soon be discussing. You may have gaps that will need to be filled in with best guesses or industry benchmarks.

The goal is to create a starting point — and this How-To can help.

Meet ‘ACME Corp.’

To properly illustrate how you might apply these insights to your own business, we’ll periodically shine a spotlight on the activities of “ACME Corp.”, a fictitious company that’s presently creating its own revenue operating model.

Since ACME exists solely as an example for our story, it doesn’t much matter what industry ACME is in, or what industries it serves, or how many people it employs. Its purpose is to simply illustrate how choices can affect its pipeline targets and revenue growth. (Put another way: It’s all about the money, honey.)

Five Steps to Creating a Revenue Plan

Sales processes differ from company to company, as do revenue models. For our purposes, ACME’s revenue operating model is based on  an account-based sales funnel . However, the principles we’ll see ACME use can apply to any company’s plan.

We’ve divided this process into five key stages; we’ll provide how-to steps to take for each stage, They are:

• Identify your revenue goal
• Analyze past performance to define benchmarks
• Apply benchmarks to your revenue target
• Allocate your resources
• Build a ramp-up plan

Our entire process starts off with a deceptively simple question: What’s your revenue goal? It might be based on:

• A percentage increase of last year’s performance
• Hitting a revenue number you define, such as $100M in annual recurring revenue (ARR), or
• Achieving a revenue goal defined by your CEO and board

In any case, unless you’re a brand-new company, your revenue goal is your target end-of-year ARR, minus existing customer revenue and pipeline.

Example: How ACME Determines Its Revenue Goal

As we mentioned earlier, we’ll turn our attention to the fictitious ACME Corp. to highlight how a company like yours might approach its revenue operating plan.

In the case of ACME’s revenue goal, the company’s CEO wants to increase its revenue by over 50% this year … so she sets a goal of $25 million net-new ARR for the year.

With the revenue goal set, ACME’s revenue leaders must determine whether they can realistically hit it with their existing resources. (More on this later.)

This means the next step in the process is looking back at its historical sales performance.

The basis of any revenue plan is to:

• Know the revenue number you need to hit
• Determine what you need to achieve at each stage of the buying journey to get there

Thanks to Step 1, you have your organization’s revenue goal. To understand what you need to achieve at each stage of the buying journey, you need benchmarks around likely performance. This should be based on your historical data, or if you don’t have any — external benchmarking .

If you’re using historical performance, to ensure your metrics are meaningful, you should analyze data that spans your typical sales cycle. This could range from three months for transactional deals, and up to 18 months for long deals.

Your team should be interrogating the data to discover key benchmarks for sales cycles, conversion rates , and average deal sizes. To give you an idea of how to approach this task, let’s see how ACME Corp. is doing it.

How ACME Defined Its Benchmarks

As we learned above, ACME has its revenue goal of $25 million net-new ARR. However, it still needs benchmarks around each stage of the buying journey to map out how the revenue team can achieve that.

ACME assesses historical data that spans its average deal cycle of six months, looking back to analyze past sales cycles, conversion rates, and average deal sizes to create metrics for each stage of their buying journey.

Account-Based Buying Journey Stages

By looking at the typical account-based buying journey, you can define the stages where you’ll need metrics to benchmark your performance. Here are the  account-based metrics  your team can review historical data for:

• Number of accounts in the Target Account List (TAL)
• Number of accounts in TAL that are in-market
• What % of accounts reached by marketing engaged with ads or content?
• What % reached the Awareness & Consideration stage?
• What % became a SQL or 6QA (aka a  6sense-Qualified Account )
• What % accepted a meeting with a BDR?
• What % booked a meeting with an account executive?
• What % became qualified pipeline?
• What % signed a deal?
• Average deal size
• Time between each stage (and overall sales cycle)

As we’ll see in the next step, you don’t need metrics for every single stage … but the more benchmarks you have, the more accurate your revenue operating plan will be.

