How To Choose A Revenue Model - Guide for Entrepreneurs

Nowadays, things evolve very quickly, and so does the business world. How to choose a revenue model depends on understanding the best, most popular, and most common revenue models available. 

You need to consider the main, tried, and tested practices to create a solid foundation to build on. For startups, this often means exploring the best revenue models for startups that have proven effective. 

Based on research, in this short and compelling guide, I'll let you know how as a business owner you can decide which revenue model is suitable for your business.

What is a Revenue Model?

So a revenue model is exactly that, the way in which your company earns money for whatever product or service you, most likely sell. It describes how an organization creates value and revenue through the sources, channels, and pricing strategies used. 

Revenue models are no longer a one-size-fits-all approach. The choice of a revenue model depends on various factors, including the type of business, industry norms, and the target audience. In this blog, we aim to guide entrepreneurs in selecting the right revenue model for their business, delving deeper into understanding different revenue models and the factors to consider when making this pivotal decision.

8 Revenue Models for Startups in 2024

There are several revenue models available today, each with its own unique characteristics and suitability for different types of businesses. Let's explore some of the most common:

1. Product/Service Sale

This is perhaps the most straightforward model, where a business sells a product or service for a profit. Companies like Apple have mastered this model by selling iPhones and related services. The key to success in this model is to create products or services that meet the needs and desires of your target audience.

2. Product/Service Sale

The subscription model has gotten tons of traction, and for good reason: it helps ensure coming months generate consistent cash. Providing a solution in the form of a product or service on recurring terms could help you create recurring income. This is suitable for businesses with a good number of users and high customer satisfaction. Subscription revenue is a great way to ensure your business has at least one large, consistent source of income every month.

3. Freemium

This model offers basic services for free while charging for premium features. LinkedIn is a prime example, allowing free profile creation while charging for additional features like InMail and premium networking tools. Freemium models entice users with a free entry point and then encourage them to upgrade for enhanced functionality.

4. Advertising

The advertising model involves offering free content or services to users and generating revenue by displaying advertisements. Google, through its search engine and various online platforms, is a prime example of this model. Advertisers pay to have their ads displayed to a large audience, and the platform benefits from ad revenue.

5. Affiliate Marketing

In the affiliate marketing model, businesses earn commissions by promoting and selling products or services of other companies. Affiliate marketers typically receive a percentage of the sales they generate. Amazon Associates is a well-known example of an affiliate marketing program, where website owners promote Amazon products and earn a commission on each sale.

6. Licensing and Royalties

Businesses can generate revenue by licensing their intellectual property or products to other companies. This model is common in the entertainment industry, where music artists, authors, and filmmakers earn royalties from the use of their creations. Licensing allows companies to expand their reach and income without significant production or distribution costs.

7. Marketplace

Marketplace platforms connect buyers and sellers, taking a commission on each transaction. E-commerce marketplaces like eBay, Etsy, and Airbnb operate on this model. They provide a platform for individuals and businesses to buy or sell products and services while earning a percentage of each sale.

8. Software as a Service (SaaS)

A software distribution model in which a company provides access to its software application over the internet on a subscription basis. Users pay recurring fees to use the software without the need for local installation, maintenance, or ownership. Adobe is a SaaS that offers a suite of creative software applications, including Photoshop, Illustrator, and InDesign, on a subscription basis. 

How To Choose The Right Revenue Model For Your Startup

1. Test Out a Few Models

Don’t be afraid to try multiple different types of revenue models. By experimenting with different revenue models, you can see which one works best for your platform. This could involve combining an affiliate revenue model with a subscription model or trying out advertising revenue. 

2. Study Your Past Data

Look at your previous revenue trends and see what has worked and what hasn’t. This can help you determine which model might be the best fit. For instance, if you have a loyal user base, a subscription revenue model might be more effective than relying on one-time sales.

3. Financial Forecasting

Prepare a revenue forecast under different scenarios This requires estimating potential revenues at different models and choose among them to the one that makes more sense for revenue growth. Financial forecasting can help you project the high-end revenue possibilities for each model and select one that brings in a substantial amount of income over time.

4. Keep in Mind the Financial Components

Consider the financial elements of each revenue model. For example, a subscription model provides consistent, predictable income but requires continuous customer satisfaction. On the other hand, an affiliate revenue model can be more volatile but might have lower upfront costs. 

5. Study the Competition

Take a look at your competitive set. Reflect on their business models - what are some of the different revenue models they have adopted. This way you can know what might be the best for. To the extent a competitor is using markups around an e-commerce context, that concept should at least be evaluated.

Conclusion - A Few Final Words!

In other words, choosing the perfect revenue model will require you to think long and hard about what exactly your business accomplishes. Through trying various revenue models, analyzing what has happened so far, and predict the future earnings you should be able to determine which is more suitable for your startup. By choosing subscription model, services, or any markup strategy - constructive planning and comprehension of a revenue model are basic to strengthen an underlying base that supports your business while steering towards success.