What is a Revenue Model?
A revenue model is the way that a business charges customers for its products or services. While many businesses have more than one revenue model, if you are starting a business, you should start with one revenue model before creating another.
Google’s initial revenue model was advertising. ‘Adwords’ (now called Google Ads) allowed people to place ads on the Google search platform. Since Adwords, Google added many other products such as Google Play and more recently Google Cloud Platform – each with different revenue models.
I have listed some of the most common revenue models below.
How is a Revenue Model Different from a Business Model?
A revenue model is a part of a business model. The business model is how the business creates value, while the revenue model is how the startup charges for that value.
TIP: If you are using the Lean Canvas, the revenue model that you select is relevant to the ‘Income Streams’ section.
Top Revenue Models
Licensing Revenue Model
Companies use this model if they have intellectual property protection over their brand or their products or services. That IP protection means those companies may authorise other businesses to use their products or services through a license agreement.
The license agreement allows the licensee to use the product or service.
Example of a Licensing Revenue Model
Microsoft uses a licensing revnue model when selling its Office suite of products. Users are not purchasing the entire rights to Office, rather they are purchasing the rights to use the product for the term of the license.
Marketplace Revenue Model
The marketplace model provides a platform for individuals and businesses to sell their products or services to others, through the internet. Generally, those advertising on the marketplace offer products or services in exchange for paying a fee to use the platform.
Examples of a Marketplace Revenue Model
Two examples of the marketplace revenue model is eBay and Etsy. Ebay is an auction marketplace model, as many of the products are sold through an online auction, while Etsy is a marketplace where its users sell their products directly.
Freemium Revenue Model
Freemium is a combination of the words ‘free’ and ‘premium’. The Freemium model allows users to register and use the product for a free version. Later, the once the user is hooked on the services, the provider entices the user to upgrade to the premium version which has more features.
Example of a Freemium Revenue Model
This freemium revenue model is utilised by companies such as MailChimp. This email marketing software service has a free plan which is quite generous. Users can upgrade to Mailchimp’s premium plan with the additional features.
Affiliate Revenue Model
The Affiliate Model is where companies place ads on their website with links to products and services of third parties. If a website visitor clicks on a link and purchases a product, the company gets a slice of the profits.
Example of an Affiliate Revnue Model
Gawker uses an affiliate model by placing affiliate links throughout its website that links to online retailers such as Amazon.
Advertising Revenue Model
The Advertising revenue model is used by companies, who are generally publications, that utilise part of their publications’ space for advertising.
Advertising Revenue Model Examples
While magazines usually come to mind when thinking of examples of advertising revenue models, companies who have an online precence, such as Facebook, Google and Pinterest are also examples of the advertising revenue model. These companies allow advertisers to purchase ads for display on their platform.
Subscription Revenue Model
If you have Netflix at home, then you’ll be very familiar with this business model. It charges a recurring fee per user over a certain contracted period of time for a service. Another example is an internet service provider (ISP) such as Telstra or TPG who charge a monthly fee to subscribers for their monthly plan for internet access. Netflix also uses a Subscription revenue model. Most Software as a Service (SaaS) utilizes the subscription model.
Intermediary Revenue Model
These are the real ‘disrupters’ of the world. Intermediaries’ join businesses and consumers in non-traditional ways. AirBNB does this particularly well by providing consumers access to those who want to rent their spare space or the entire property.
Which revenue model suits your product or service? Remember, it is important to ensure that you focus on one revenue model, to begin with.
It is not uncommon for companies to change their revenue model. For example, Adobe used to sell boxed versions of Photoshop – a licensing model. In 2013, Adobe began to provide Photoshop and their other products on the cloud as a Software as a Service – a subscription revenue model.