How do you get your product, service, or app into the hands of your target customers? Our guide on the most used revenue models will help you decide.
There are multiple revenue models in existence to pick from. Instead of describing all of them in this post, we made a list of the most popular ones and outlined their pros and cons. Feel free to experiment, test, and combine them when you feel ready; however, in the beginning, we recommend keeping it simple. An easy way to start on the right foot is by applying The Rule of One and activating a single revenue stream.
Finances are the backbone of your business model and directly affect your startup’s marketing and talent resources. For early-stage founders, a robust revenue model will provide a higher level of independence along with the security they need to hire a skilled team and scale.
Business Model vs Revenue Model vs Revenue Stream
Before we delve into the different types of revenue models, we should differentiate the terms "business model", "revenue model", and "revenue stream", as they are very often used interchangeably. In the GlowingStart article, "What Is The Difference Between A Revenue Model, Revenue Stream, And A Business Model", Alex Genadinik does a great job describing the relationship between those terms:
‘‘A revenue stream is a company’s single source of revenue. A company can have zero or many revenue streams, depending on its size.
A revenue model is the strategy of managing a company’s revenue streams and the resources required for each revenue stream.
A business model is the structure comprised of all aspects of a company, including revenue model and revenue streams, and describes how they all work together.’’
Now that we know the revenue model basics let’s examine the most common types that have proved to be strong fits for startups.
Types of Revenue Models
There are numerous types of revenue models, so this list in no way attempts to list them all, especially since so many of them go by other names in the startup community. However, below are ten of the most popular and effective revenue models employed by companies, both big and small.
Genadinik’s article, “Different Revenue Models”, covers some of the more common revenue models that countless recently-launched startups use to generate their first sales. Here are the revenue models he covers below:
1. Ad-Based Revenue Model
Ad-based revenue models entail creating ads for a specific website, service, app, or other product and placing them on strategic, high-traffic channels. If you have a platform that generates a lot of traffic, you can profit by selling advertising space. We are all familiar with digital promotions as this is a preferred marketing strategy of giants like Google and Facebook.
There are four main categories of advertising strategies: display, video, mobile, and native. Data plays a critical role in measuring ads performance, and you should be able to provide advertisers with precise metrics like CTR (clickthrough rate), CPC (cost-per-click), CPM (cost-per-impression), and many others.
Advantages: Making money from ads is one of the simplest and easiest ways to implement revenue models, which is why so many companies utilize ads as a source of revenue.
Disadvantages: In order to generate sufficient revenue to withhold a business, you will need to attract millions of users. In addition, most people find ads annoying, which can lead to low clickthrough rates and, therefore, lower revenue.
2. Affiliate Revenue Model
Another popular web-based strategy is the affiliate revenue model, which works by promoting links to relevant products and collecting a commission on the sales of those products. It can work in conjunction with ads or separately. This method is basically a contract between a supplier of a product/service and a promoter where the promoter redirects buyers to the sellers, who then finalize the transaction. Popular companies that offer affiliate marketing schemes for partners are Amazon and Shopify.
Advantages: One of the most obvious benefits of employing an affiliate revenue model is that it generally makes more money than ad-based revenue models.
Disadvantages: If you use an affiliate revenue model for your startup, remember that the amount of money you make is limited to the size of your industry, the types of products you sell, and your audience.
3. Transactional Revenue Model (direct and web)
Countless companies, both tech-oriented and otherwise, strive to rely on the transactional revenue model for a good reason. This is one of the most upright ways of generating revenue, as it simply implies a company providing a service or product and customers who pay for it.
Advantages: Consumers are more attracted to this experience because of its clarity and the wider set of options.
Disadvantages: Because of the directness of the transactional revenue model, many companies employ it themselves, which means more competition and price deterioration, and therefore, less money for everyone who uses this model.
The transactional revenue model can be broadly split into two categories - web sales and direct sales.
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Web sales have grown radically in the last few years and are suitable for a huge variety of offerings, including software, hardware, and even subscription services. At the same time, relationship sales are incompatible with the web sales model, so if your company is related to consulting or big-ticket items (high-value items such as houses, appliances, and cars), you should consider employing a model that goes together with your offering better.
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Direct sales can be inside sales, in which someone calls in to place an order (or sales agents call prospects), and outside sales, which is a face-to-face sales transaction.
Direct sales models are efficient with relationship sales cycles, enterprise sales cycles, or complex sales cycles that entail multiple buyers and influencers. However, these kinds of operations often require hiring a sales team of some sort, which means that it isn’t optimal for small ticket price items. If your offering is priced below the $1,000-$2,000 range, you’ll have trouble building a scalable company by selling directly.
