Revenue Streams Model For Startup
- foryoucrafted
- Jun 25, 2020
- 5 min read
Updated: Jun 26, 2020
The option you pick will be important to your enterprise valuation – or what your company is worth when you go to sell. Is it scalable? It will also determine which investors will be most interested in your company and potential success.
What is Your Revenue Model?
Services/Fee for service – when people are required to deliver the product or service.
Product is Free, But Services Aren’t
This model is unique compared to others, in that you have to give your product
away for free, yet require customers to pay for installation, customization, training
or other additional services.
Advantages: This model is great for building trust with your customer base and boosting brand awareness, as any company that offers anything for free will generate considerable buzz.
Disadvantages: Remember, employing this model means that you are basically running a services business with the product as a marketing cost. Also, a model like this isn’t always the best for scaling your company in the long term, so keep your eye on additional revenue models to utilize later on.
Commerce – the sales of a product or service, think Amazon. It could be a product that you
make, but also just a product that you sell.
Subscription – historically, a magazine subscription was an example of a business model or
revenue stream. This model is now the standard for recurring revenue businesses –
think Salesforce.com and Spotify.
The subscription revenue model entails offering your customers a product or service
that customers can pay for over a longer period of time, usually month to month, or
even year to year.
Advantages: If your company is far enough along in its development, this model can generate recurring revenue, and can even benefit from customers who are simply too lazy to cancel their subscription to your company (which is the dirty little secret of a subscription-based model).
Disadvantages: Because this model depends so much on having a large consumer base, it’s critical to maintain a higher subscribe rate than an unsubscribe rate.
Metered Services – Similar to subscription, they have monthly recurring elements, but in
addition to a subscription, they are usage-based vs tiered pricing.
Productize a service – this is where you charge a flat fee for a product/service that is
delivered by people – however, the cost of delivery is brought down over time with tools
and software. Moz would be an example of a business that started as a services
company and migrated to a subscription company.
Transaction Fee and/or Rental – Chugg is a great example of a rental business and
Kickstarter is in the business of taking a transaction fee for providing their service.
Transactional Revenue Model
Countless companies, both tech-oriented and otherwise, strive to rely on the
transactional revenue model, and for good reason too. This method is one of the most
direct ways of generating revenue, as it entails a company providing a service or
product and customers paying them for it.
Advantages: Consumers are more attracted to this experience because of its simplicity and the wider set of options.
Disadvantages: Because of the directness of the transactional revenue model, many companies employ it themselves, which means more competition and price deterioration, and therefore, less money to made for everyone who uses this model.
Lead Generation – is where marketers are better at acquiring web traffic cheaper than the
lead buyers. Think Mint.com and CreditCards.com – they aggregate traffic and sell
those leads at a premium.
Gaming – is in the business of selling fun, not necessarily solving a problem. Pay to
download was the old model and overall the trend is toward in-app purchases.
Marketplaces – are connectors of buyers and sellers for a transaction fee. Uber’s business
models are a marketplace as are other “gig-economy” companies. Like eBay,
marketplaces don’t typically “own” their inventory and are distinct in that they have two
customer acquisition funnels of buyers and sellers.
Advertising/Search – Google and Facebook are great examples of the Advertising and
Search Revenue stream or revenue model. If you get the product for free, you’re the
product! This model only works at scale however, so plan how you’re going to make
money before you get to 1M unique users visiting your site monthly.
Ad-based revenue models entail creating ads for a specific website, service, app, or
other product, and placing them on strategic, high-traffic channels. If your company has
a website or you have a web-based company, Google’s AdSense is one of the most
common tools get ads. For most websites, AdSense will earn about $5-10 per 1,000
page views.
Advantages: Making money from ads is one of the simplest and easiest ways to implement revenue models, which is why so many companies utilize ads as a source of revenue.
Disadvantages: In order to generate sufficient revenue to withhold a business, you will need to attract millions of users. In addition, most people find ads annoying, which can lead to low clickthrough rates, and therefore, lower revenue.
New Media – is the model that is referred to as “going viral” and is really a placeholder for a
future advertising model. Think WhatsApp and Facebook, they have a viral coefficient
of >2 users signing up for every paid user you bring in as a paying customer. This
model is great because of its Network Effect. However, it doesn’t work in Business to
Business revenue models
Combinations – take two (usually) models in combination – this is difficult when you launch
your product because you don’t usually have many options – however you can be a
service + subscription business or a transaction fee + subscription fee. An example of
this revenue model at both the launch and scale stage is SmartSheet. They do
customer setup/integrations for large customers. This brings in profitable revenue and
shortens the sales cycle to onboard new customers.
Big Data – if you have big data you can definitely sell it! However, if you’re getting ready to
launch your startup and don’t yet have the data it could easily take you 18-36 months to
capture enough data to sell. PatientsLikeMe is an example of aggregating (and
anonymizing) source data of patients to large pharma companies.
Licensing – I mention licensing as the final model, not because it’s no longer viable, it’s
simply in decline. 20 years ago when I started my first company in the Microsoft
ecosystem all of their software was sold as a license. I also remember the transition
stage from license to subscription and the “gnashing of teeth” at the time. Now it’s
nearly all subscriptions.
Affiliate Revenue Model – Another popular web-based revenue model is the affiliate
revenue model, which works by promoting links to relevant products and collecting
commission on the sales of those products, and can even work in conjunction with ads
or separately.
Advantages: One of the most obvious benefits of employing an affiliate revenue model is that it generally makes more money than ad-based revenue models.
Disadvantages: If you use an affiliate revenue model for your startup, remember that the amount of money you make is limited to the size of your industry, the types of products you sell, and your audience.
Freemium Model – The freemium model is one in which a company’s basic services are
free, yet users must pay for additional premium features, extensions, functions, etc.
One of the biggest companies to use this model is Linkedin, the most popular
business/social media platform.
Advantages: Similar to the previous model, the freemium model offers something free to users, which is a great way to give them a taste of your product or service while simultaneously enticing them to pay for something later on.
Disadvantages: This model requires a considerable investment of time and money to reach out to your audience, and even more effort to convert free users into paying customers.
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