5 Revenue Models And How They Work

Evaluating an investment prospect nowadays calls for more than just reading it’s annual reports and performance updates. We also need to understand the basic fundamentals of operating a business as well.

Apart from the financial performance, product, or it’s operating industry, do consider it’s means of generating revenue as well.

Innovative players these days tend to eschew conventional methods of revenue generation such as manufacturing and retailing due to various factors. This includes reasons such as high capital requirements, low margins, or the inability to scale the business quickly.

Nowadays, many enterprises have also started employing innovative revenue models so as to increase their turnover and augment their income.

Because revenue models tie in with a company’s product or service development, it’s important to establish the direction early on. Management can then move to develop products and services around it so as to drive revenue growth and capture market share.

In this article, we’ll delve into 5 revenue models which we observe are being used by newer entrants. By grasping these concepts, you should be able to understand the business strategy of your investment better.

A Primer

It’s important that we explain what a Revenue Model is before continuing. A Revenue Model is a process through which the enterprise expects to receive income from customers.

A Revenue Model identifies what value is offered to the customer, how it is given, and over what time period. It also determines it’s pricing strategy, and who pays for it. As mentioned, this also leads to the development of future products and services in support of that revenue model.

Without a clear, actionable, and well-defined revenue model, businesses especially newer ones, will likely encounter difficulties in collecting adequate revenue. This will lead into issues such as inability to secure financing, and also insufficient cash flow for operations.

Signing Up

The Subscription Model is perhaps one of the most well-known revenue models in practice. It’s a popular source of recurring revenue for cloud-based or software-as-a-service companies, and online video-streaming companies such as Netflix.

Such a model generally involves customers paying a pre-determined or fixed fee in return for a service or product. Subscriptions normally run for a fixed period of time before expiring.

Apart from being easy to track and predict, subscriptions are very much a recurring source of income which management can use for forecasting and assessing demand. Furthermore, businesses no longer have to focus on constantly acquiring new customers, but can instead invest more towards product/service quality and customer support.

This relationship-building improves customer stickiness if performed well, and can also offer deeper insights into customer behaviors and preferences in the form of actionable data.

Companies which utilize the Subscription Model includes local telecommunication companies such as Singtel and Starhub, as well as Netflix and Spotify in the US.

Commissions

Commissions are another way that a business can generate revenue. This method is especially prevalent among brokerages or marketplace-esque platforms which orchestrate deals between two parties.

While helping to facilitate a transaction, the business also charges a small fee, which can be fixed, or based on the total value of that settlement.

A Commission based revenue model mostly relies on transaction volumes to drive revenue.This means that the success of commission based models tend to rely on the market size of their respective products and how much value can they provide through the form of advertising or convenience.

Sellers and buyers also benefit from such a arrangement, as they normally do not need to pay until they actually require the services of the business.

Property brokers such as Propnex and APAC Realty, as well as Marketplace platforms like Airbnb and Booking.com all utilize commissions to drive revenue.

Free+Premium = Freemium

A Freemium revenue model consists of a basic service offered freely to consumers, while having an option for customers to pay for enhanced or additional features.

This model lowers the barriers of entry to consumers, and is commonly deployed by software companies and application developers in order to drive acquisitions early on, and monetizing their user base in later stages.

It’s a very popular go-to-market strategy for platforms with low scaling and acquisition costs, but high lifetime value. As consumers utilize the free features, the business or platform can also collect feedback and data about their customers in order to improve their value proposition and offer in-demand services.

Some enterprises also offer their paid features in separate tiers, in order to suit the requirements of customers with different needs.

Commonly cited examples which use the Freemium revenue model include applications such as Asana, and software companies like Dropbox.

The Age Of Data

There’s a saying that goes, “If you not paying for it, it means you’re the product.” In the Data sales revenue model, data collected on customer preferences and trends is sold directly to other businesses.

These companies can then use this data to create in-demand products and services, and optimize processes. They can also augment decision-making for resource deployment and marketing efforts.

In the digital age, such data is becoming increasingly valuable as businesses transition online, and are constantly on the lookout for marketable products and services which can be exploited for opportunities.

Furthermore, some categories of data have huge potential value, especially if it is hard-to-attain and has been cleaned, structured, or scrubbed beforehand.

However, businesses which focus on Data-as-a-service should be wary of possible ramifications associated with the sales of data. This is as the the general public starts to express concerns about privacy and surveillance fears.

Some players in the Data sales space include Statista and Gartner.

Lead Generation

In sales/marketing terms, Leads are basically potential customers, or individuals who have expressed an interest in a particular product or service.

However it can be difficult or time-consuming for businesses to attract leads consistently on their own without assistance. This is especially true for newer enterprises which do not have a established customer base.

This is where lead generation comes in. Such a business acquires leads for clients who could then sell a product or service to these leads. The clients pay fees to the business for directing the specific demand towards their products and services, which contributes to their revenue stream.

In order to do so, the enterprise needs to attract significant traffic volumes to their platform, which could then be converted into leads for their clients. However unlike a commission based model, the business isn’t involved in the actual transaction but simply facilitates the connection between customer and seller.

An example of a Lead generation business would be the Life360 app, as well as companies such as ZoomInfo Technologies.

It’s All About Value

By discovering and understanding an investment’s revenue models and streams, readers will likely be in a better position to make decisions. Forecasting of their growth trajectories will also be less complicated.

Some businesses also choose to employ a mixture of revenue models, instead of sticking to just one. This allows them to maximize the value they bring to the table.

Ultimately, we need to understand and assess these models in order to determine the viability and end-state of our investments in the future.

Casey H

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