Introduction

Revenue models are an important part of any business, and small businesses should pay close attention to them. There are several different revenue models that can be used by small businesses, and each has its own advantages and disadvantages. Before choosing a specific revenue model, businesses should evaluate their needs and the market conditions prevailing at the time.

When it comes to revenue generation, SMEs face unique challenges. Some need to find ways to reduce costs, while others may need to explore new revenue sources. In this article, we’ll discuss how various revenue models can assist SMEs in achieving their objectives. We’ll also look at the benefits and drawbacks of each model and offer tips on how to choose the right one for your business. Ready to start generating some extra income? Let’s get started!

At the conclusion of this article, readers should be able to answer the following Google-generated questions:

• What are the main types of revenue models?
• How do you explain a revenue model?

Overview

You have already found your target market and decided on the type of business you want to start, but now you must figure out how you are going to make money doing it. If this sounds complicated, it is not! The simplest way to comprehend revenue models is to consider what occurs after a customer makes a purchase. What are the steps that happen between buying and getting paid?

What is a revenue model?

A revenue model is a way for your company to make money. Whether you are a start-up or an established business, it is important to understand how you can generate revenue for your business. Which model is best for your business will depend on the type of business you run and the services or products you provide. For instance, if you run a website that does not sell physical products, such as eBay, it may be more advantageous to use a cost-per-sale model in which users pay a fee whenever they purchase something from your site.

As part of the strategy for any business, big or small, it is important to properly identify and define the revenue model(s). A revenue model is a framework for creating revenues. It pinpoints which revenue source to engage in, what value to offer, how to price the value, and who pays for the value.

Without a well-defined revenue model, that is, a clear plan of how to generate revenues, new businesses will more likely struggle due to costs that they will not be able to sustain. With a defined revenue model, a business can zero in on a target audience, fund product or service development, establish marketing plans, initiate a line of credit, and raise capital.

Business Model vs. Revenue Model

What is the distinction between these two terms?

If you are going to start a business, you are most interested in revenue models: how much can you make? But what exactly is a revenue model and how does it differ from a business model?

At its core, your business model explains why customers would pay for your product or service—or, more precisely, why they would pay at all. Your revenue model, on the other hand, tells you how much money you can make once those customers start paying. However, to grow sustainably over time, an effective business must have an appealing offering (revenue model) and a strategy for delivering that offering (business model).

The revenue model is a key part of a company’s business model. It identifies the value that will be created to generate revenue and the distribution channels for the product or service.

Consider the following while developing your own revenue model

Design, Deployment, and Scalability

How straightforward is it to create, deploy, and scale a new revenue model?

If a revenue model is too complex or costly to implement, potential customers may shy away. To ensure a successful launch, pick a product that is easily integrated into your product from the start or does not require significant changes in customer behaviour.

Timing of Revenue Recognition

Your company will not receive any cash from its users at once upon launch – you will have to wait for customer adoption rates and your conversion rate to increase before users start buying. Choose a revenue model that complements these realities.

Types of Revenue Models

Any business may have multiple revenue streams and, as a result, multiple revenue models. The revenue model will vary according to the industry and the product or service type. The following are some of the more prevalent revenue models:

1. Transactional Revenue Model

Companies that employ a transactional revenue model make money by selling their goods or services to customers. This is based on the sale of goods and some services, the majority of which are one-time transactions. Apple is an example of a company that uses a transactional revenue model. When someone buys an iPhone, they are paying for it with money and receiving valuable goods in return. Or, when we dine at a restaurant, they are compensated each time they bring in new customers, who pay with money. In both cases, these businesses do not need to worry about whether people enjoy their product because what matters is how many people are using it.

The transactional revenue model is less appealing because each sale requires the company to do something new. Previous sales to a customer do not guarantee future sales (except when a contract is signed), but this does not have to be a problem if the product or service meets a frequent need or solves a frequent problem.

Advantages

The transaction-based revenue model has several advantages, including:

1. It provides a consistent source of income, which can be critical when the company is expanding or otherwise investing heavily in its operations.
2. It can shorten the time between when a business incurs costs and when it receives revenue from its operations to cover those costs.
3. It can increase a company’s cash flow, as customers pay for each transaction and the money is deposited into the company’s bank account immediately.
4. It can allow the company to negotiate its own terms for payment and collection, whereas other types of financing often require the use of intermediary institutions that set their own payment terms and collection policies.

