How to Start A Business Course – Launching Your Business: Revenue And Business Model – Part 16/26

Throughout the years, revenue models and business models have changed, due to various internal and external pressures experienced. Some businesses and industries, however, have remained stagnant, maintaining comfort in their traditional methods of strategic endeavors. Although various large-scale companies’ secret sauce lies within their original business models, they use hybrid approaches to maintain their competitive edge.

However, due to the fast-paced introduction of digital transformation, the rapid changes in innovative strategies, and the ever-changing demands of consumers, most businesses have been forced to think outside the box and intentionally mold their strategic endeavors into proactive, future-forward, and consumer-centric decisions.

The advantage of starting a small business in this exciting age of innovation and transformation is the ability to discover and deploy revenue and business model with a modern approach – not only suited to your business, but to the demands of your customers. Properly executed from the onset, these models could provide your customers with favored value and your business with a sustainable competitive advantage.

For today’s topic, we’ll focus on describing the various revenue models and business models available for start-up businesses and explore the basic components of each to assist you in selecting the appropriate models suited to your specific business and the demands of your customers. I’m excited to start with this, given that we’re focusing on the backbone of a start-up business and the foundation on which your people, processes, performance, and profit are built.

Throughout, we’ll dive into some practical, and hopefully relatable examples, to equip you with the necessary insight to build a business of the future.

I’d like to begin with this quote from Walt Disney:

“First, think. Second, dream. Third, believe. And, finally, dare.”

As a new entrepreneur, the journey to realizing your ideal business and purpose can be both challenging and exciting at the same time. However, the four primary steps in activating your journey are to think, dream, believe & dare.

OBJECTIVES:

Understand the Differences Between Revenue Streams, Revenue Models & Business Models
Explore Popular Revenue Models, Real-Time Examples & Tips for Selecting the Best One
Understand the Composition of a Business Model & Tools Available for Designing One

Before we delve into the specifics of Revenue Models and Business Models, we should spend some time exploring the differences in the terms Revenue Stream, Revenue Model, and Business Model.

Revenue Streams, Revenue Models & Business Models

Revenue Stream

A Revenue Stream represents a single source or multiple sources of revenue, generated by the sale of products or services to your end-users or customers. Start-up businesses usually have zero revenue streams from the onset, unless supported by externally sourced capital. However, in most cases, a single source of revenue is realized once the business launches and is optimized once the business approaches the growth/scaling phase. Once your business matures, multiple sources of revenue should be considered to ensure financial stability.

• Single / Multiple Sources of Revenue
• Generated via Sale of Products / Services
• Start-Up Businesses = Zero Revenue
• Functioning Streams = Financial Stability

Revenue Model

A Revenue Model provides a high-level overview of the quantity and quality of your revenue streams, which will adapt as your business matures. Your revenue strategy, and the revenue model described within, will depict your top earning revenue stream, as well as additional, supporting revenue streams. Each revenue stream will require a certain amount of selected resources, including skilled employees, requiring careful consideration and allocation to ensure the source of revenue is streamlined and continuous.

• High-Level Overview of Revenue Streams
• Illustrates Adaptable Revenue Strategy
• Top Earning & Supporting Revenue Streams
• Each Revenue Stream = Allocated Resources
• Revenue Sources = Streamlined & Continuous

Business Model

A Business Model, sometimes incorrectly used interchangeably with a Revenue Model, represents a high-level overview of your business. Taking every aspect of your business into account, a Business Model depicts your Revenue Model and Revenue Streams, as well as the relationship and collaborative efforts between the various stakeholders/units/departments within your business. The latter would include your business partners/suppliers/investors, key activities and resources within your business, the core value provided to your end-users / customers, your distribution channels, customer segments, and relationships, as well as your cost structure and revenue streams.

• High-Level Overview of Overall Business
• Depicts Revenue Model & Revenue Streams
• Relationship Between Units / Departments

Most Popular Revenue Models & Consideration Areas for New Businesses

There are various Revenue Models available for start-up entrepreneurs to consider, each of them labeled differently within the entrepreneurial community and business landscape. This section will primarily focus on the most popular and effective Revenue Models deployed by small-scale, medium-scale, and large-scale businesses throughout recent years – exploring the advantages and disadvantages of each, and the steps to selecting the appropriate model for your business.

