Basics of a revenue model and its types
Usually, when you hear innovators starting their journey of entrepreneurship with their idea, they are passionate only about the idea with no clue on how to make money from it. They spend months fine-tuning their idea to create maximum impact in terms of creating value for their customers. What they forget is capturing value is equally important as creating value. In the end, it is the revenue model that decides the viability & feasibility of a business idea by describing its money-making process.
What is a revenue model?
A revenue model is a part of the business model that explains the process of generating income for the business. It is the strategy to manage revenue streams, the techniques to generate revenue, and the obvious or derived sources of revenue, including the methods to charge for the offering.
A number of sources can help you generate revenue for your business. These sources can be in the form of rent, commission, royalty, etc. Revenue from them can be one time or recurring depending on your method to charge for your offering.
Types of Revenue Models
There are many types of revenue models each having its own significance for a different business. Businesses should reinvent their existing revenue models for capturing new market segments and also to keep up with the behavioral shifts in the consumers’ minds.
The rising digital economy is enabling many companies to generate income from a large number of sources that exist in the digital world.
All these sources fall under one of the 10 types of revenue models stated below:
Ad-Based revenue model
In this type of revenue model, money is earned through advertisements. A company that attracts traffic (through offline or online route), can earn money by charging the advertisers. You can see advertisements on social media platforms, blogs, etc. All these routes attract viewers and advertisers pay to feature their product on such platforms. Advertisers can be charged based on PPC (pay per click), size of the space for displaying their ads, or other prevalent ways.
Example: Blogging companies usually follow this route to monetize their content
In this type of revenue model, the products or services are rented to other businesses against licensing fee and/or royalty. This route is adopted usually by intellectual property holders (having a patent, trademark, or copyright in their name), inventors, and even software companies. Based on the terms and conditions set out between the seller (who grants a license) and the buyer, the rights of using the intellectual property are provided to the buyer. However, the seller retains full control of the IP on the product or service used by the buyer.
Example: License of CAD (Computer-Aided Design) Software provided to Universities for the purpose of teaching students and also to design firms for designing their products.
It’s a type of revenue model wherein companies charge a commission on each transaction handled by it between two parties or for providing buying leads to the party. Online market places or aggregators use this model by charging a commission on every item sold through their platform.
Brokers, auctioneers, and affiliates also work on a commission-based revenue model.
Though it’s easy to earn money through this revenue model as you don’t have to provide your own products to buyers, it’s particularly tough to scale such businesses unless you create a monopoly as an aggregator or marketplace.
Examples: Amazon, Uber
This model provides a promise of recurring revenue. Quite common among SaaS (Software as a Service) companies, it is also used by entertainment service providers like Netflix, Youtube, etc. Customers are charged on a monthly or yearly basis for using the product or service.
This model is used by companies to generate revenue by renting the assets. Assets, most commonly physical in nature, are rented for recurring revenue or leased by receiving one-time payment.
Free Product, Paid Service
The product is given away for free, but customers need to pay for customization, training, or other desired services.
This model works well when you want to increase your brand awareness and generate trust among users by providing them something valuable for free.
The fee-for-service or pay-as-you-go model is quite different from other service-based models in the sense that customers are required to pay only for the number of times they use the service. Examples are telecom service providers or DTH television services.
Few products/ services temporarily have different prices in different markets. This revenue model makes use of this price difference wherein you buy currency, security or commodity at a lower price in one market and sell them at a higher price in another market thus making a profit in the process. Cryptocurrency firms are the best examples of this revenue model.
This revenue model generates revenue in the form of interest from loans or deposits. Most often banks and other e-wallet companies use this model. Banks earn interest on loans and e-wallet service providers earn by depositing the money kept in their e-wallets in other banks. When you store a certain amount of money in your e-wallet, it will then save that money in another bank and earn interest from that deposit.
It’s quite a common revenue model among the companies. The idea is simple: take the goods’ cost, increase it by say, X%, and sell it with a profit margin.
Retailers, wholesalers, etc. often use this type of revenue model as they buy the products from manufacturers, add their profit margin to it, and then sell to the customers.
Before deciding the revenue model for your startup or business, it’s important to know your customers (market) as well as the product that you are planning to offer to them. Sometimes, the nature of the product itself reveals the best revenue model for the company. For example, you may have a high-tech product that is tough to scale due to the inclusion of multiple systems and sub-systems in it. In this case, you may realize that licensing would be a better option than to manufacture it all by yourself.
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