Choosing the right revenue model for your startup
Choosing the right revenue model for your new business can be tricky. Revenue models are key since the definition of a revenue model is how your business makes money.
To preface, I highly recommend experimenting with a few different ways that your business can make revenue. Even if your new business is a “standard” or “typical” business like a law firm or any other main street business. It never really hurts to experiment with your revenue models at the start.
At the end of the day, your customers won’t remember your failures, they’ll only remember the successes. Keep that in mind as you work through determining your revenue model.
To help with determining your revenue model, here is a broad overview of revenue models that might work for your new business.
One of the most popular revenue models in theory is making money with ads. That means that you place another company’s brand on your content or product and that company pays you for that placement. The company can also pay your company based on how many orders you’re able to send their way through a promo code or an affiliate link where the link can track how many orders are placed through it.
If you’re a first-time founder that wants to build a social media company, it can be really tempting to just say we make money on ads and pitch that to investors. I’m sorry to let you know that that pitch won’t give you investor dollars most likely.
A revenue model based on ads or affiliate links typically only works when you have a large audience in the tens of thousands or more than likely, hundreds of thousands of followers. If you have a really niche audience, you may not need as many. It’s a balance between how large your audience is and the conversion rate of someone clicking through the ad or using your affiliate link.
If you’re building a YouTube community or a blog, an ad-based revenue model can work, but keep in mind that you’ll have to be patient if you’re just starting out. Building an audience takes time.
Some examples of ad-based revenue models are Facebook, YouTube, and Blogs.
2) Direct Sales
This is most common revenue model in history – direct sales. A direct sale revenue model is when your company sells a good or service and you receive money for that good or service. It’s a one-time transaction.
Direct sales have been around since the dawn of time with trading and to this day, direct sales still dominates much of the marketplace.
Direct sales can take the form of e-commerce sales or in-person sales. There’s no middle person with direct sales. It’s a sale between your company and your customer.
Companies that utilize direct sales would be Warby Parker or Sphero.
Typically associated with non-profits, donations are when a person or organizations gives money or goods to your organization with no expectation of receiving anything.
These are typically tax-write offs and occur when a person or organization strongly believes in what you’re trying to accomplish.
With platforms like Patreon, a donation revenue model is becoming more prevalent with new businesses – even for-profit businesses. If you’re a content creator (blogger, YouTuber, etc.), the use of this model might be something you could pull off. If you’re creating good content, people know that you have to make money somehow and will pay you to keep making that content if you have high quality content.
One tip with a donation revenue model is to find ways of creating sustainable donations. Whether that’s companies donating 1% of profits to you or donors that commit for a period of time, it’s in your interest to find ways of making donations consistent.
Examples of a donation based revenue model would be Worldvision.org or New Story Charity.
4) Indirect Sales
The indirect sales revenue model is when you have a product or service and someone else is selling it for you. Examples would be if you’re an inventor of a product and licensed it to a company or if you have given products to retailers to sell.
For retail, these could be under the direct sales revenue model, but even if you do sell products to retailers, they could still come back to you if the retailer isn’t able to sell the goods. That’s a pretty normal situation for retailers unfortunately, so it’s usually needed that retailers have to sell through your product(s).
If you’re a founder that is more technical or just wants to focus solely on creating, indirect sales can be a great revenue model.
If you’re a B2C (business to consumer) company, indirect sales can be great to get volumes up. As much hype as Amazon gets for closing brick-and-mortar stores, 90% of consumer sales are still going through brick-and-mortar retail. There’s plenty of sales to get there!
Companies that rely heavily on indirect sales would be Nintendo, Nest, and even Dyson back in the day as they explained in their How I Built This podcast episode.
Subscriptions have been the trending revenue model for the last decade or so now. This is when a customer pays a monthly (sometimes annually) fee to use a good or service.
Subscriptions have been a trending revenue model and quite popular for a few reasons. First, they provide reoccurring revenue for a company which is huge, especially for a startup where every dollar coming in is significant. Second, some customers like these better as it can make goods or services cheaper up-front. Instead of paying one large payment right away, subscriptions can allow for the payment to be spread out over a period of time.
A subscription revenue model greatly increases the lifetime value of a customer quite dramatically. Instead of a customer being worth $100 once, they could be worth $100/year would be one overly simplified example.
Netflix was one that really kicked off this trend when they used to deliver DVDs to your mailbox every month. Other companies like Squarespace, Adobe, and Spotify are now using them as their main source of revenue.
If there’s a revenue model that is the least used, it would most likely be the transactional revenue model. A transactional revenue model is when a company makes money based on the value of the good or service.
To demonstrate this, let’s say you buy a good for $100 online. To have that payment processed, companies typically pay around 3% of the total transaction to the credit card providers. So, Visa, or any other credit card provider, would earn $3 on a $100 transaction.
Due to it’s specificity to types of company, a transactional revenue model can’t be used for most companies. A transactional revenue model is mainly used in the financial industry with crowdfunding like Kickstarter, or with banking.
7) Combining Revenue Models
With all of these revenue streams in mind, it’s important to realize that these revenue models can be combined to diversify your revenue streams. This can really help to make your company more stable as it grows. However, with that in mind, you don’t want to diversify your revenue streams too fast. Stay focused!
Some ways of combining revenue models are pretty obvious. If you’re a B2C company, direct sales with e-commerce sales and indirect sales with retail sales are pretty common.
One way of combining revenue models that is becoming more popular is combining the direct sales revenue model with the subscription revenue model. That means you would sell a good directly to a customer and then that customer can purchase additional services to use the good even more.
If you’re a hardware startup, this way of combining the direct sales and subscription revenue models is almost becoming necessary to even exist.
Great examples of companies combining revenue models would be Peloton and Xbox.
For Peloton, they sell their bike or treadmill, and then you pay for their classes that integrate with their products. For Xbox, they sell their Xbox gaming systems and then to play online with friends or to just have more resources in a particular game, you have to purchase a Xbox Live membership.
Combining revenue streams can be a complete gamechanger for most companies, so if you can find ways of doing so, find a way to get there over a period of time. It doesn’t have to be overnight.
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