How do you intend to generate income? How can you create regular and sustainable income? What strategy will you use? These are crucial questions that will determine the financial health of your company. There are various ways to earn money. However, the selection of a revenue model should be a well-considered decision. It is therefore wise to carefully consider various revenue models.
What is a revenue model?
The revenue model is often confused with the business model or company model but is in fact one of its main pillars. A business model reflects the way in which you create, deliver and monetise value. The revenue model is used to establish where you are going to get your earnings from. In other words, exactly how will your business generate a profit?
Quite a few start-up companies ignore this aspect and later find themselves faced with inadequate revenue streams (=source of revenue) because they failed to analyse their revenues by customer segment beforehand.
Over fifty revenue models
Below, we will list a few of the better-known revenue models.
1. TRADE MODEL
This is a classic and simple revenue model that is particularly common in retail: you manufacture or purchase products and sell them (on) to your customers at a profit. This includes things like cars, clothing, books, food or electronic equipment. The main advantage of this model is that you are paid immediately upon purchase. One disadvantage is, for example, the fact that increasing sales prices can seriously jeopardise your margins. A judicious purchasing policy and the maintenance of consistent sales figures are crucial here.
In order to use this revenue model, you essentially need a shop or a webshop. It doesn't matter whether the products are physical or digital or what your audience is (b2b, b2c). The advantage of the webshop is of course that it does not require a physical location and enables you to reach a larger target group.
2. HOURLY RATE MODEL
This is the most commonly used revenue model for (self-employed) service providers. Examples include an accountant checking the books, a plumber repairing a toilet, a copywriter writing a press release, and so on. You are therefore paid according to the number of hours worked. The simplicity of this revenue model is its main advantage: if you work one hour, you charge one hour. Its biggest disadvantage is its lack of scalability. Given that ‘one hour of service’ cannot generally be broken down into costs and margins, it is important to sell enough hours at a sufficiently high price in order to achieve the desired turnover and margin. The calculation of your hourly rate is therefore very important.
3. SUBSCRIPTION MODEL
This revenue model is particularly useful if you sell products/services that can be purchased on a regular basis. This includes things like software, meal boxes, website hosting, membership to a gym, etc. B2B companies unwilling to tie up their capital in office furniture, machinery, IT, catering, etc. are increasingly looking for subscription solutions. To millennials, subscriptions are a natural mode for purchase and consumption, and it’s therefore a growing market. Who would have thought that it would one day be possible to subscribe to a bicycle? While remarkable, it’s something people have quickly gotten used to, and so the subscription business model will continue to expand resourcefully in the coming years.
This is a low-threshold solution for users who do not have to pay all costs in one go. It also offers them the security and routine of a service. As an entrepreneur, you benefit from a stable source of income, provided that you can retain existing customers and attract new ones. It is important to offer various subscription options and to not make it difficult for customers to cancel a subscription.
4. LICENSING MODEL
If you own the intellectual property rights to a product or service and want to grant others, in return for payment, the right to commercially exploit that idea, then you can opt for the licensing model. This model is mainly used for films, photos, drawings, patented or copyrighted technologies. The advantage for the licensing party is that it need not deal with the production, sales and marketing of the product or service itself. You therefore run almost no financial risk.
5. CONSUMPTION-BASED PRICING MODEL
This revenue model, as the name implies, is based on actual use. The more the customer uses, the more they pay. This model is mainly used when actual use is difficult to estimate in advance. It is essentially a variant of the subscription formula, whereby a basic cost/advance is typically set and subsequent usage is charged accordingly. Consider, for example, water and electricity connections, road pricing, etc. A more modern and recent example of this revenue model is The Cloakroom, a concept in which men receive a box of clothes by courier, which they can try on at home and, if necessary, return free of charge. The frequency is determined by the customer himself, who only pays for the garments he keeps.
6. ADVERTISING OR PUBLICITY MODEL
Many websites and blogs provide their visitors with quality content free of charge. If your website attracts a large number of visitors, you can sell advertising space to other companies, media or advertisers. In doing so, they will attempt to reach your readers or visitors. The revenue model of numerous media companies such as Google, Facebook, Youtube, but also daily newspaper Metro, which is distributed daily in stations, is based on this advertising model. This may become an important source of income for you, allowing you to invest further in quality content production. It is however extremely important to be able to continue to attract a growing number of visitors to your website and offer your advertisers a good return on investment.
