With over 4 million new ventures coming into the market, not everyone survives due to the high competition. It is a known statistic among startups that only about 95% survive in the long run. Most startups tend to fall off the wagon even before they get properly started and one of the key aspects startups fail is their inability to understand and figure out their business and revenue model.
In this post, we look closely at what a Revenue Model is and how it differs from a Business Model.
Let’s look at what a Business Model is?
In a business, especially when you’re starting out, you must decide on certain key aspects of the business you’re about to build. These include, but are not limited to;
What is your product or service?
Who is your customer?
Where is your customer?
How will you serve this customer?
How much are you going to charge for this product or service?
In what ways is your business going to make money?
All these areas combined create the Business Model of your startup.
Then, what is the Revenue Model?
Revenue Model is one such aspect of your business model which will help to give the business a plan and guideline on how to manage your multiple revenue streams, to ensure the business is successful and can run for a long time.
A business can have multiple revenue streams that will help a business generate revenue in the short and long run. This strategy is what we call the ‘Revenue Model’.
At the beginning of planning your startup, coming up with a solid revenue model will be crucial. This gives your investors confidence that you have thought through how to generate revenue and how to maximize your revenue-generating avenues.
There are several revenue models a startup can adopt. It is not a must to stick to one of these models as the most successful startups generally combine several of these models to maximize profit.
Transactional Revenue Model
This is the most known and simple revenue model for startups, whether you’re selling a product or a service. This revenue model simply means that your customers pay a price for the product or service that you provide.
The most crucial aspect of this model is your product or service pricing strategy. If this is your main revenue stream, then considering several areas such as competitor price structure, demand in the market, size of the market, your product/service value proposition etc. is very important to consider. Startup founders must be able to display to potential investors how they will adopt this revenue model and how it will improve in 3 to 5 years to gain maximum profitability. We call this ‘financial forecasting’.
Partnership Revenue Model
This type of revenue model is described by many names, such as Distributor Model or Channel Sales. This in general means that your product or service is sold through a third party to markets and consumer bases that your business is unable to reach otherwise. This Revenue Model generally go-hand-in-hand with the main revenue stream as Transactional Revenue Model.
The main areas to consider in this type of Revenue Model is the ability to reach bigger markets and larger consumer groups and generally ties with complimenting services via other partners. An example of such a model is a known hotel chain partnering with a known restaurant chain to expand its business. This creates a partnership that can be complemented by both brands.
In online revenue streams, Affiliate Marketing plays a similar role. Affiliates who partner with your product or service will promote your offerings to their network for a commission upon a sale.
The major disadvantage of such a partnership is if your partner has the potential of extending their own product or service covering your offering or become in the market an expert in your domain, leaving you out of the market. Therefore, whilst partnering with complimenting services is a good strategy, having clear differentiation and clear paths to ensure you don’t become competitors.
Subscription Revenue Model
This is a model which in the past used to be primarily for services. However, in the recent past as you must be familiar with, with is widely being used for products as well. Most common subscription revenue models you see these days are for digital products and services where models such as Software as a Service (SaaS), Blockchain as a Service (BaaS) and Platform as a Service (PaaS) are widely used. This model of creating revenue through subscriptions has become ever more popular due to its many benefits to the consumer, primarily the option of trying out a product or a service without having to purchase it off the shelf. Most of such subscription services provide a free trial period, which allows businesses, especially in the SME sector, a chance to try out prior to purchase and pay a nominal monthly fee against a larger purchase price.
Due to the many benefits of this subscription model, businesses have seen a massive increase in customer base which also solidify this revenue model as a sure win. As such, today’s investors are very keen on finding startups that offer such a subscription model and have a year-on-year growth plan in place.
There are many businesses that consider a subscription model as their primary revenue stream. For a business that has a big consumer base in a large market and is a market leader, having such a primary revenue model may be fine. However, if your startup is still in the early stages where you’re trying to build your customer base, depending heavily on a subscription revenue model may not be ideal.
There are many options a business can use when adopting a subscription revenue model.
- Direct Subscription Model – This is where products/services are directly sold for a subscription fee
- Freemium Model with Paid Services – This is a very popular option where the initial product may be free with specialized services which are known as ‘add-ons’ that can be purchased for a price. A good example of this model adopted is LinkedIn, where the basic product with limited features is free, while for specialized services, consumers must pay a nominal fee.
- Freemium Model – In this model, customers get the product absolutely free. The business makes its revenue based on the customer base they create as a result, which in turn can be used for other promotional or marketing activities. Facebook and Instagram are great examples of where a product/service is given for free with other monetizing models in place.
All of the revenue models discussed above are used successfully by many businesses. Whilst there is no rule to stick to one revenue model, startups must find the best revenue model that fits them based on their product/service, target market and consumer profile.
In the early stages of a startup, it may not be easy for the startup to decide on a particular revenue model. Hence, adopting a hybrid model can also work, which is used by many startups today. This will allow the startup to try out different models and decide which are their primary and secondary revenue streams. The main goal of selecting a revenue model needs to be based on the profit margins.
Revenue models can also change with the stage of the startup, hence understanding these models, thinking through your revenue goals and aligning the right model that fits them, will allow easier decision making for both founders and investors.