Knowing your sales cycle, deal size, and average conversion rate from engaged accounts enables you to start making predictions and a basic plan. Say, for example, your:

• Average deal size is $200,000
• Conversion rate from engaged account to customer is 10%
• Sales cycle is six months

Since 1-in-10 engaged accounts are expected to sign a deal, we can assume that an engaged account has an average value of $20,000 in six months.

But you can go beyond these basic benchmarks to dive deeper and look at what numbers to expect at each stage of the buying journey . Here’s how ACME did it.

How ACME Applied Its Data to Plot a Plan

Once ACME uncovered the historic data for conversion at each buying stage, it became a math exercise to determine how many accounts ACME needed at each buying stage in order to achieve its revenue goal of $25 million.

Analysis of ACME’s past data revealed:

• It had been effectively reaching 80% of its In-Market Ideal Customer Profiles  (IICP) with marketing messages
• Of those, 30% began conducting serious research
• Of those, 15% became a 6sense Qualified Account (6QA) / sales qualified lead
• Of those, 75% booked a BDR meeting
• Of those, 40% booked a meeting with an AE
• Of those, 75% began exploring the solution, validation, and negotiating
• Of those, 50% signed a deal

ACME’s Past Performance

With its IICP of 75,000 accounts, that came to 303.75 deals — or roughly $15.2 million in revenue. That’s about $10 million short of ACME’s new revenue goal.

So how could the company hit $25 million? Its leaders ran the math in reverse to see what it would take.

Calculating ACME’s New Targets

Without making any changes or improvements to its marketing and sales process, ACME needed the equivalent of roughly 123,000 in-market accounts, 4,430 6QAs, or 3,330 BDR meetings to hit its new revenue goal. 

With an understanding of these numbers, ACME’s next step was working out whether it had the resources to handle the volume.

While it’s a mistake to forget seasonality and assume a linear progression of revenue generation throughout the year, dividing planned activities by days, weeks, or months helps to generate a ballpark figure for resource allocation.

You can map your targets against your current resources to better understand how far current team sizes and budget will get you towards your revenue goal.  

Mapping ACME’s Resource Allocation

As seen in the chart above, to hit its $25 million goal, ACME must book 3,333 BDR meetings. The team mapped this against approximately 260 business days in a year (in the U.S.) to reveal a target of almost 13 meetings a day. 

ACME then examined past BDR performance and workload to assess whether its current headcount of two full-time BDRs could handle the volume, or if it was time to grow the team. ACME applied the same logic across its revenue team to estimate headcount. Could three AEs cover five initial calls a day, plus many follow-up conversations with buyers? 

Increasing the revenue target by 66% was always going to require investment. But by breaking down the numbers and understanding how quickly engaged prospects convert into qualified sales opportunities, ACME could start to map out how much of an investment it needed to make in people, and where to make it. 

Calculating Required Marketing Budget 

Alongside headcount, your marketing team should look at how much budget you used to reach your previous goals. You can then divide your budget by a key measurement metric, e.g. a 6QA or SQL, to understand your marketing spend to reach this goal. 

This is an important step to tie marketing back to revenue and helps you project future outputs in light of targets or budgetary changes. Here’s how it looked for ACME.

ACME’s Marketing Performance

With last year’s budget of $1 million, Acme’s marketing team generated 2,700 6QAs (or alternately, SQLs). To get the cost per 6QA, they divided the budget by the number of 6QAs generated, equalling $370. (6QA could be replaced by another metric of choice, using the same formula.)

So what would happen as ACME attempted to ramp up its revenue? To plan for this year’s budget, ACME multiplied the cost per 6QA by the new target of 4,432, giving a proposed budget of close to $1,640,000.  

By also examining the cost per channel from last year, ACME’s CMO then mapped out the budget by channel to assess whether they had the resources to hit the new targets.

