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What Is a Revenue Model?

A revenue model is a company’s forecast to predict bookings and revenue from the products and services it offers to customers. In simple terms, it’s a consolidated model demonstrating the way you charge for and monetize your offering.

Lemonade stands charge by the cup, and newspapers sell advertisements online and in print. Companies with physical products have different revenue models than companies that sell software. Your startup will only achieve (and maybe even exceed) your revenue goals by presenting your products and services in a way that appeals to customers — and differentiates you from the competition.

Many elements inform your model, including:

  • pricing and packaging;
  • lead conversion metrics;
  • quota carry; and
  • net new revenue retention.

With a clear understanding of the inputs, a model can be used to create quantifiable booking and revenue forecasts that will drive your budget and rolling forecast.

We’ve included a revenue model template for startups at the end of this blog to help you get started. But first, let’s explore some of the basics:

Types of Revenue Models

There are dozens of ways for businesses to charge their customers. Here’s a rundown of five of the most common in the startup world:

Recurring Revenue

A recurring revenue model usually involves some sort of subscription or membership fee that provides the customer goods or services with a regular billing cadence. Gyms, for example, charge monthly fees to gain access to their facilities. You can get just about any product through subscription services nowadays, from contact lenses to beauty products to meal kits. Of course, you can also purchase software as a service (SaaS) on this basis.

Transaction Model

Direct-to-consumer businesses and other sellers of goods rely on the sales revenue model to forecast revenue for goods shipped to their customers. This type of sale results in a different revenue recognition pattern, and therefore is modeled separately from a subscription revenue forecast.

Think of things like buying a coffee from a cafe, ordering a dress from your favorite retailer’s website or purchasing one-time access to a movie on-demand. Quantity or units shipped may vary significantly throughout the year, and revenue trends may fluctuate with seasonal trends or capacity constraints.

Affiliate Revenue

Third-party sellers and platforms are the main proponents of the affiliate model, which is based on commission. Anytime you make a purchase on Amazon, Etsy or eBay, for example, those sites get a percentage of the sale. This type of model is often based on macro trends, given that the bookings are one step removed from the team — and therefore influenced more by larger campaigns than on an individual client basis. Similar models, such as channel or reseller markets, also rely on a third party to connect the seller to its end user.

Advertising Revenue

Advertising can be a significant source of revenue for publications or other platforms with access to a large audience. Any website or content platform can generate revenue by offering ad space to another seller. This revenue model is typically based on a B2B contract for the advertisement itself, rather than any customer behavior or end-user booking.

Usage-Based Revenue

This model, as the name suggests, charges customers based on how — and how much — they use a product. Cell phone companies deploy a usage-based model when your monthly bill is correlated to how much data you used. Similarly, you’re usually charged by the pound at a salad or hot bar at the local grocery store.

Included within this model is the freemium strategy. Companies using the freemium strategy will offer a free, basiline product or service to customers while also enticing them to pay extra for additional features, services or expertise. Common services such as LinkedIn, DropBox and WordPress fit this description.

While there is no direct revenue to forecast from a freemium model, it’s important to track your user base and their behavior. That information is critical to predict upgraded revenue in the subscription model, and may also be used to determine pricing for advertising or affiliate programs.

Business Model vs. Revenue Model

These terms are sometimes used interchangeably, but they’re not the same thing.

To keep it simple: A revenue model is just one component of a business model. It forecasts the way in which a company expects to experience bookings and realize revenue, while the business model is a broader and more foundational strategy that encompasses many more financial elements.

The business model covers the processes necessary for the company to create value for customers and earn a profit. Basic business operations such as product development, human resources, marketing and sales are all included.

How to Choose the Right Revenue Models

Lost on where to start? Here are a few tips to selecting the right model for your startup:

Get to know your customers

This is the first tip for a reason. Rather than assuming what they’d like, get in the trenches with your customers and learn their preferences. Find out what types of models your competitors are using. Do they work, or would customers prefer something different? Customers have to embrace your offering for your startup to succeed.

Embrace multiple revenue models

It’s possible to monetize your startup’s offering in multiple ways. Perhaps you can sell a product direct to consumer on your own website and offer it through a third-party such as Amazon. Maybe you can sell your software with a recurring revenue subscription and offer white-glove services on top.

Be flexible

Flexibility is one of the most important aspects of startup success. Don’t be rigid with your revenue model.

Continuously gather customer feedback and monitor your sales metrics. When you see a meaningful opportunity to change your model, go for it! Don’t make changes every month (that could be confusing for customers), but don’t be afraid to adjust, experiment and adapt.

Get Started with a Revenue Model Template for Startups

As I always say, the most important part of scaling your business is getting started. You might not know everything about revenue models, but at York IE, we’re here to help!

Download the booking and revenue template from our Fuel platform, get on the phone with some of your core customers and start differentiating your startup’s offering.

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