What Is a Revenue Model?
A revenue model is a framework to predict revenue performance and results over a period of time. Revenue models take into account the various ways your company generates revenue, also known as revenue streams.
They also factor in the fixed and variable expenses the business incurs in order to generate that revenue. Many elements inform your revenue model, including:
With a clear understanding of the inputs, a revenue model can be used to create quantifiable booking and revenue forecasts that will drive your budget and rolling forecast.
What Are the Different Types of Revenue Models?
The five major types of revenue models are:
- recurring revenue model
- transaction revenue model
- affiliate revenue model
- advertising revenue model
- usage-based revenue model
Recurring Revenue Model
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 SaaS applications on this basis.
Transaction Revenue 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 Model
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 Model
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 Model
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, baseline 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.
Revenue Model vs. Revenue Stream
Revenue models and revenue streams are subtly different concepts.
Your revenue model predicts and forecasts what your revenue is going to be. Revenue streams are inputs into that forecast. A company could have multiple revenue streams that are all accounted for in the revenue model strategy.
A revenue stream defines where your revenue comes from by answering questions such as:
- What are you selling?
- How much are you selling it for?
- Who are you selling it to?
All of your startup’s revenue streams — defined and forecasted over time — will make up your revenue model.
How to Choose the Right Revenue Models
Keys to choosing the right revenue model:
- Get to know your customers.
- Embrace multiple revenue streams.
- Be flexible.
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 Streams
It’s possible to monetize your startup’s offering in multiple ways. Perhaps you can sell a product direct to consumers 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.
Flexibility is one of the most important aspects of startup success. Don’t be rigid with your revenue model. The ability to pivot and be agile in your response to the market will be critical to your early success.
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 (which 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.