The revenue model of a business is a vital element of your business plan and Lean Canvas. I am therefore dedicating this section to it. You would be surprised the number of founders I have met that don’t know exactly how they are going to charge for their product or services. Others are confused by the differences between a revenue model and a business model or think they are the same. A revenue model is a significant part of your business model. The business model is how the business creates value, while the revenue model is how the startup charges for that value. The Revenue Model that you select is relevant to the income streams section of your Lean Canvas.
Your Revenue Model
A startup’s revenue model affects all areas of business such as branding, sales, marketing, finance and operations. In my experience it is usually bad idea to have more than one revenue model at startup. Early-stage startups should focus on a single revenue model to avoid confusion for their team, investors and customers about what your company does and where it is heading.
Google’s first primary revenue model was from advertising ‘Adwords’ (now called Google Ads). Since then, Google added many other products with their own revenue models such as Google Play and more recently Google Cloud Platform. The lesson here? Start with your core product or service and revenue model and perfect it. Google didn’t launch with Google Search, Adwords, Youtube, Gmail and Google Play. They scaled their services in unison with their organization.
Below, I have listed some of the most common revenue models that are relevant to startups below for you to consider.
Licensing Revenue Model
Companies that use this model create a product or service, protect the idea with a patent, design or trademark and authorize other companies to use it. Intel uses a licensing model by selling computer chips to computer manufacturers.
Marketplace Revenue Model
The marketplace model provides a platform for individuals and businesses to sell their products or services. An example of this is eBay, which is an auction marketplace platform. Another example is Etsy, which is a marketplace where artisans can sell their handmade goods.
Freemium Revenue Model
Freemium refers to Free and Premium. This model has gained popularity and is utilised by companies such as MailChimp. This email marketing software service has a free plan that later entices users to sign-up for the premium plan that has additional features. The Freemium model is a brilliant way to get people addicted to your product, so you can sell them on the premium version later.
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. Gawker uses an affiliate model by placing affiliate links throughout its website that link to online retailers such as Amazon.
Advertising Revenue Model
The Advertising revenue model is used by companies such as Facebook, Google and more recently, Pinterest. 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 users 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) utilize the subscription model.
Intermediary Revenue Model
These are the real ‘disrupters’ of the world. Intermediaries’ join business and consumer together non-traditional ways. AirBNB does this particularly well by providing consumers access to those who want to rent their spare space or 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.