Guide to Revenue Models: 6 Types of Revenue Models

A revenue model is a blueprint that shows how a startup business will earn revenue or gross income from its standard business operations, and how it will pay for operating costs and expenses. This model is one of the key performance indicators (KPIs) for a company to measure the profitability of its pricing strategy and product sales.

Revenue model is sometimes used as another term for a business model, which is a structure for generating value for customers. However, these terms are not interchangeable but there is a connection between them. A revenue model is part of a business model, serving to explain how a company’s goods or services are made, distributed, and sold for profit.

The purpose of a revenue model is to manage a company’s revenue streams, which are its sources of income from target customers in different demographics and locations.

With a revenue model, a business can determine crucial factors that can help it thrive and grow. Companies use the information from a revenue model to determine how much money they will have to focus their sales and marketing on a target audience, develop new goods and services for customers, and ultimately determine their place and future in their particular market. Without a revenue model, companies, and especially startups, can generate costs that can make their business unsustainable.

There are many different types of revenue models for businesses, including:

1. 1. Advertising model. The advertising model is frequently used by media companies whose platforms include content with advertising, such as newspapers, search engines, and social media sites. Revenue is generated by charging advertisers based on various criteria, including the size of the ad space or number of clicks.
2. 2. Freemium model. “Freemium” is a business plan in which a company offers access to its product or services, such as a software product, for no charge to customers, but sets a licensing fee for premium features and functionality within a tier format. This model is often used as a monetization strategy for apps.
3. 3. Licensing model. In the licensing model, a company rents content that they own to third parties. This model is frequently used by software companies in place of transactional sales of their product, and for intellectual property, such as trademarks and patents.
4. 4. Markup model. The markup model is a common revenue model, especially among retailers and wholesalers, as well as e-commerce sites. Here, revenue generation is created by buying a product and then increasing or marking up the price before selling it to customers.
5. 5. Production model. Also known as a transactional revenue model, the production model is also one of the most common revenue models. Using the production model, a company produces or manufactures a new product for sale, and generates revenue when the customer pays for it.
6. 6. Subscription model. The subscription revenue model allows a company’s target audience to use a product or service for a predetermined and contracted rate and period of time. It’s a popular source of revenue for cloud-based or software-as-a-service (SaaS) companies, and online entertainment hosting companies. This model differs from the licensing model in that the subscription has a fixed term, while licensing continues in perpetuity until the licensee or property owner terminates the deal.

Here are tips to help you pick the best revenue model for your business:

1. 1. Product value. The revenue model you choose should connect to your value proposition, which is a statement that clearly expresses your product or service's distinct selling points to potential customers. Is your product something that is sold or licensed? Does it involve a tier structure for payments? Does it generate income from a per-user arrangement? The value that your product delivers to the consumer should be reflected in your revenue model.
2. 2. Customers. An understanding of the customer segments that use your business will also help you determine your revenue model. Single customers may benefit from a subscription model, but larger companies may require a different approach, such as licensing.
3. 3. Competition. How does your competition in the financial market generate revenue? Studying their strategies will help you determine if your current model is more successful than that of other companies in the marketplace, or if you should consider adopting a different approach.

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