Bleeding Edge

Here are a dozen different Revenue Models for Startup Companies for the founders and the executive team to think through and establish for their own Start-Up.

Of course as with anything else, seasoned, serial, and first time entrepreneurs alike, need to take the time to decide which model is most suitable for their startup — not the one that makes the most money — and implement it.

And of course you ought to know that once a Startup company, settles on a revenue model, it can be rather hard to switch, pick another, or change course of revenue creation mid-stream.

As with every revenue model used by startups, highlighting the most effective revenue models, should help you pick the ONE that will boost your startup into the big leagues.

Now, regardless of what your product, service, or mobile app might be — it’s only useful if you can get it into the hands of your target customers in a reasonable exchange for folding money.

Because once you’ve got an MVP, an Alpha, Beta, or Gamma version of your software, or a finalized offering, there still remains the most important job of selling your “thingy” to the consumers, the aliens, or the “whomevers” you plan on selling to…

And this is not an easy job either, since there are countless factors that need to be taken into account when you set out to bring your service/product to the market, that need to be taken into account, like the industry you’re in, whether you’re selling a web-based product, SAAS, other software, or even physical hardware, and consumables — the channels that you will be using in order to attract your customers, and close the sale, are all commensurate to the method that you have selected in your business model for how to generate revenue for your budding enterprise…

And with the beginning of a New Year, we ought to double down on all of our Startup’s viability, because that is the best time to let go of the old things and try new ones, and that includes the Startups that we are so fond of. Think of the comparative advantage of working with a viable Startup vs working with one that hasn’t got a prayer to survive, or most importantly, one that hasn’t got a proper Revenue Model.

So that is why I’ve prepared this extensive guide that clearly outlines some of the most commonly and widely used startup business revenue models that our various early stage startups use to sell their offerings. This guide is written with a basic description of each one, along with the advantages and the curious disadvantages of each “R.M.” in order to help you pick the best Revenue Model for your company. Please keep in mind that there are foundational and fundamental differences, between the Business Model, the Revenue Model, and the Revenue Stream, for our various types of Startups.

Yet, before we delve into the different types of revenue models, we need to bone up on the fundamentals, so we shall spend a little time differentiating between the terms “business model,” “revenue model,” and “revenue stream,” as they are all used incorrectly and interchangeably as mixed up business management concepts. And that is mostly why the MBAs earn their keep by often being the only ones able to recognize the key differences in these management discussions. They simply speak the “lingo,” they know the “language,” and they’ve got the “Argot” down pat.

Now, basically the correct way to think about all of these business concepts, is that a revenue stream, is a company’s source of revenue. A company can have one or multiple revenue streams, depending on its market size, but at least it has to identify one or even few of them and employ them until it finds out which ones work, and stick with them. Contrast that with the revenue model, which is the strategy of managing a company’s revenue streams, and the resources required for each revenue stream to flow. Lastly, a business model is the infrastructure of the Startup company as comprised of all the working aspects of a company, including the aforementioned revenue model, and the revenue streams, and the description of how all of them fit and work together, in order to ensure the company’s growth, as well as it’s long-term survival, and viability.

So here bellow are the s types of revenue models in the startup community, with the most popular and effective revenue models, highlighted ahead of the other models since they are employed by the greatest number of Startups and Grown-up companies, big and small ones, unicorns, and uni-mice, too.

We start with the Ad-Based Revenue Model that entails creating and placing ads for a specific website, service, mobile-app, or other product & service, and then placing these ads, on strategic, high-traffic channels, banners, pop-ups, scrolls, and third party ads. If your company has a website or you have a web-based company, Google’s AdSense is one of the most common tools to get ads and create ad revenue from the get-go. Yet, for most startup websites, AdSense will earn about $5-10 dollars, per 1,000 page views. Here the basic advantages are in making money from the ads in one of the simplest and easiest ways to implement revenue models, which is why so many companies utilize web based ads, and specifically Google Ads, as a source of revenue. Of course, there are some clear disadvantages here too, because in order to generate sufficient revenue to sustain a Startup business, you will need to attract many millions of users. In addition, to having to climb that molehill, you ought to know that most people find these pop-up and many other kids of targeted ads, super annoying, which can lead to low clickthrough rates, and therefore, lower revenue, since it defeats the first rule…

Second, we will talk about the Affiliate Revenue Model, which is another popular web-based revenue model, that works by promoting links to relevant products and collecting commission on the sales of those products, and can even work in conjunction with the above mentioned ad based revenue model, or separately. The obvious advantage is also the most obvious benefit of employing an affiliate revenue model in that it generally makes far more money than a simple ad-based revenue model. But the disadvantage is that if you use an affiliate revenue model for your startup, remember that the amount of money you make is limited to the size of your industry, the types of products you sell, and your audience.

Third is the transactional Revenue Model that is employed by countless start-up companies, both tech and otherwise, that strive to rely on the transactional revenue model, for good reason, since this method is one of the most direct ways of generating revenue, as it entails a company providing a service or product and customers paying them for it straight up. The advantage is hat consumers are more attracted to this experience because of its simplicity and the wider set of options, and because it mimics the bazaar mentality that has been a staple of the man experience for Thousands of years, whereas the main disadvantage is the directness of the transactional revenue model, and the fact that far more companies employ this method themselves, which means far more competition and price deterioration, and therefore, less money to be made by anyone and everyone who uses this RM – revenue model.

