Every entrepreneur should be familiar with the different revenue models at their disposal. After all, this model is your startup’s backbone and how it becomes and stays profitable. The value of making the best selection out of the gate can’t be stressed enough.
While there are times you may need to pivot based on unforeseen circumstances, it’s important to implement the best revenue model for your business from the start. The chaos of frequent switches can be just as detrimental and ineffective as an initial poor choice.
Selecting The Right Revenue Model
The key factor in picking a revenue model that works with, not against, your business is to direct your focus where it matters most. In most cases, you’ll need to start by examining your customer insights and direct competition. The latter provides a solid benchmark. Meanwhile, customer insights reveal if there’s room for innovation within the model. Once you’ve determined the above, you can explore which model is a problem-solver and adds customer value.
Top Five Revenue Models
There are a few variations out there, but most startups are largely based on the following five basic models:
1) On-Demand
Your customer’s needs are fulfilled as they arise, or rather on-demand. Every completed transaction equates to a payment. This model is frequently used by the hospitality, healthcare, transportation, and food industries.
On-demand business models have radically changed the way customers solve their on-demand problems by simplifying the process and making it more convenient and efficient. So, the on-demand revenue model is ideal if the problem your business solves for the consumer is common/frequent, and you have a better mousetrap way of solving it than established competitors.
2) e-commerce And Marketplace
Today, e-commerce accounts for one-tenth of retail sales, and it continues to grow yearly. Business models are accommodating the rising online buyer’s demands, and it’s easier than ever to cheaply and quickly launch e-commerce. This offers you selling power without the heavy burden of establishing inventory.
One highly prized asset here is that e-commerce enables you to make money on products within your specific marketing, distribution, and manufacturing margins. That’s not always possible in traditional retail veins.
Keep in mind that e-commerce and online marketplaces are two different portals. While e-commerce sites offer products direct B2C, marketplaces have an already established supply and demand. That’s not to say you can’t be both.
An e-commerce and marketplace site would own and sell its own products B2C and be an intermediary portal for other entrepreneurial sellers to connect with potential buyers.
Keep in mind that you also don’t have to just pick one revenue strategy, either. On-demand transportation companies, for example, are also intermediary marketplace models. They facilitate the on-demand transactions between drivers and passengers in return for a percentage of the ride’s cost.
A marketplace or e-commerce model works best if your business’s secret sauce is in matching up under-serviced consumers with a specific product and/or facilitating such a match with a secondary high-quality supplier.
3) Membership
This model is all about delivering a service or product direct to subscribing consumers in exchange for a set fee, which is usually yearly or monthly. It can be utilized in several different ways, including as a premium election, as part of a tier for how goods/services are offered, or as an exclusive delivery method. Think ad removal or other exclusive benefits and advantages.
4) Licensing And SaaS
Licensing entails you owning proprietary or IP (intellectual property) that are delivered to consumers and/or other businesses via licenses.
The difference between SaaS, or software as service, and licensing is possession and use. Licensing offers others something tangible to operate or use. Meanwhile, SaaS can be thought of as more of a hosted service environment for others to access online without a tangible product being involved.
5) Freemium
This strategy is very similar to membership. It’s common amongst app developers. The core product is free to entice users. Function, feature, and benefit upgrades entail a pricing strategy to then covert those “free” leads into paying customers.
Which Revenue Model Is Right For You?
You’ll need to evaluate your product/service value, target customer, and competitor saturation to determine which revenue model offers the most appropriate delivery and highest value.
Remember, you don’t necessarily have to pick only one revenue model, but you do have to ensure that your revenue models work together and add value and no unnecessary complication.
While you don’t want to jump ship every time your model hits a snag, you do want to stay open to pivoting as both your own business, its customers, and these established revenue models evolve.
Brandon Webb is a former U.S. Navy SEAL, Sniper, and finished his time in the Navy as the Naval Special Warfare Sniper Course Manager. A passionate Entrepreneur (Crateclub.us) and a New York Times bestselling author. Brandon Webb is a member of YPO New York City and, Harvard Business School OPM 56. Brandon Webb wants to thank all of the readers out there!
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