The purpose of the revenue model is to manage various streams of revenue for your business. The business also gains insight into estimating the marketing budget for various channels and determines the pricing strategy. Simply put the revenue model is a framework that assists business to understand and exploit the viable sources.

Often people use business model, revenue model and revenue stream interchangeably but they are very different. Business model specifies what does your business do, who are your audience and for whom do you create value for. Revenue model demonstrates how does your business make money. Revenue stream tells you where does your income come from.

Let us first look at the traditional revenue models for a business.

1.Transaction-based revenue model

This model is simple and straightforward traditional transaction model.

You make money from selling single or multiple products. Once you find an acquisition channel you can retain the channel while keeping up and adapting to market trends. Transaction-revenue model is typically adopted by brick-and-mortar stores/restaurants. There are online and offline channels adopted by them.

This model requires higher capital as these are typically the tradition brick and mortar store. Typically import, export or domestic trading/restaurants use this model.

You could adopt this model if you plan to sell physical products offline or/and online.

2.Service-based revenue model

You make money by selling your time, expertise, and/or labor for a set amount. You can either use an online or an offline channel. If you’re a start-up you need to invest minimum capital on rental space and can carry out from your home as well.

Typically includes, consulting services like, financial/legal advisory. You can start the business at your own place and move to a rental space/business space once your expand. This is one of the most common revenue models. A business produces a product or manufactures a new product for sale, and generates revenue as the customer pays for it. The products can be durable, non-durable or service-based.

This model is typically adopted by restaurants, health and nutrition companies, telecom companies and software products. Many companies don’t use this model because it requires hiring additional resources for sales; small and medium companies might not have sufficient budget for this.

Customers pay directly for the product in person or online; products sold on ecommerce sites, diverted to the seller site via ads, food orders are placed through restaurant’s own website or food aggregator sites.

3.Commission-based model

This model is applicable for both online and offline businesses. Offline businesses display an ad of a complementary product at their store or restaurant. For instance, restaurants promoting an F&B-related product and get a commission on each product sold or pay for one-time paid advertisement just to promote the products.

• Advertising-Based Model

Usually extremely competitive sites in a particular niche have high demand for their space. For instance, online economic times website displays an ad for a local times newspaper. Advertisement based model is used as an additional source of income generation and only used by search engines and social media or competitive websites. Social media sites and search engine site generate their main source of income from this model. Other small to large businesses generate paid advertising income as an additional source of income.

• Affiliate-Based Model

This model gained popularity in the recent times and is a main source of income among growing and established social media influencers. The influencer/celebrity can promote any consumer goods from restaurant to beauty products or technical or service-based products. If they create lifestyle-related content and if one is a technical content-related influencer then they promote software products, applications and certifications and generate a moderate to high commission on a products sold. If one has low customer base then their commission is lower compared to influencers with high customer base.

The below are the models that have emerged in the recent past with evolution of digital and online services. If you’re a selling a software or an online service then the below models are applicable:

• Licensing/One-time purchase model

This model mostly entails licenses used by an individual or a group of users. For example, Microsoft Windows, Apache Server, a majority of video games.

•  Subscription or/and recurring payment

When one receives access to software or online resource by making recurring payments directly to the seller in most cases and sometime the services are hosted on popular ecommerce sites. For example, Adobe Creative Cloud, The Economic Times Online newspaper, Adobe hosted on Amazon site.

• Pay per use

Mostly used by different cloud-based products and services that charge you for the computing power, memory, resources and time used. Examples are Amazon Web Services and Google Cloud Platform.

• Freemium/Upselling

The basic product is available for free but additional features will be charged. Additional features could be; extracts information from unlimited data set and processes information, bonuses, plugins, or extensions in case of video-calling application. For example, LinkedIn, Zoom, Skype.

•  Hybrid pricing

Products are available for free for a particular time period after registration and at the end of the time period you have to choose a plan and pay for continued services. Most of these products mandate you to provide for payment details when you register for the product and payment is automated at the end of the free period. For example, Mailchimp, Amazon Web Services, and Salesforce.

How to choose a revenue model?

The revenue model depends on:

1.Value proposition: How your customer’s life will improve or what problem are you solving for the customer? Most businesses offer vitamins in the market where there is opportunity to sell a pain killer; vitamins have other vitamin substitutes whereas a pain killer doesn’t have too many substitutes. Often value proposition and unique selling proposition is confused. Value proposition is solution offered to solve the customer’s problem while Unique Selling Proposition (USP) emphasizes on the superiority of your brand (directly and most time indirectly over others).

Let’s look at some popular value propositions for these brands:

• Nike’s value proposition is to “Inspire anyone to become an athlete”
• Apple’s value preposition is to “The experience is the brand”

For instance, using phrases like new and improved, best in the town/city are examples of USP

Some popular USPs are:

DeBeers. “A diamond is forever”

Avis, “We’re number two. We try harder.”

2.Consumer buying patterns & Product market: Create a user persona, understand the customer buying patterns; one-time, weekly purchase, buying channel; online or offline etc.

3.Competitor Analysis: Understand the revenue stream & mechanism used by your competitor.

Most times the value preposition is charged, which is paid value preposition; subscription fee, freemium, pay for usage/consumption.

There are times when the products are free-to-use; like YouTube, Google, Facebook and they depend on the advertisers for their revenue stream. The revenue model is crucial for the business as it helps the business determine the revenue source to prioritize, understand purchasing patterns of the customers and how to price the products.

Without a revenue model, companies lose track of costs and their liabilities exceed their current assets and leaves a blur future for the business.