The resource allocation exercise unsurprisingly showed ACME would need more investment to hit its higher targets, so the revenue team set about building a ramp-up plan to reach its new goals.

Before investing heavily in new headcount and huge budgets, you must ensure you’re getting the most from your current investment. Efficient growth doesn’t come solely from increased demand. It comes from increasing conversion rates, too. 

The law of diminishing returns means bettering conversion metrics at any stage in the funnel drives out-sized growth vs increasing activities. 

How ACME Plans to Ramp Up 

For example, looking at ACME’s past performance, a 1% increase in conversion between the Awareness and Consideration stage to 6QA would mean 180 more 6QAs. Following the metrics further down the funnel, that meant 20 more deals, and $1 million more revenue. Not bad at all.

So ACME’s revenue leaders went back further, to the very top of the cascade of their conversion percentages, and the total number of in-market accounts they were attempting to reach. 

The team agreed to tighten their targeting to IICPs — which means going after accounts that are ready to buy and therefore most likely to close first. 

Using this targeted approach, ACME can increase conversion at every stage of the funnel, driving efficient growth. By honing its focus on the accounts most likely to purchase, ACME has improved its chances of winning deals more efficiently.

As revenues lift and more resources free-up for growth, ACME can look to widen its Target Account List (TAL), which will add more IICP prospects to its funnel … and bring in more opportunities for additional sales reps to work. 

By combining this more targeted approach with an increase in activities, ACME expects to smash its revenue goal. 

Following this How-To guide and ACME’s lead gives you a framework for your own revenue operating plan. But it’s by no means perfect — this plan is susceptible to human error, diminishing returns, seasonality, and threats.

To build a watertight plan, companies are turning to AI to help identify the best accounts, and accounts that are in-market. The AI does the hard work for you, gathering data from across business units to get a complete picture. 

This robust data can then be effortlessly combined with past and present performance, alongside trends, seasonality, and threats to create real-time forecasts that can accurately predict future pipeline and inform your revenue operating plan. 

Learn More in Our ‘No Forms. No Spam. No Cold Calls’ Resource Center

Interested in learning more about taking your sales and marketing effort to the next level by uncovering and targeting the accounts most likely to buy? Visit our Resource Center to find more How-To’s like this one inspired from the pages of Conant’s book.

All of 6sense’s proceeds from book sales go to GoodSense , the charitable arm of 6sense whose mission is to do our part for our community and beyond.

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Better Knowledge. Your Insight Is Sharper

From Idea to Income: Building a Successful Business Model

Updated: August 31, 2024 · Reviewed by: Ahmad Nasrudin

This post may contain affiliate links, meaning we may earn a small commission if you purchase through our links. This helps support our work.

A business model is the blueprint that outlines how a company generates revenue, attracts customers, and delivers value. It’s the strategic plan that guides a company’s operations.

Understanding business models is essential for anyone who wants to start or grow a business . By knowing the different types of business models and how they work, you can make informed decisions about your entrepreneurial journey .

What is a Business Model?

A business model is a comprehensive plan that outlines how a company creates, delivers, and captures value. It’s more than just a strategy; it’s a roadmap that guides a company’s operations, from product development to customer acquisition and revenue generation. A well-crafted business model ensures that a company’s activities align with its goals and provides a clear framework for decision-making.

Key Components of a Business Model

Understanding these key components can create a solid foundation for your business model and help you make informed decisions about your company’s strategy and operations.

• Value proposition: The unique benefits a company offers to its customers.
• Customer segments: The different groups of customers a company serves.
• Channels: The ways a company reaches and communicates with its customers.
• Customer relationships: The type of relationship a company establishes with its customers.
• Revenue streams: The ways a company generates income from its customers.
• Key resources: The assets a company needs to operate its business.
• Key activities: The most important actions a company undertakes.
• Cost structure: The expenses incurred in operating a business.