Although your business could embody a distinct difference and provide a completely unique offering compared to your competitors, chances are HOW you generate income and monetize your business won’t be uncommon or inimitable. However, how well you optimize and nurture your Revenue Model, and its subsequent Revenue Streams, could certainly distinguish you from the rest.

Although there are standard Revenue Models available, some more traditional and others supported by digital advances, selecting the appropriate pricing strategy, cost structure and revenue streams pose a challenge for some start-up entrepreneurs. Your selected Revenue Model is the key to attaining your financial objectives and could impact both the longevity and success of your entire business.

Top 10 Popular Revenue Models

Advertising

Advertising-based Revenue Models encompasses strategically placing your advertisements or promotions of your business and product/service on other business’ digital platforms or channels – usually generating substantial traffic, transforming this traffic directly into revenue for the hosting business. Search Engine Marketing, Social Media Marketing, and Mobile Advertising fall under the same revenue model – and are usually deployed in a B2B setting.

Platforms such as Facebook, Twitter, Instagram, Pinterest, WhatsApp, YouTube, and Google source the majority of their revenue and income using Advertising-based Revenue Models. Should you consider this model, you must ensure your platform or channel generates a sufficient amount of daily traffic. For those businesses wanting to utilize your platform or channel for promotional purposes, they desire to reach the optimal levels of engagement and a substantial quantity of prospective end-users/consumers, to make the investment worthwhile.

The advantage of Advertising-Based Revenue Models is that your business is able to generate substantial revenue without too many resources. However, in order to generate the desired revenue to withhold your business, you’ll have to attract thousands and millions of users. In addition, most consumers are over-saturated with advertising noise and are usually deterred by advertisements – leading to low click-through rates and ultimately, lower revenue. Spend extra effort in placing quality content.

Subscriptions

Considered one of the most popular Revenue Models among modern consumers, include Subscription-Based Revenue Models. This model enables consumers to enjoy your product/service instantly, while paying over a longer period of time, instead of a larger initial lump sum – usually month to month, or annually. This Revenue Model wasn’t considered innovative until non-traditional businesses started using it to “hook” customers into staying long-term. Usually geared towards B2C companies.

Here are a few examples of popular businesses deploying Subscription-Based Revenue Models:

• Amazon Prime: A subscription-based business that provides users with access to additional services otherwise unavailable at a premium to regular customers. Services include streamlined and free delivery, exclusive deals, and discounts, as well as access to entertainment such as gaming, movies, and music.

• Netflix: A subscription-based business that sources revenue with three simple revenue streams – basic, standard, and premium, giving consumers access to streamable series, movies, and shows. The business runs negative cash flows due to upfront payments for content licensing and original content production – yet, remains profitable.

The advantage of deploying this Revenue Model is that recurring revenue and passive income can be generated. However, since this model largely depends on a substantial consumer base, start-up entrepreneurs must maintain a higher subscribe rate than an unsubscribe rate. With this level of market saturation around the availability of subscription-based business, it’s easy to get started with this revenue model but it’s hard to get noticed. My advice would be to use this revenue model as an option for your customers rather than making it the hallmark of your offering.

Freemium

The Freemium Revenue Model gained popularity around the same time mobile applications did. This model enables a business to provide basic products/services for free (sometimes referred to as trial versions) but requires the end-user/customer to pay for additional premium features, extensions, and functions embodying optimal value.

Here are a few examples of popular businesses deploying Freemium Revenue Models:

• LinkedIn: Considered one of the most popular Freemium Platforms, LinkedIn enables access to the core functionality of posting job experiences and linking with other professionals. Various paid memberships enable access to more advanced functionality and focus on activities around recruitment and other fundamental requirements.

• Spotify: Operating a two-tiered Freemium Revenue Model, Spotify enables users an initial free tier supported by advertisements. The premium feature removes advertisements and provides personalized features, at a monthly cost.

• Other commonly known examples include YouTube Music, Mailchimp, Hootsuite, Skype, Buffer & Evernote.