4. Subscription Revenue Model
In the subscription revenue model, you offer your customers a product or service that they can pay for over a longer period of time, usually month to month or year to year. Subscription as a Service (SaaS) providers usually give users a free trial before they start charging them monthly or yearly.
According to recent research, companies like Netflix, Spotify, and millions of others adopting the subscription-based revenue model, constitute an industry that has grown over five times in the last seven years.
Advantages: If your company is far enough along in its development, this model can generate recurring revenue and can even benefit from customers who are simply too lazy to cancel their subscription to your company (which is the dirty little secret of a subscription-based model).
Disadvantages: Because this model depends so much on having a large consumer base, it is critical to maintain a higher subscription than unsubscription rate.
5. Channel Sales (or Indirect Sales)
The channel sales model consists of agents selling your product for you and either you or the reseller delivering the product. The affiliate revenue model is a good companion to this one, especially if your offering is a virtual product.
A classic example of channel sales revenue model is wholesale merchants supplying regional distributors.
Advantages: The channel sales model is ideal for companies with a product that’s an incremental sale for their channel and can produce an accumulative profit.
Disadvantages: Don’t employ this model if your product requires you to evangelize your marketplace or if your product competes with your partner's, as they will push theirs and not yours.
6. Commission Marketplace
The commission marketplace is most often an e-commerce platform where intermediaries sell services or products and charge a commission. This is a perfect revenue match for rentals, physical products, or one-time services.
Among the most successful startups that rely on this cash flow plan are Uber and Airbnb.
Advantages: The commission-based revenue model is lucrative because of its scalability, flexibility, and monetization potential for all parties involved.
Disadvantages: This type of mediatory service requires plenty of software development and administration workforce for handling orders, payments, shipping, and other processes that might be relevant.
7. Licensing
This revenue model is widely embraced by data and technology providers. As the name suggests, the licensing income strategy is about managing the rights to use an offering. After signing a legal agreement, the copyright owner receives payments from people or organizations that want to use their products or services.
The licensing deal can be temporary or permanent; it can grant access to an unlimited number of clients, or it can be exclusive.
Advantages: This revenue model advocates for intellectual property protection. When fulfilled properly, licensing can deliver a steady income while simultaneously promoting a concept or a trademark.
Disadvantages: The downfall of this type of monetization might be hidden in the small print of the contract between the licensor and the licensee. If too many extra clauses on how to use the product are apparent, it becomes easy to breach them.
8. Retail
The retail revenue model demands setting up a traditional store in which you offer physical goods to your customers. Keep in mind that this brick-and-mortar style of sales requires shelf space (that you’ll have to pay for) at existing stores, and is designed for companies that have logistics and storage capabilities.
Advantages: Retail sales are a great way to offer deals and complimentary products to an existing customer base and help boost brand awareness.
Disadvantages: The retail sales route is not ideal for early-stage companies or companies that offer digital products like software or apps.
9. Donations
This is probably the newest revenue model on the list. It became known through the emergence of crowdfunding platforms like Kickstarter and Patreon where users vote for a product or a service and support it financially.
People who pay for the development of an MVP may even become investors and can later benefit from dividends when the project they have endorsed grows.
Advantages: This revenue model can generate fast returns and win you high visibility. It is also a smart way to get feedback, test a business idea, and examine your audience closer.
Disadvantages: You will need a large and loyal community backing you up in order to drive solid revenue. Users who are willing to pay for an idea or a piece of content will likely expect you to interact with them, so save some time for that as well.
10. Freemium Revenue Model
The freemium model is one in which a company’s basic services are free, yet users must pay for additional premium features, extensions, functions, etc. One of the biggest companies to use this model is LinkedIn, the most popular business social media platform. Another example is the email marketing platform MailChimp - on the free plan, you can still send out emails, but only utilizing basic features and addressing a limited number of contacts.
Advantages: The freemium model offers something free to users, which is a great way to give them a taste of your product or service while simultaneously enticing them to pay for something later on.
Disadvantages: This model requires a considerable investment of time and money to reach out to your audience, and even more effort to convert free users into paying customers.
Final Thoughts
As stated before, this blog post doesn’t cover every revenue model used by startups, but by highlighting the most popular ones, you should have enough information to pick the profit strategy that will boost your startup into the big leagues.
Do your research, considering the value of your product, the market, and your competitors. Finally, don’t forget to check in with your target customers, too, because they are the ones to pay for your services, and their opinions and preferences matter the most.