Disadvantages

The disadvantages of a transaction-based revenue model include:

1. It is short-term oriented, which precludes long-term planning.
2. Forecasting future earnings is difficult.
3. There is no way to predict how much you will be paid, which makes salary and bonus determination difficult.
4. Prohibitive cost of customer acquisition.

2. Subscription/Membership Revenue Model

A simple approach to your revenue plan is through a subscription model. You can charge your users on a recurring basis, either per month or per year. This allows you to earn money each time they visit your site without incurring additional costs or worrying about marketing; however, you will need a sizable user base to make it worthwhile. If you want to earn money from your site as soon as possible and are not concerned with making it public, membership may be for you.

Businesses that adopt this model usually develop techniques to offer paying members certain advantages over non-paying members. This model usually guarantees revenues for the membership/subscription period.

Advantages

The benefits of the subscription-based revenue model include:

1 – The subscription revenue model provides predictable revenue streams.

2 – Additionally, it enables improved cash flow management and a healthy bottom line.

3 – Subscription-based models are adaptable, as they can be applied to a variety of scenarios.

4 – Additionally, they free up your time to focus on other aspects of your business, such as marketing and development.

Disadvantages

1. Subscription-based revenue models can be challenging for businesses to implement at first.
2. Businesses must determine the right price point, which is hard when you’re starting out and don’t have a lot of data.
3. Another challenge is determining the right frequency of service delivery, or how often customers will receive new products or offerings from your business.
4. You may be forced to incur losses if costs significantly increase during the subscription period and cannot be passed on to customers.

3. Licensing Revenue Model

The licensing revenue model is one of a business that wants to keep ultimate control over its product. When you sell licensing rights to your product, you are selling a certain amount of control over how your product can be used and distributed. For example, you might want to keep the rights to use your software on certain platforms while allowing others to license it for use in other areas. Licensing arrangements vary depending on what type of business you are working with and where it operates. Licensing can also include digital products like eBooks, music, or movies; businesses that create these products often work with publishing or distribution companies for coordination of copyright laws and distribution methods.

Selling renewable licenses is a fantastic way to guarantee future revenues to customers using the license.

Advantages

This model has advantages over other models:

1. In licensing, the company does not have to pay for additional employees to make sales. Rather than that, they simply need to create a few documents outlining how their product/service works and distribute them for free. That way, others will appreciate what makes it so special!
2. The company also requires less capital upfront—rather than incurring debt or raising capital through investments (which takes longer), all those upfront costs are covered by those who wish to use their product or service.
3. Recurring revenue
4. Predictable revenue
5. Branding opportunities

Disadvantages

The disadvantages of the license-based revenue model include:

1. Lack of a predictable cash flow.
2. The risk of underselling products.
3. A product may become outdated quickly.
4. The potential for customers to not renew their licenses or subscriptions.

4. Rental/Leasing Revenue Model

Rental revenue models tend to be a variation of the licensing model. Under a rental model, you let your customers use assets for a fee, and it can work for almost any kind of product or service. If your company specializes in large assets like machinery or real estate, renting out those assets is one way to generate revenue from them. On the other hand, if you have small items that are easily replaceable, such as office supplies, you might try renting them out instead of selling them outright. By renting them to a variety of businesses within a brief period, you can increase your sales volume over the long term by leveraging customer loyalty.

Although this model is associated with buildings and vehicles, it is applicable to any rented or leased asset.

Advantages

1. The company can focus on its core business, rather than getting bogged down with customer relationship management and customer support.
2. Since the customer is paying only for a service, the company does not have to worry about product upgrades and maintenance.
3. The company has a steady stream of revenue from customers who pay monthly or annually for the service.
4. A rental or leasing revenue model is easy to set up and has low start-up costs.
5. The customer can use the asset only when they need it and do not have to commit to using it whenever they want.
6. If a customer cannot pay, they can simply return the asset without any hassle. This helps in reducing bad debts.