The advantage of using the Freemium Revenue Model is that it provides your end-users/customers the ability to test the product/service, whilst simultaneously enticing them to enjoy the added value components accompanied by additional purchases. However, this model requires considerable investment in both time and effort to reach your ideal audience and convert them from free users to paying customers.

It’s important to understand the difference between Freemium and Subscription-Based Revenue Models. Although they often co-exist, they’re not the same. As you can see in the graphic below, there are a series of steps and activities between a Freemium offering and the ultimate subscription:

Mark-Up

A Mark-up Revenue Model works best when your business doesn’t sell its own products – usually deployed largely within the retail environment. The hallmark element to remain aware of when considering this Revenue Model involves understanding where the offering is produced and how it’s going to be sold. If the product is produced in Place X and sold in Place Y – you can be assured there’s a certain percentage markup on the cost price. In most cases, the product doesn’t change from the point of purchase to the point of sale – usually sold exactly the same.

Examples of businesses deploying Mark-up Revenue Models, include Saks 5th Avenue, ZARA, Target, Wholefoods Market, and Best Buy.

The advantage of the Mark-up Revenue Model is that you’re able to provide your end-users /customers with a variety of product assortments, whilst selling your own brand simultaneously. However, when your cost price is high, you usually have to increase markup and ultimately your selling price, which may deter new customers if it is too expensive. Also, ensure that the products you desire to host/stock within your store adhere to the requirements of your customer profiles and are of the desired quality.

Tiered Pricing

Should you provide a product/service that can be utilized in various ways by a single end-user/customer, you might want to consider the Tiering Pricing Revenue Model. This model enables you to offer your product/service at various levels and bundles of features in a way that targets various customer segments. Businesses using tiered pricing will often list the various features available with each package and gray out the features that aren’t available, in an attempt to use fear of missing out to influence customers to upgrade.

Examples of commonly known businesses deploying Tiered Revenue Models, include Zoom, Calendly, Dropbox, Microsoft, Netflix, and Amazon.

The primary advantage of the Tiered Revenue Model is that it enables you to reach a variety of customer segments based on various preferences and serves as an effective means to influence buying decisions. However, with this model, maintaining profitability among each tier becomes challenging, especially if consumers stay on one tier for an extended period of time. Should you consider this model, keep the names of your pricing packages the same as others within your industry. Decision fatigue sets in when there are more than three things being offered and gets even worse when each package comes with different features that each need to be evaluated.

Commission

When you can’t see where the money is being made, it’s probably being made off you. This is the basis for the commission revenue model – a passive income is made continuously per sale, usually some form of sales agent/content platform. For each transaction, a percentage is collected by the platform that enabled it. Usually deployed by 3rd party sellers, selling other business offerings.

Examples of commonly known businesses deploying Commission Revenue Models, include eBay, Etsy, Booksy, Uber, and Stripe.

This model works great for 2-sided marketplaces and for online businesses, hosting other businesses’ products/services. Offer a wide variety of brands, and assortments, and aim to various customers with diverse interests/demands/preferences.

Complimentary

Products that are sold separately but that are used together, each creating a demand for the other. A Complementary good is a product or service that adds value to another. Can be used separately in some instances, and some are used together. On occasion, the complementary good is absolutely necessary, as is the case with petrol and a car. However, a complementary good can add value to the initial product.

For instance, pancakes and maple syrup.

• Tennis Balls and Tennis Racket

• Mobile Phones and Sim Cards

• Petrol and Cars

• Burger and Burger Buns

• PlayStation and Games

• Movies and Popcorn

• Shoes and Insoles

• Pencils and Notebooks

Complementary products can also be found in various B2B settings, where suppliers provide manufacturing parts, a software company works with a data platform business, and so forth. The biggest threat to this revenue model is competition – another business providing your offering. You have to conduct the necessary competitive analyses to determine who your direct and indirect rivals include.

In addition, you have to monitor the average price for your offering and adapt your price both accordingly and competitively – switching abilities are usually low, but B2B and B2C end-users will know if they’re being taken advantage of.

You also don’t need to necessarily provide any discounts – for the fear of creating a reduced value perception, but either create innovative pricing strategies or stick with the status quo. In addition, start small and expand your offering assortment once a large customer base and competitive advantage have been set.

