The revenue model of a startup demonstrates how it will make money. More than the novelty of the product or service you are offering, the revenue model determines your startup’s fate. Choosing the wrong revenue model can result in your business shutting shop even before it had an opportunity to scale.
While there are numerous ways of defining revenue models for startups, let’s look at some of the most popular ones:
Direct sales
In this model, the employees of a business sell the products or services directly to the customer. Several health and nutrition companies like using this model as it gives an opportunity to foster stronger relationships with the customer.
Since there are no distributors or stores involved in the sales, a direct sales model makes it easier to streamline the respective strategies for production, marketing, and sales. Moreover, this model is an excellent pick for startups because it provides access to customers who may be otherwise difficult to reach. For instance, customers who do not follow advertising campaigns on social media can still be targeted through direct sales.
Subscription-based
In this model, the customers are offered a service or a product for which they can pay on a monthly or yearly basis. This model relies on establishing long-term relationships with customers who will pay the subscription fee at regular intervals. Major players in the video and music streaming sector such as Netflix, Spotify, Prime Video, and Hulu follow a subscription-based revenue model.
When you choose a subscription-based revenue model, you accumulate revenue every time a new subscriber signs up. If you can acquire customers on a steady basis, your revenue will grow exponentially.
Freemium
In this model, the basic service or product is available to the customers for free. However, to access the more sophisticated features or upgraded version of the product, the customer needs to pay a fee, which is often based on the usage.
A lot of startups using a freemium model have various subscription plans that customers can choose from. Examples of companies using a freemium model include LinkedIn, Flicker, and Evernote.
Typically, freemium models work best for web-based service companies that target a broad market. SaaS companies like to use a freemium model to test the waters in a new market and assess the viability of the product or service before launching on a bigger scale.
Ad-based
Sometimes startups may rely solely on advertisers to generate their revenue. Advertisers place an ad on your platform, and you can generate revenue each time a user clicks on an ad and completes the action. Companies in the media sector prefer an ad-based revenue model since it can be challenging to get customers to pay for content.
If your website receives high traffic, generating money from ads is the easiest way to earn revenue. However, if you are still a new kid on the block, attracting millions of users who will watch the ad and pay attention to the call-to-action can be extremely difficult.
Transactional revenue
As the name suggests, this model is suitable for startups that provide a transactional service. In other words, unless you sell your product or service, you cannot generate any revenue. This model is considered one of the most direct ways of earning money. E-commerce companies like eBay use a transactional revenue model.
However, your revenues may suffer if your product or services stops being attractive in the long run. Moreover, if you are selling a physical product, you will need to manufacture and ship the product each time you want to make money.
Recurring revenue
This model involves a one-time deliverable that is capable of generating recurring revenue. Take, for instance, IBM that provides a one-time installation of hardware to its clients. The income is generated from the long-term service and maintenance contracts and onsite/offsite support.
With a recurring revenue model, you can predict your revenues with a greater degree of certainty. That’s why investors prefer startups that implement this model. However, you need to ensure that you retain the customers to maintain a consistent stream of revenue at all times.
Affiliate revenue
You can also earn your revenue by promoting the products or services of other companies. This model involves promoting the links of such products or services and making a commission on each sale. The commission is either fixed or a certain percentage of the total sales. Wirecutter, a product review website that is owned by the New York Times Company, is based on an affiliate revenue model.
Compared to an ad-based revenue model, it is much easier to earn through this. Moreover, you don’t need your products or services if you plan to earn as an affiliate. However, unless the product or service you are promoting can sustain itself, you may not be able to generate decent revenues.
Wondering which revenue model is the right one for you?
Profits are not enough to sustain your dream of running a startup. You need to have a solid framework in place that helps to generate steady financial income. The ideal revenue model should be a perfect match for your business idea. While you can always look at your competitors and rely on customer insights to figure out which revenue model is best suited for your business, doing it on your own may not be a cakewalk. That’s why
Centurion Consulting LLC is here to help you.
Centurion Consulting LLC offers end to end business consulting services in the UAE. The team of qualified business and finance experts guide, mentor, and empower you to launch your business successfully in the UAE and make it profitable. We offer various services, including market research, entry strategy, corporate structuring, regulatory compliances, Feasibility study, Business Plan and a lot more.
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