Then is the subscription revenue model which entails offering your customers a product or service that customers can pay for over a longer period of time, usually month to month, or even year to year. And the obvious advantage is that if your company is far enough along in its development curve, this model can generate recurring revenue, and can even benefit from customers who are simply too lazy to cancel their subscription to your company, which is the dirty little secret of a subscription-based model. There are clear disadvantages, because this model depends very much on having a overly large consumer base — so it’s critical to maintain a higher subscribe rate than an unsubscribe rate, and to keep stoking it upwards.

Next up is the Web Sales Revenue Model, which is an offshoot of the classic transactional revenue model, in which a customer pays directly for a product or service, except that the new customers must first come to your company via a web search, or an outbound SEO or other type of marketing, and then you need to conduct all the transactions solely over the internet. The advantages of Web sales are mainly, in that it works with a wide variety of offerings, including software, hardware, and even subscription services, whereas the disadvantages are that relationship sales are incompatible with the web sales model, so if your company is related to others, such as in consulting, or selling big ticket items (high-value items such as houses, appliances, and cars), you should consider employing a model that’s more suited to your offering.

We also have Direct Sales Revenue Model, where there are two main types of direct sales, the inside sales, in which someone calls in to place an order or sales agents calling prospects, and the outside sales, which is a face to face sales transaction. Advantages of Direct sales models is that they work great with relationship sales cycles, enterprise sales cycles, or complex sales cycles that entail multiple buyers and influencers. The disadvantages, are that the direct sales model often requires hiring a sales team of some sort, which means that it isn’t optimal for small ticket price items. If your offering is priced below the $1,000-$2,000 range, you’ll have trouble building a scalable company.

Channel Sales (or Indirect Sales) Revenue Model, is the model where the channel sales model consists of agents or resellers selling your product for you and either you or the reseller delivering the product. The affiliate revenue model is a good companion model to this one, especially if your offering is a virtual product. Advantages: The channel sales model is ideal for companies who have a product that’s an incremental sale for their channel and can produce incremental profit. Disadvantages: Don’t employ this model if your product requires you to evangelize your marketplace, or if your product competes with that of your partners, as they will push their products first and foremost, and not yours.

Retail Sales Revenue Model: Retail sales entails setting up a traditional department store or retail store in which you offer physical goods to your customers. Keep in mind that the retail sales model will require shelf space (that you’ll have to pay for) at existing stores, and is best suited for products that require logistics to reach your customers. Advantages: Retail sales is a great way to offer deals and complimentary products to an existing customer base to help boost brand awareness. Disadvantages: The retail sales route is not ideal for early stage companies, or companies that offer digital products like software or apps.

Product is Free, But Services Aren’t Free, Revenue Model: This model is unique compared to others, in that you have to give your product away for free, yet require customers to pay for installation, customization, training or other additional services. Advantages: This model is great for building trust with your customer base and boosting brand awareness, as any company that offers anything for free will generate considerable buzz. Disadvantages: Remember, employing this model means that you are basically running a services business with the product as a marketing cost. Also, a model like this isn’t always the best for scaling your company in the long term, so keep your eye on additional revenue models to utilize later on.

Freemium Revenue Model: The freemium model is one in which a company’s basic services are free, yet users must pay for additional premium features, extensions, functions, etc. One of the biggest companies to use this model is Linkedin, the most popular business/social media platform. Advantages: Similar to the previous model, the freemium model offers something free to users, which is a great way to give them a taste of your product or service while simultaneously enticing them to pay for something later on. Disadvantages: This model requires a considerable investment of time and money to reach out to your audience, and even more effort to convert free users into paying customers.

Product or service is free, yet we get the revenue from FB ads, and that is why this is also known as the “Facebook Model.” This one is the most common Revenue Model, currently used by Internet startups around the globe the interface with Facebook Apps. With this model, your service is free, while the revenue comes from click-through advertising, making it excellent for customers, and truth be told, a little less excellent for fresh startup companies that are on a tight budget.

Lastly the “Product is free, but you pay for support services” revenue model, means that if you opt for this revenue model, your product will be given away free of charge, but the users will be paying for installation, customization, training or other additional services. This is a good model for getting your foot in the door, but be aware that this is basically a services business with the product as a marketing cost.

And that completes the “Dirty Dozen” of Revenue Models for your Startup and for your Future Life.

And by taking all this into account, we must also remember that the various ways that a startup company can sell their products or services is directly affected by how the market you choose to ply your trade in, affects the way in which you actually bring your product to the marketplace and how you are being rewarded for your efforts, or not…

As for finding out if you have chosen the right Revenue Model of not, follow your nose for success.

Once you find a Revenue Model that works — stick with it.

Stick with it, because it’s rather hard to argue with success.

Yours,

Dr Churchill

PS:

Choosing the right revenue model for your business is not an easy thing to do, especially with so many people confusing it with the marketing model. Although the two are indeed closely related, make sure you know how to differentiate between these two concepts. A good marketing plan is crucial if you want to get visible, but revenue model takes care of your money in the long run.

A key challenge for every entrepreneur seeking funding is to convince potential investors that the marketing model will substantiate your positive revenue model, customers will buy the offering, and you have a viable business model.

Once you choose the right revenue model – then your investors will be happy to fund you bec cause they can smell SUCCESS.

And by the way, “Sex” still sells…