Earning revenue is the main aim of businesses which is instrumental in sustainability and growth. There are various ways by which you can earn revenue. A revenue model given a framework for generating income and a road map for profitability and growth. The success of a company depends mainly upon its revenue streams and revenue model.
What is a Revenue Model?
A revenue model is a plan which how a company will earn its revenue or income from its businesses. This model is one of the key performance indicators (KPIs) for a company to measure the profitability of its pricing strategy and product sales.
Revenue model is sometimes also called the business model; however, these terms are not synonymous. The revenue model is a part of the business model, which explains how a company produces, distributes and sells its products or services and how it generates income.
Types of Revenue Models
There are various types of revenue models, some of which are described below:
Subscription Revenue Model
It is also called as recurring revenue model. This model generates income by charging a fixed fee from customers at specific intervals (monthly, quarterly, annually, etc.) for using the product or service of the company.
The advantage of this model is that a fixed amount is guaranteed from the customers after a fixed interval of time.
Example: Spotify, Amazon, Money Control, etc.
Affiliate Revenue Model
The companies using this model, earn revenue in the form of commission, when they sell products or services of other companies. The products or services are normally sold using the website of the company. 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.
Example: Amazon affiliate links and ticket promoting services.
Advertising Revenue Model
In this type of model, the businesses earn revenue by selling advertising space to other companies. The company selling the advertising space have large audiences and high traffic it uses its website or other platforms to give visibility to products or services of other companies.
Example: Various companies having blogs or YouTube Channels.
SaaS Revenue Model
The full form of SaaS is ‘Software as a Service’, which is similar to subscription based model. The companies using this model earn revenue by charging a fee from the customers at fixed intervals for using the software of the company.
Example: Adobe, Zoom
Sales Revenue Model
Sales revenue model is based on earning money on the sales of products directly to customers. Any business that directly sells products and services uses this model. The companies using this model sell product either online or in person.
Example: Clothing stores using stores or their own websites
The companies using this business model take license fee from users for using their products. This model is popular among software companies and companies having trademarks, intellectual property, etc.
Example: Macdonald’s corporation, Microsoft’s Xbox Live Gold subscription service
Markup Revenue Model
Markup revenue model is based on the concept that you buy certain product or service at a price and sell it at a higher price. The difference between the two is the profit margin of the company. This model is often used by wholesale, retail, and service-based businesses.
Example: Airline consolidators Mondee, Picasso Travel, and Centrav, which book flight seats in bulk at discount rates and then resell them to travel agencies.
Donation Based Revenue Model
The use of products or services is free by default in this model and the users pay the company on voluntary basis. The revenue is generated in the form of donations, or sometimes in the form of “pay-what-you-want.”
The companies using this model are different from ‘charity organizations’ since they required to pay their taxes which is exempted for charity organizations.
Example: Wikipedia, which relies on donations as a significant source of revenue.
Arbitrage Revenue Model
The marketplace oriented companies use this model for generating revenue. The arbitrage revenue model uses the price difference in two different markets of the same good/service to make a profit. The companies using this model buy in one market (a security/currency/commodity) and simultaneously sell in another market, at a higher price, what they just bought, pocketing the temporary price difference.
Example: Vintage clothing
How to Choose Your Revenue Model?
Before using the appropriate revenue model, you need a fully developed business strategy which include a business model. There are few tips, how to choose the revenue model:
Know Your Product and Define Your Value Proposition
The most important thing is to do a thorough analysis of the product and understand what value the product is offering to the customers. The revenue model you are choosing, should be aligned with your product. Not every revenue model is fit for every type of product. Can you offer subscription for the use of your product or service? How frequently the customers are using your product? Can you sell your product or charge license fee for its use? Find the answer of such questions and you will have an idea about which revenue model is suitable for you. Suppose you are selling cloths, then your customers will not need cloths every month. Therefore, the sales revenue model will be suitable in this case. If you are offering some software, then the licensing model or SaaS revenue model would be more appropriate. Hence the nature of the product & its value preposition defines the revenue model you should choose.
Explore Your Market and Customer Segment
Explore your market and know who are your customers. Single customers may be inclined towards the subscription based model, but if your customers are the large companies, then the licensing model would be more appropriate.
Analyze Your Competitors and Their Products
Make an analysis about your competitors and study their products. Which type of revenue models they are adopting? Are those revenue models successful or you need to go for other options?
Selecting the right revenue model is crucial for the success of your business. You should know about various revenue models and their pros and cons before deciding on a revenue model. Not every revenue model is suitable for every type of business. Understanding your product & value proposition, analysis of the target audience and your competitors is helpful in choosing your revenue model.