Disadvantages

1. You may lose money on customers who stop paying for your product but keep using it.
2. You miss potential opportunities to upsell your customers on additional products and services.
3. If you’re leasing something like office space, there could be hidden costs like maintenance fees that aren’t included in their monthly payments.
4. A revenue model requires a client to pay on time or face a loss.
5. With the revenue model, there is no way to show the product’s quality to increase sales.
6. Because the company is selling a service rather than an actual product, there are fewer ways for the company to grow its revenue.

5. Freemium Revenue Model

One of the most popular new business models is the freemium model, which gives a basic product away for free and makes money from premium features. A notable example of a successful freemium app is Dropbox, an online file storage service that lets users get started for free with 2GB worth of storage space. The catch? You must pay $9.99 per month to upgrade from 2GB to 100GB, but this is still more than generous in comparison to some competitors. The biggest appeal here is the ease-of-use offered by Dropbox: users do not have to make any major decisions like paying for file storage upfront or installing something new on their device just to get started.

This is frequently found in software, apps, and the like, but it is also frequently found in consulting professionals who provide “free” basic consulting services to customers but reserve advanced features and attention for paying customers only.

It is a good model to attract potential customers to try out certain aspects of an offering and hook them into paying. It is a highly popular model, with notable success.

Advantages

1. The freemium model is a profitable option for startups that are just getting started.
2. The freemium model aids in the growth of your user base, which results in increased revenue once you begin charging users.
3. The freemium model helps build brand loyalty among users.
4. Clients can test the product prior to purchase, which results in increased sales due to their familiarity with it.

Disadvantages

1. It’s difficult to convince people to upgrade.
2. Free apps saturate the market, making it difficult for businesses to compete.
3. It’s difficult to determine the appropriate price for upgrades.

6. Advertising Revenue Model

Being an aggregator is a popular revenue model for online advertising. You aggregate content from various sources and present it to your audience. Visitors to your site come to learn about current events, business trends, or simply find something entertaining. Customers who want to reach audiences are charged in exchange for driving traffic to their pages. Many of these businesses earn money by taking a cut of each transaction—typically 30%. This allows other creators, who may not have as big of an audience, to generate income based on page views (like Google AdSense). Companies that adopt an advertising revenue model include Outbrain and Taboola, though they are best known for their video content services—anything can be advertised!

Advantages

1. It’s a simple and straightforward method of monetizing an app/website without the need to develop an e-commerce feature or charge users upfront.
2. You can use the data you collect from users to serve highly relevant ads, which increases the appeal of your ads to advertisers.
3. Advertising provides businesses with a much easier-to-track return on investment (ROI) than other types of revenue models.

Disadvantages

1. The Ad Revenue Model Is Expensive
2. The Ad Revenue Model Doesn’t Encourage Quality Content
3. The Ad Revenue Model Requires a Lot of Traffic

How to choose a revenue model for your business?

You’ll need a fully formed business plan that includes a ready business model with all its key instances before settling on a revenue model. As a result, before choosing a revenue model, you will need to take a few steps.

Define your value proposition. What is it? Define its purpose, its operation, and the benefits it provides to the consumer. Prepare to explain the target audience for your product or service and the type of appeal it will have to them.

Investigate the market’s state and customer segments. This step entails determining how your user persona typically purchases items. For example, certain customers are more receptive to single purchases, while others are more receptive to upgrades or in-app purchases.

Conduct a competitive analysis of your competitors and their products. You will need to research your competitors and their revenue streams. This should show you your competitors’ strengths and weaknesses, and where your business can thrive.

Conclusion

Revenue models are one of the most important aspects of any business, as they determine the path to profitability. In this blog, we have discussed some of the most common revenue models and outlined their pros and cons.

Startups and small businesses do not necessarily have to stick to one model. For instance, Amazon is a company that has implemented all six models despite its origins as an e-commerce site for books. As your startup grows, new models will evolve. In the initial stages of your business, start with the model that delivers the highest value without necessarily reinventing the wheel. While competing products can serve as a road map, let your customers tell you what they need and how.

Do you have a better understanding of which model would work best for your business? If not, don’t hesitate to call us today! We would be more than happy to help you determine the best path to profitability.