Licensing

Businesses that own intellectual property or have a unique technological advantage do well with the Licensing Revenue Model. Essentially, if you create something- a product, a play, a movie, a line of dog food, that someone else may want to use when they’re building their core offering, you can license the use of your product to them.

Typically, licensing deals are conducted for either a flat rate (for example, $6,000 per year) or on a sliding scale depending on how much the product or service is being used (for example, $2.50 per unit sold). It’s essentially a business arrangement in which one company gives another company permission to manufacture its product for a specified payment.

Examples of licensed businesses include Disney, Warner Brothers, Nickelodeon, DreamWorks, Ferrari, and Cartoon Network.

Be sure you write your own licensing agreements and triple-check the conditions. Focus on the various terms and conditions, particularly those that could directly affect your brand identity and reputation. To protect your offering, ensure to have the necessary patents, trademarks, and copyright in place. The last thing you want is someone holding your own brand over your head or using it against you to slander your professional image. Lastly, only select deals that are aligned with the overall business and product/service vision.

Brokerage Fee

A brokerage fee is a fee charged by a broker to execute transactions or provide specialized services. Brokers charge brokerage fees for services such as purchases, sales, consultations, negotiations, and delivery. This revenue model is absolutely crucial to the success of a platform business. When there are two sides of the market that cannot easily or effectively communicate with each other, a brokerage business can be found playing the middleman and cleaning up in terms of profits.

Examples of brokerage businesses include AirBnB and WeWork.

So many brokerage firms fail because they try to expand into what they see as complementary areas but are really just slightly related money wasters. Consumers want their brokerage firm to work at the very peak of excellence as they are giving a lot of money to a person they’ve never met to take and hopefully make something great happen. A business can break trust if they’re spread too thin or is offering services that customers didn’t ask for. So, stick to your overall business vision – essentially, what you do and be the best at it – that’s how you win the brokerage game. Start expanding to offering complementary offerings once established.

Pay-Per-Use

One of the oldest revenue models in existence is incredibly still viable today. If you’ve ever used a payphone or rented a moving truck, you’ve experienced the pay-per-use revenue model.

This model is unique because it trades flexibility for profit due to the increased margins on a pay-per-use basis. It depends on the specific business but typically, the pay-per-use model is either working on a per minute or per hour basis (think parking meters) or the customer is paying a flat rate for the use of the product or service for a limited amount of time (think all-day parking lots).

The innovation in this revenue model comes from finding unique ways to charge the per-use amount. Conduct industry/competitive analysis to determine the need for increased convenience. Apply this model to existing industries to add flexibility. Charge Rates required by end-users/customers, whilst maintaining profitability. Lately, start small and expand your assortment of products/services once your business hits the growth/scaling phase.

Process for Selecting the Appropriate Revenue Model for a Start-up Business

The key to developing the best revenue model for your business is to understand the existing options and either choose one strategically or combine a few to create something new altogether. Some of these models work better for physical products and others only work for digital services. When deciding on a revenue model, be very sure you are not just “going with the norm” because it’s noisy out there and in addition to having great branding you have to give customers a reason to say “hmm, I’ve gotta try that.”

The key to creating your revenue model is through forecasting – that is, projecting revenue estimates, even if you’re currently pre-revenue. Forecasting is an ongoing process that will help you to manage your cash and continue to grow. There are two general approaches to financial forecasting: top-down and bottom-up forecasting.

Top-Down Forecasting

A top-down analysis starts with a business assessing the market as a whole. First, you determine the current market size available for your business and factor in relevant sales trends. Then you can estimate how much of the market will buy your products or services.

Bottom-Up Forecasting

Also known as an operating expense plan, bottom-up forecasts examine factors such as production capacity, department-specific expenses, and addressable market in order to create a more accurate sales projection. You calculate the spending necessary to achieve your revenue and development goals and identify what’s driving your revenue. From here you can predict how quickly you can scale based on headcount and milestone projections.

