Business Model Vs Revenue Model – A business starts with an idea of how to generate value for the customer. So, if a customer is looking for a table, you can produce the table, send it to market, and get paid for it—and
– Coal is what keeps your train moving. Depending on the complexity of the business model, revenue will cover production, distribution, marketing and other costs.
Business Model Vs Revenue Model
Apart from simple transactions, there are many ways to generate revenue. This is even more true for software companies: the nature of web distribution and software creates different possibilities for monetizing code. Think about licensed/freemium apps, service subscriptions, and more. All of these represent a certain mechanism that specifies how a business generates revenue. The structure of this mechanism is called A
The Revenue Model Catalogue By +opennext
For those exploring the world of business strategy planning, we will expand on the definition of a revenue model, and the relationship between business models and revenue streams. We will also analyze different types of revenue models and look at some examples to investigate the advantages and disadvantages of each approach. Finally, we will reflect on how to choose or develop a model for your business.
A revenue model is a plan to earn revenue from a business or project. It explains the various mechanisms of revenue generation and its sources. Since selling software products is an online business, the plan to make money from it is also known as an eCommerce revenue model.
A simple example of a revenue model is a high-traffic blog that places ads to make money. Web resources that present content, for example, news (value), will use its traffic (audience) to place advertisements to the public. The ads will in turn generate revenue that the website will use to cover its maintenance costs and staff salaries, leaving a profit.
Revenue models are often confused with business models and revenue streams. To avoid any misinterpretation, let’s quickly define these three terms that make up a business strategy.
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A business model (BM) is a broad term that outlines everything related to the key aspects of a business, all of which are included in answering the following questions.
The numerous forms of business models cannot be categorized in a single list because each part is highly individualized to the industry, type of product/service, audience or profit. Business models are often depicted strategically on the Business Model Canvas. It is a composite representation of all the main elements of BM.
So BM describes how a business works from a value generation perspective. Revenue models, on the other hand, are a part of the business model used to describe how a company achieves gross sales.
A revenue model is used to manage a company’s revenue streams, forecast earnings, and modify revenue strategy. Revenue itself is one of the main KPIs for a business. Measuring it annually or quarterly allows you to understand how your business is performing in general and whether you should change the way you sell products or charge for them.
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A revenue stream is a single source of revenue that a business has. There may be many of them. Streams are often divided by customer segments that bring in revenue through a given method. Two conditions –
– Often used interchangeably, since, from a business perspective, a subscription revenue model would have a revenue stream coming from subscriptions. However, models may name multiple streams divided into customer segments, while the principle of revenue generation (subscription) will remain the same.
Any start-up, tech company, or digital business can combine different revenue models. The revenue model will look different depending on the industry and product/service type.
Here we will focus more on the most common revenue models used in the software industry and online business.
Elements Of A Business Model 2
A transaction-based model is a great way that a business can make money. Revenue is generated by selling goods or services directly to customers. A customer can be another company (B2B) or a consumer (B2C). The price of a product or service constitutes production cost and margin. By increasing margins, the business can generate more revenue from sales.
Involves using different pricing strategies to sell products or services. While some of them can be considered separate revenue models, these strategies are often used in pairs. Because pricing strategies can be seen as pricing schemes in the software business, we can clearly define the following types.
License / one time purchase. It involves selling a software product through a license that can be used by a single user or a group of users. A common idea is to offer products that require only one payment, such as Microsoft Windows, Apache Server, and some video games.
Subscription / Recurring Payments. Unlike a license, a user gains access to software by paying a subscription fee on a monthly/yearly basis, e.g., Netflix, Spotify, and Adobe products.
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Pay-per-use. This pricing strategy is often used by various cloud-based products and services that charge you for computing power/memory/resources/time used. Examples are Amazon Web Services and Google Cloud Platform.
Freemium/Upselling. Freemium is a form of app monetization in which the user can access the core product for free, but will be charged for additional functions, services, bonuses, plugins, or extensions, such as Skype, Evernote, LinkedIn, and many video games.
Hybrid pricing. Sometimes pricing plans are a mix of more than one. So that freemium plan could take the form of some form of pay-per-use tiered plan. After passing some limit on calculations or resources, the user can be forced to use or another type of pricing. Mailchimp, Amazon Web Services, and SalesForce are examples.
Different combinations of pricing strategies can be used simultaneously, which is often seen in cloud-based products that offer multiple payment options at once. In this case the revenue model is based on transactions and purchases made by customers. Variation in pricing strategy modifies how revenue is generated and basically depends on the type of product/service you sell.
Subscription Vs Pay Per Use—which Revenue Model Would Work For Your Business ?
Opposition. Cons will depend on industry/product type and pricing strategies, as the model itself implements continuous generation of sales with the help of advertising and marketing strategies. The only caveat we can mention here is the financial burden associated with the sale that you bear yourself.
Transaction-Based Revenue Model Examples. Almost any company that manufactures and sells its products uses this type of revenue model. Examples are Samsung, Rolls Royce, Nike, Microsoft, Apple, Boeing, and McDonald’s, to name a few.
An advertising-based revenue model is a scheme whereby businesses make money by selling ad spaces. This is one of the most standard methods of generating top-line growth, and it is valid for both online and offline businesses. It is mostly used by websites/applications/marketplaces or any other web resources that attract large amount of traffic.
Professionals. Being a high-traffic source allows you to monetize ad space almost instantly. Often, there is a strong demand for advertising space, especially with platforms with organic traffic and targeted audiences.
Revenue Streams In Business Model Canvas
Opposition. Running advertising campaigns to gain web visibility on various platforms such as social networks is a standard marketing activity with more precise targeting tools than ever before. However, ads are everywhere, so you might want to think twice about distracting a user by placing an ad in your app – even if it’s a secondary revenue stream.
Examples of advertising-based revenue models. YouTube, Instagram, Facebook, and Google are some prominent examples. All of these platforms generate revenue by displaying ads to users and charging businesses for exposure. In addition to promotions, these platforms can also generate revenue through other sources, such as premium subscriptions or licensing agreements.
A commission-based revenue model is one of the most common ways businesses make money today. A commission is an amount the retailer adds to the total cost of the product or service.
Marketplaces and ecommerce platforms, in particular, use commissions the most. Another large category includes businesses that connect service providers/tenants with consumers. Think of any ride-hailing company, food delivery, online travel agency (OTA), or alternative accommodation services.
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Opposition. There are many problems with the concept of commission, but the main one goes to the scalability of the business linked to the transaction size or volume. In general, reliance on product supplier sales requires upfront investment and competitive advantage to generate revenue.
Commission Based Revenue Model Examples. Airbnb is a platform that allows people to list and rent their homes or apartments as short-term rentals. It generates revenue by charging a commission on every booking made through its platform. The commission is usually a percentage of the total booking cost and is paid by the host (property owner). Other examples are Booking.com, Uber, Lyft, Ticketmaster, Priceline, and Upwork.
A markup is a type of revenue model whereby you buy a product at a fixed price and then sell it at a higher price: the difference between the two is your profit margin. This model is often used by wholesale, retail, and service-based businesses.
For example, a wholesaler might be a bed bank — a B2B company that buys rooms from accommodation providers in bulk at discounted, fixed prices for certain dates, and sells them to OTAs,
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