7. AFFILIATE MARKETING
You can also earn money with “affiliate marketing” by selling as many of other companies’ products as possible through an ad on your website, a link in your newsletter or a post on social media. You are paid if someone clicks on the ad and subsequently performs the desired action. The desired action can be anything from a click, a download, a purchase or a subscription. Many large companies, like Amazon or Coolblue, have affiliate programmes, while there are also specific affiliate networks, like Daisycon.
If you’re a true fashionista, you can share images of clothing and fun outfits which bring your visitors to the website of the brand in question by clicking on these images. If they go on to purchase these clothes, you receive a small percentage of the sale.
8. FREEMIUM OR ENTRY-LEVEL MODEL
Freemium is a portmanteau of two words, namely free and premium. This model offers users a free product with a number of basic functionalities. Users who want to use more product functions can buy a premium version of the product. This is the same product but with additional options.
A well-known example is the music service Spotify, which users can listen to for free if they listen to advertising. By switching to Spotify Premium, you are switching to a subscription service. Numerous online games such as Candy Crush also employ this model.
The advantage of the freemium model is that you can reach many people by offering something for free and can therefore build up a strong customer base. This customer base is in turn interesting for advertisers. In order to successfully implement the freemium model, you do have to find the right balance between free and paid features. The free features have to be sufficiently valuable to attract new visitors. The premium features have to provide sufficient added value to convert free visitors to paying visitors.
9. BAIT AND HOOK MODEL
This model was devised by King C. Gillette, inventor of the disposable safety razor. Here, you offer a cheap entry-level model and derive your profit from the more expensive add-ons or components that have to be ordered separately from the same brand. For example: loose blades for razors, nespresso capsules for the corresponding machine, ink cartridges for printers etc. This ties customers to the brand for a longer period of time. It is difficult to combine this model with a sustainable business model.
10. SERVICE MODEL
One model that can generate regular income is the service model. This model is often used for products that are difficult for customers to maintain themselves. The actual turnover is generated by maintenance or service contracts. IT companies, garages, specialist fitters etc. all offer a number of additional services such as repairs, upgrades, help desk, maintenance, troubleshooting etc.
11. RENTAL AND LEASING MODEL
Rental is of course a well-known phenomenon, but is also increasingly used on products that you would not expect: for example clothing, tools, carpet tiles etc. The main advantage is that customers need not make a purchase and also help the environment through reuse (also read our article about business models in the circular economy). A particularly future-proof revenue model!
12. COMMISSION OR BROKERAGE MODEL
Real estate agents and recruitment and selection agencies have been using this revenue model for decades, receiving a commission (a fixed amount or percentage) on the sales price or financial transaction. Businesses that employ this model today include Paypal, Booking.com, etc. These are often platforms that do not own the products/services themselves and therefore need not concern themselves with purchase, transport or storage. While it is certainly getting easier for customers to directly contact the other party via the internet, these platforms remain a convenient solution for many.
The commission-based revenue model is also widely used in the auction world. Auction houses, notaries (public sale of houses) and marketplace websites like eBay are well-known users of this model.
13. THE FRANCHISE MODEL
Franchisees pay you in order to provide products and services under your banner. We will not further explore this in this article. If you find this model interesting, we recommend reading this article: Starting an own franchise business
14. DATA MODEL OR MARKET INTELLIGENCE MODEL
As the name suggests, data provision is the key here. Google, Facebook, Twitter all collect data that they in turn sell to anyone looking for more insight into their customers in order to market their products or services. A combination with this model is increasingly being used as more and more data is available which, through heightened analysis, can be used to create valuable information.
15. THE HYBRID MODEL
A hybrid model is a combination of two or more different revenue models that can strengthen one another. In practice, of course, a huge number of companies employ hybrid revenue models. Supermarkets selling meal boxes, for example, have a hybrid revenue model. Freemium is best combined with a subscription model. In practice, one sees many online businesses employing multiple business models at the same time.
What revenue model is the best fit for you?
As you can see, there are many revenue models to choose from. Choosing the correct revenue model is of crucial importance when setting up a profitable business.
First develop your business model and see which revenue models best go with it. Assess the pros and cons of each revenue model and decide how they affect your business model. Don’t forget that you can combine various revenue models.
Heve the courage to question your revenue model
Already started your own business? Have the courage to regularly challenge your model: after all, each model has a different perspective that can clarify the outlook on your business model. Take a look at what is happening in other industries or explore what new technologies or digitisation can do for you.
Economic circumstances are constantly changing. So continue to evaluate your revenue model and in doing so, give yourself the chance to be and remain valuable.