Selecting a revenue model depends on the nature and composition of both your business and offering, but there are 6 key consideration areas for new entrepreneurs:

Company Type & Background
Select a revenue model that best suits your company type and background. Dependent on your company type, it would make sense to embed revenue projections that are linear in nature or ones that are exponential. In other words, do you want to mitigate capital risk and start small, then build from there? Or prove your revenue model at scale? Ultimately, you want to select a model that helps you direct your growth and scaling efforts. A revenue projection template is a great way to start developing your approach.

Offering Value Communication
Your revenue model should also enable you to communicate your value. In other words, those key components that make your offering special and serve as your selling points/value propositions.

Forecasting Near Future
Project out into the foreseeable future, in order to determine the horizon/outlook for your business model. This would include on average, a 12 – 24-month revenue projection, including short and long-term milestones.

Identify Capital Requirements
Identify your revenue/capital requirements based on your revenue model, which includes determining whether you require external funding/capital such as investor capital, grant funding, or donations, for example.

Revenue Model & Stream Agility
Understand that your revenue model is always evolving. The overall architecture might not change much over time, but you should continuously renovate and refine your model and conduct re-forecasting. Pivoting is key, especially given the various external drivers influencing your business.

Identify/Mitigate Variables
Your variables will be process specific and depend on which stage of your business you’re in. You’ll determine which variables will have the most impact on your revenue and which components within your business will trigger changes. A sensitivity graph is a great tool for exploring each variable and graphic its potential impact.

Business Models

Let’s have a look at Business Models. Startups are typically born out of big, innovative, bright ideas. However, even the most luminous idea will quickly fade and die out if you fail to execute it properly. That’s why, at the core of every successful start-up, there needs to be a sound, profitable business model. The idea itself is just the first step in the business-building process. Sure, you need to offer the marketplace something cool, new, and unique to garner the attention of your target audience. But that alone isn’t close to enough. You must also build a solid framework that will enable you to turn your idea into a profitable and sustainable business.

You need to determine which marketing strategies and channels you’ll need to utilize to effectively reach potential customers, and how you’re going to present your offers to them. That framework which will guide you and largely influence all your marketing and advertising efforts, as well as ultimately determines the success of your new venture — is the business model you opt for.

Before you can start turning your idea into a full-fledged business, there are several questions you need to ask yourself. The answers will give you a better sense of direction and help you determine the right approach.

Here are the crucial aspects you need to take into consideration while making your decision:

• Target Market: Before you move any further, you first need to triple-check that your concept is actually viable. Thorough market research and analysis are thus crucial and something we’ve highlighted all throughout.

• Competition: You have to understand who your rivals are and determine how successful they are, and why.

• Potential Customers: Although you won’t be able to rely on data until you’ve been in business for a while, it helps to create a mental image of your ideal customer. Create an avatar or profile of your ideal customer through thorough market research and analysis, to select the appropriate strategies.

• Revenue Streams: The big idea that made you decide to start a business in the first place, will be your main source of revenue. However, you should also consider what other possibilities there are to add multiple revenue streams. For instance, you might include other products that you can offer as upsells and cross-sells. Or perhaps you can add affiliate products to your offers and generate additional income through commissions. Don’t just focus on selling one product or service. Explore all your different options and try to bring in money from multiple streams.

The Business Model Canvas is an extremely useful tool you can leverage when choosing your business model. The concept was first developed in the book Business Model Generation, by Alexander Osterwalder and Yves Pigneur. This canvas helps up-and-coming entrepreneurs clearly define all the different aspects of their business. It also gives you a clear visual representation of your business, which will be a valuable resource throughout your entrepreneurial journey. Utilizing the Business Model Canvas as a template, you can refine an existing model to best suit your needs or create your own ideal business model.

Let’s cap it off with our quote from the beginning:

“First, think. Second, dream. Third, believe. And, finally, dare.”

As a new entrepreneur, you must push yourself to think differently & out-of-the-box every day, challenge yourself to dream big, constantly believe in yourself & your idea, and lastly, dare to make your dream a reality.

The advantage of starting a small business in this exciting age of innovation and transformation is the ability to discover and deploy revenue and business model with a modern approach – not only suited to your business, but to the demands of your customers. Properly executed from the onset, these models could provide your customers with favored value and your business with a sustainable competitive advantage.