Guide to Revenue Models: 6 Types of Revenue Models

Roshni Khatri

24th Jun'22

To start a business and take it to the heights is a tough task. As we all know the fact that entrepreneurship is the most crucial action as it creates pressure on the business owners to fit into the market demand and competition. Every business’s success and growth rely upon the revenues, which can lead your venture in the right direction. By adopting a revenue model, you can know how to categorize and track small business expenses to help you in generating more returns.

Every business person has to make several changes and constant planning to build and design such a trade model that can create value in the market. This model is inclusive of several components such as the operating model, the ways to create value and the mechanism that specifies the business operations. 

In all this process, it is essential to make a blueprint of the revenue model that is equally important to decide the feasibility and long-term projections of the business and money-making process. So let’s understand this whole concept more precisely!

 

Revenue Model

 

What is the Revenue Model?

A revue model is a structural process that elaborates the revenue earning strategy of the business. It includes the revenue-generating techniques, revenue sources and target consumers of offered products. 

Moreover, we should focus on the tools and forms of revenue generation. As it can be in the form of commission, mark-up, arbitrage, bids and many more. So a revenue model is the part of the business model that includes every aspect of the revenue generation strategy of a venture. In short, the revenue model is the tool that describes how a business can succeed.

 

Why is the Revenue Model Important for a Business?

The revenue model is basically made to measure the income of the target audience who belong to different demographics and locations. With the help of the revenue model, a business can determine all the crucial aspects and factors that can help it thrive and grow. It also helps the companies to gather the information about the requirements of funds to focus on the sales and marketing, and on a target audience.

In addition to this, a proper revenue model assists a business in developing the goods and services for customers and ultimately determines the future in the particular market. In absence of this model, the companies and start-ups can generate more costs that can make their business unsustainable. 

 

Major Types of Revenue Models

There are many types of revenue models and some of these are described as under:

1. Markup

It is a common model that is majorly used by retailers, wholesalers and even e-commerce sites. Here I will explain to you how this works, in this model the revenue is created by buying a product and then increasing the price before selling it to the consumers. 

2. Subscription Model

This model enables an organization to use the product or service for a predetermined rate and period of time. These companies are like cloud-based, (Saas) companies and entertainment hosting companies. Here I would state that this model is different from the licensing model. In the licensing model, the subscription has a fixed term. Moreover, the licensing is perpetual until the owner of the property or licensee terminates the deal. 

 

Revenue Model

 

3. Production Model

In this model, as the name states the businessman manufactures a product for sale and generates the revenue by selling it to the customers. It is a quite simple and common model that several producers use. 

4. Licensing

A business can generate revenues by licensing the intellectual property for other businesses to use at their company. It can be the prime aspect for a company if it owns any intellectual property like a patent. Some organizations sell their own versions of the products while others license the design to other companies. In other words, it is a charge or payment of owning intellectual property and giving license to others to use it.

5. Advertising

If you have an online channel where a large number of visitors like busy stores or websites then advertising can be the best mode of generating the revenues. This model is paired with another source of income as a supplement to the main revenue stream and makes up the income for content driver ventures.

6. Pay Per User

It is the revenue-generating strategy where you have to pay for the content you use and choose from the available services and products. The company earns money every time the customer uses the services. This model works alongside subscription revenue with single-use purchases available to discounted monthly plans. 

Thus you should also know about the pillars of entrepreneurship that can assist you in choosing the best revenue model, according to your trade status.

 

How to Choose Revenue Model for Your Business ?

To choose a revenue model you need to develop a business strategy that includes the business model with all the key instances. So you have to just focus on a few factors for securing a revenue model, and these are as under:

Know the Market

To choose a proper revenue model you should first focus on the market. Like where are your consumers? How are they accessible to you? If your target is single customers then address subscription options that are targeted to their needs. On the other hand, if your target is larger companies then you need to have a customized version of your product. With this, you can also consider the license-based option that can allow you to establish solid high return long-term plans.

 

Revenue Model

 

Know the Product

Sometimes the nature of the product dictates the best revenue model itself. So it is essential for you to assess the performance of the product and how it compares with the other competitors. Thus an awareness of the product enables you to choose a revenue model that hits the value-to-pay sweet spot.

Predict the Unexpected

According to the changes in the market, your initial revenue model is also affected. So I would suggest here that you may begin with the subscription model which assimilates elements from advertising, data sales, and affiliate models with the opportunity and time. So after assessing the fraction of your potential success, you can move to the license revenue model. Thus it is important for you while shifting the revenue model that it should complement what you have used earlier. 

A revenue model is based upon customer's preferences and choices, as customer service plays a vital role in business, so we should keep this fact in mind while choosing any model.

 

Conclusion

There are several revenue models according to the business and all are having slight differences. Such as if your SaaS Company is making your own software product, you can get all that with an arbitrage model. Well, the choice of prime revenue model that does work for you and your product and company is solely yours. With this, you should keep your product and market all the time in your mind. 

We at OpenGrowth, are committed to keeping you updated with the best content on the latest trendy topics from any major field. Also, both your feedback and suggestions are valuable to us. Do share them in the comment section below.

A keen observer, who loves to spend time with nature. A fun loving person, enjoys to explore the new aspects of life. Passionate about reading and learning new things. Roshni is dedicated towards her work and has worked in different professions.

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