Value Proposition

A compelling value proposition is the cornerstone of a successful business model. It sets your business apart from competitors and attracts customers. Your value proposition should clearly articulate the unique benefits your product or service offers and address the specific needs and pain points of your target market .

To craft a strong value proposition, consider these questions:

• What problem does your product or service solve for your customers?
• How does your offering differ from competitors?
• What unique value do you provide?
• How do your customers benefit from using your product or service?

Answering these questions can help you develop a value proposition that resonates with your target audience and drives customer acquisition .

Customer segments

Understanding your customer segments is essential for tailoring your business model to meet their specific needs. Customer segments can be defined based on various factors, including demographics (age, gender, income), psychographics (lifestyle, values, interests), behavior (purchase frequency, usage patterns), and geography.

Once you’ve identified your customer segments, consider these questions:

• What are the common needs and wants of each segment?
• How do these segments differ from each other?
• Which segments are most profitable for your business?

By targeting specific customer segments, you can optimize your marketing efforts, product offerings, and pricing strategies to maximize customer satisfaction and revenue.

Channels are the touchpoints through which your business interacts with customers. They can include your website, social media, physical stores, sales representatives, advertising campaigns, and more. Choosing the right channels is crucial for effectively delivering your value proposition to your target audience.

When selecting channels, consider these factors:

• What channels do your target customers prefer?
• Which channels are most cost-effective for reaching your audience?
• How well do these channels align with your value proposition?

Using a combination of channels, you can create a multi-channel customer journey that enhances customer engagement and drives sales.

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Customer relationships

Building strong customer relationships is essential for long-term business success. These relationships can range from transactional (one-time purchases) to more personalized and ongoing interactions.

Consider these strategies for building strong customer relationships:

• Provide excellent customer service.
• Personalize your interactions.
• Offer loyalty programs and rewards.
• Encourage customer feedback.
• Build a strong online community.

You can increase customer loyalty, reduce churn, and generate repeat business by fostering positive customer relationships.

Revenue streams

Revenue streams are the ways your business generates income. Identifying your primary revenue streams is essential for understanding your business’s financial sustainability.

Common revenue streams include:

• Product sales: Selling physical or digital products.
• Service fees: Charging for services provided.
• Subscriptions: Offering ongoing access to products or services for a recurring fee.
• Advertising: Generating revenue by selling advertising space.
• Licensing: Granting permission to use intellectual property for a fee.
• Affiliate marketing: Earning commissions for referring customers to other businesses.

By diversifying your revenue streams, you can reduce your reliance on any single source of income and improve your business’s resilience.

Key resources

Key resources are the assets that your business needs to operate effectively. These can include:

• Physical assets: Buildings, equipment, and inventory.
• Intellectual property: Patents, trademarks, copyrights, and trade secrets.
• Human capital: Talented employees and skilled professionals.
• Financial resources: Cash, investments, and loans.

Identifying your key resources helps you assess your business’s strengths and weaknesses and make informed decisions about resource allocation.

Key activities

Key activities are your business’s most important actions to deliver its value proposition. These can include:

• Product development: Creating and improving products or services.
• Marketing and sales: Promoting your products or services and attracting customers.
• Customer service: Providing support and assistance to customers.
• Operations: Managing day-to-day business activities, such as production, distribution, and administration.

Focusing your resources and efforts on your key activities can maximize efficiency and help you achieve your business goals.

Cost structure

Cost structure is the expenses incurred in operating your business. Understanding your cost structure is essential for managing profitability.

Common cost categories include:

• Cost of goods sold: The direct costs of producing or acquiring products.
• Operating expenses: Costs of running the business, such as salaries, rent, utilities, and marketing.
• Fixed costs: Costs that remain constant regardless of production or sales volume.
• Variable costs: Costs that fluctuate based on production or sales volume.

By analyzing your cost structure, you can identify areas where you can reduce expenses and improve your profitability.

