When expanding on your business idea, the most important thing you need to consider is how to satisfy the needs of your potential customers. To satisfy customer needs, you must provide value to them. Of course, you will have a tough time providing value to your customers without a proper business model.
A good business model should address the following questions:
➢ What value am I providing?
➢ How will I generate revenue by providing it?
➢ How will I deliver it to my customers?
➢ How will I make a profit from my services?
A couple of these questions center around generating revenue as does the ultimate success of your business. To generate consistent revenue for your business, you will need to create an effective revenue model. Your business cannot thrive being solely focused on creating profits. Your revenue strategy will necessarily have to focus on value-driven revenue, meaning revenue created as a result of delivering value to your customers.
What is a Revenue Model?
A revenue model is a structure that embodies the strategy and plans for a business to generate enough resources to deliver the value it promises to offer its customers.
It is a framework that outlines how your business will raise and manage the different streams of financial income and resources to satisfy your customers.
Types of Revenue Models
There are a variety of revenue models that businesses can use. The most common types of revenue models include:
- Transaction-based model
- Licencing revenue model
- Recurring revenue model
- Advertisement revenue model
- Commission revenue model
- Affiliate revenue model
- Freemium revenue model
- Hybrid revenue model
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This is also called a production-based model. It is the most basic type and involves directly selling your products and services to your customers. The target customer could be a business (B2B) or a customer (B2C).
The price of the good or service must cover the cost of production and profit to avoid a lapse in business.
Licensing Revenue Model
When a user or users must purchase a license in order to access your product or services, you are employing the licensing revenue model. This model is usually a one-time payment. Once you purchase the license or software, you can use it for life.
Examples of this type of model include Microsoft Windows, Apache Server, Video games, and Web applications. However, keep in mind that a licensing model has also been used in combination with the recurring revenue model below, where a customer must make periodic payments (typically monthly or annually) in order to license the software.
Recurring Revenue Model
Here the service is recurring, so the user has to pay for subscriptions before getting access to the service. It could be monthly, bi-monthly, or annually, e.t.c.
Advertisement Revenue Model
An advertising-based revenue model is typically utilized by both online and offline businesses. Businesses and brands in the physical and digital space use it to increase traffic to their sites or business. They generate revenue by selling ad spaces on their platforms to other marketplaces.
That way, they make enough revenue while providing a marketing platform to other businesses.
Commission Revenue Models
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The commission revenue model is also a very popular method of generating revenue. A commission is an additional compensation earned by a retailer based on goods and services sold.
A commission could be rewarded as:
- Based Rate Commission: This amount is fixed as a flat rate for a particular transaction. For example, a $500 transaction can be fixed with a $20 commission.
- Percent Based Commission: This is usually fixed as a percentage of a certain amount. For example, a 10 percent commission for $320.
- Tiered Commission: This percentage commission is linked to the volume of goods/services sold. For example, a 10 percent commission for selling 5 products worth $320 or a 20 percent commission charged with selling 10 products worth $500. Companies that use this revenue model include Airbnb, Uber, Lyft, and Ticketmaster.
Affiliate Revenue Model
While the affiliate revenue model seems similar to the advertising-based model, it is quite different. This model works by offering promotional links for products and services with an additional commission at the close of any sale. You could combine this with selling ad spaces or focus on this alone.
With the freemium model, a company or business offers free access to its products or services while limiting its function or having premium features that customers need to pay for.
Many social media applications or third-party software are utilizing this model.
Some companies can decide to combine different pricing plans. For instance, a freemium plan could transform into a premium plan or a tiered revenue model with time. After enjoying free services on a product or service, a user will have to pay before accessing it in the future. If the product or service created was valuable to the user throughout the free period, it won’t be hard for them to switch to the paid plan.
How Do You Create Value With a Revenue Model?
As explained earlier, creating value for your customers expands your business. But how do you create value for your customers continuously? You can achieve this by extracting revenue using a structured revenue model. You need to understand your target market, identify their problems and devise means to generate revenue to meet them.
In other words, the more revenue you make, the better you can offer value to your customers. So study your key activities and value proposition to identify the best revenue model that suits your business. Make it a win-win for both you and your customers.
You could also forecast the revenue for your business. This is done by calculating the average selling price (ASP) for future products and multiplying that by the number of expected units sold. This is called the Revenue Projection Model. This will help you keep track of your revenue growth and help you plan for the future.
Research is the key factor here. All you need to do at this point is to study each revenue model described above, and then figure out which better suits your business model. Once you have selected one, you can develop it.
Keep in mind that you can use more than one revenue model or a combination of a few, so long as it attracts customers to your products and generates enough income for your business expansion.