Popular Business Model Types

Imagine you’re starting a new business. To attract customers and generate revenue, you’ll need to consider your monetization strategy carefully. You can identify the approach that best suits your goals and resources by exploring different business models. This section will explore popular options, including their key characteristics and advantages.

Subscription model

A subscription model is a recurring revenue model where customers pay a regular fee for ongoing access to a product or service. This model is particularly effective for businesses that offer digital products or services, such as software, streaming content, or membership-based services.

Key advantages of the subscription model include:

• Predictable revenue stream: Subscriptions provide a steady income stream, making it easier for businesses to forecast revenue and manage expenses.
• Increased customer loyalty: Subscribers are likelier to remain loyal to a brand if they find the product or service valuable and convenient.
• Opportunities for upselling and cross-selling: Subscription-based businesses can easily offer additional products or services to existing subscribers, increasing revenue.

Examples of subscription-based businesses include:

• Adobe Creative Cloud
• Microsoft 365
• Amazon Prime

Freemium model

A freemium model offers a basic version of a product or service for free, while premium features or additional benefits require a fee. This model often attracts new customers and encourages them to upgrade to the paid version.

Key advantages of the freemium model include:

• Low-cost customer acquisition : Offering a free version can help businesses acquire new customers at a lower cost.
• Customer testing: Freemium models allow businesses to test their products or services with a wider audience before charging for premium features.
• Increased customer loyalty: Customers who enjoy the free version are more likely to upgrade to the paid version.

Examples of freemium businesses include:

Advertising model

The advertising model generates revenue by charging advertisers to reach customers through a platform. Websites, social media platforms, and mobile apps commonly use this model.

Key advantages of the advertising model include:

• Multiple revenue streams: Advertising can be a significant income source for businesses with a large audience.
• Cost-effective for advertisers: Advertising can be a relatively affordable way for businesses to reach potential customers.
• Opportunities for personalization: Advertisers can target specific customer segments and personalize their ads to increase relevance.

Examples of advertising-based businesses include:

Transactional model

In a transactional model, customers pay a one-time fee for a product or service. Businesses that sell physical goods or services that are consumed once use this model.

Key advantages of the transactional model include:

• Simplicity: The transactional model is straightforward to understand.
• Immediate revenue: Businesses can generate revenue immediately upon selling a product or service.
• Flexibility: The transactional model can be used for various products and services.

Examples of transactional businesses include:

• Retail stores
• Restaurants
• Service providers (e.g., plumbers, electricians)
• Online marketplaces

Affiliate model

An affiliate model earns revenue by referring customers to other businesses. Bloggers, influencers, and online marketers who promote products or services on their platforms often use this model.

Key advantages of the affiliate model include:

• Passive income: Affiliates can earn income without creating or selling their own products or services.
• Flexibility: Affiliates can choose to promote products or services that align with their interests and audience.
• Opportunities for collaboration: Affiliates can collaborate with businesses to create mutually beneficial partnerships.

Examples of affiliate marketing programs include:

• Amazon Associates
• Commission Junction
• PartnerStack

By understanding these popular business models, you can better evaluate different business opportunities and choose the one that best aligns with your goals and resources.

How to Develop a Business Model

A well-crafted business model outlines how to attract customers, generate revenue, and manage expenses. Let’s discuss the essential steps to developing a business model that will set your venture up for success.

1. Define your value proposition

A compelling value proposition is the cornerstone of a successful business model. It sets your business apart from competitors and attracts customers. Your value proposition should clearly articulate the unique benefits your product or service offers and address the specific needs and pain points of your target market.

2. Identify your target market

Understanding your target market is essential for tailoring your business model to meet their specific needs. Customer segments can be defined based on various factors, including demographics (age, gender, income), psychographics (lifestyle, values, interests), behavior (purchase frequency, usage patterns), and geography.

3. Choose your revenue model

Your revenue model determines how you will generate income from your business and how you will charge customers for your products or services.

Common revenue models include:

Your revenue model should align with your value proposition and target market.

4. Outline your cost structure

5. develop your marketing and sales strategy.

Your marketing and sales strategy outlines how you will reach and attract your target market. It involves determining the channels you will use to communicate with customers, developing messaging that resonates with your audience, and creating a sales process to convert leads into customers.

Key elements of a marketing and sales strategy include:

• Target market identification: Clearly define your ideal customer.
• Value proposition messaging: Craft compelling messaging that highlights the benefits of your product or service.
• Channel selection: Choose the most effective channels to reach your target market (e.g., social media, email marketing , content marketing , public relations).
• Sales process: Define the steps in selling your product or service, from lead generation to closing the deal.
• Customer relationship management: Implement a system to track and manage customer interactions and data.

6. Create a financial projection

A financial projection forecasts your business’s future revenue and expenses. It helps you assess its financial viability and make informed decisions about its operations.

Key components of a financial projection include:

• Income statement: A forecast of your projected revenue and expenses.
• Balance sheet: A snapshot of your business’s financial health at a specific time.
• Cash flow statement: A projection of your business’s cash inflows and outflows.

By creating a detailed financial projection, you can identify potential risks and opportunities and adjust your business plan as needed.

Common Business Model Mistakes

Lack of differentiation. One of the most common mistakes businesses make is failing to offer a unique value proposition. If your product or service is not distinctive or doesn’t clearly benefit customers, it won’t be easy to compete in the marketplace.

Ignoring customer needs. Understanding your target market is essential for a successful business. Failing to understand your customers’ needs and preferences can lead to products or services that don’t resonate with them. Conduct market research to gather insights into your target audience and tailor your offerings accordingly.

Overreliance on a single revenue stream. Relying solely on one source of income can be risky. If that revenue stream dries up, your business could be in trouble. Diversify your revenue streams by exploring multiple income sources, such as sales, subscriptions, advertising, licensing, or affiliate marketing .

Underestimating costs. Many businesses underestimate their costs, which can lead to financial difficulties. Accurately calculate your expenses, including production, marketing, sales, and administrative costs. This will help you set realistic pricing and avoid financial losses.

Neglecting marketing and sales. It won’t sell itself even if you have a great product or service. Neglecting marketing and sales can lead to low customer awareness and sales. Develop a comprehensive marketing and sales strategy to reach your target market and attract new customers effectively.

Additional Resources

• Business model canvas: The Business Model Canvas is a popular tool for visualizing and understanding your business model. It’s a one-page diagram that outlines the key components of your business, including your customer segments, value proposition, channels, customer relationships, revenue streams, key resources, key activities, and cost structure. This tool can help you identify your business model’s potential strengths, weaknesses, and opportunities.
• Lean startup methodology: The Lean Startup Methodology is a framework for building and growing businesses through experimentation and iteration. It emphasizes rapid prototyping, customer feedback, and continuous improvement. By following the Lean Startup principles, you can reduce risk, increase efficiency, and accelerate your time to market.
• Business plan template: A business plan is a structured document that outlines your business strategy and financial projections. A well-written business plan can attract investors, secure financing, and guide your business operations. Many online resources and templates, such as those offered by HubSpot and Shopify , are available to help you create a comprehensive business plan.

Start building your dream business today. Click here to learn more.

• Business Fundamentals: Your Simplified Guide for Success
• Business Plan: Guide for Startups & Investors (Funding, Strategy)
• A Comprehensive Guide to Business Ideas: From Conception to Launch
• The Ultimate Guide to Entrepreneurship and Starting a Business
• From Idea to Implementation: Essential Business Planning Strategies

About Ahmad Nasrudin

Introverted writer with a passion for storytelling. Leveraged analytical skills from financial background (equity research, credit risk) at a leading rating agency to enhance writing with a unique statistical and macroeconomic perspective. Learn more about me

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