example of revenue model in business plan

Revenue models: 11 types and how to pick the right one

Finding the right revenue model for your company and products is an incredibly important part of starting and expanding your business. It's a key part of building a brand. Explore popular revenue models and how to choose the right one.

What is a revenue model?

• 11 different types of revenue models

Costs associated with revenue models 

How to choose your revenue model.

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In one of the most famous lines from the 1941 classic Citizen Kane , Mr. Bernstein proclaims: “ It's no trick to make an awful lot of money... if what you want is to do is make a lot of money .” If only that statement were as true as it seemed. It's probably more accurate to say, “There are a lot of ways to make a lot of money.”

That’s particularly true for software businesses, with the rise of the mobile internet stimulating an explosion in the number of viable revenue models. Choosing which revenue model works best for your SaaS business, though, is not easy (even if that's all you want to do is choose a revenue model for your SaaS business). Your choice will help determine your sales strategy , and from there the growth rates, the amount of money you’ll need to invest initially, and the kind of relationship you’re likely to build with your customers. More than that — the choice determines the future of your business. Let’s take a look at some of the most popular revenue models used today — why they’re popular, why they work, and why they will (or won’t) work for you.

A revenue model is the income generating framework that is part of a company’s business model. Common revenue models include subscription, licensing and markup. The revenue model helps businesses determine their revenue generation strategies such as: which revenue source to prioritize, understanding target customers, and how to price their products.

Revenue models often get conflated with revenue streams, probably because each is a single revenue generation source. They are also confused with business models, of which revenue models are a part. Revenue models help business owners determine how to manage their revenue streams and are required to complete a business model.

Without a considered revenue model, your business will incur costs it cannot sustain. With a revenue model, you can set, track, and forecast business growth based on specific customer segments.

11 different types of revenue models 

There is no such thing as a perfect revenue model, but the popularity of some of the methods below suggests that many of them are well-tailored for the current state of the market. Here we’ll walk through each type of revenue model and when they may be most beneficial and applicable.

1. Subscription

The  subscription model  is the “vanilla” SaaS revenue model, not that there’s anything boring about a well-worked subscription plan. Businesses charge a customer every month or year for use of a product or service. All revenue is deferred and then fulfilled in installments. The subscription model is perhaps the most popular among SaaS companies because of its versatility, promise of  recurring revenue , and high value:customer lifetime balance.  Done right it's a one-way-ticket to sustainable growth .

Companies working with recurring revenue models, such as  subscription or licensing , see more value from a customer across a given customer lifetime. Being able to offer a variety of value options means your company can respond to more than one set of customer needs, expanding your appeal. Hubstaff’s subscription plan, seen below, is a classic of the genre:

Hubstaff’s various plans are distinct from one another in price and feature. This flexibility in the subscription model means that tentative or lower-budgeted customers can still get what they need, all the while maintaining visibility of what extra they could get for a few dollars more a month.

The freemium model is often described as a subscription revenue model, but in fact it’s an acquisition model, not a revenue model. Freemium involves giving users free access to an app and then selling subscriptions for a premium tier that includes more features.

Markup is a very common revenue model for buyer companies (i.e., companies that buy the products they sell). It’s as simple as can be: Take the cost of goods you just bought, mark it up X%, and make a profit margin on the original purchase. There are various subgenres of the markup model, including the following:

• Wholesale: Sale of goods or merchandise to retailers, business users, or other wholesalers
• Retail: Identification of demand, and satisfaction of it through a supply chain via a number of possible outlets, including physical and ecommercial ones

Markup is particularly used by mediators like ecommerce marketplaces — Amazon, for example. On average, Amazon charges a seller who uses their site 15% of the sale, plus  FBA fees  (including storage, pick & pack, shipping).

5. Pay-Per-User

One of the most enduring legacies of SaaS in the world of business is the introduction of pay-per-user (PPU). It involves giving a customer potentially unlimited to access to a range of features while charging them only for the services they use. At the dawn of SaaS, as the software required no physical delivery and deployed so quickly and cheaply, PPU appeared to be the most sensible revenue model. However, as natural as it seemed back in the day,  pay-per-user is not popular  anymore. Ascribing value to your product is one of the key considerations of your revenue model, and that includes demonstrating why it’s worth your target customers’ valuable dollars, not just making everything so cheap and easy that they can’t refuse. The issue with PPU, then, is that it’s rarely where value is ascribed to your product. Moreover, PPU kills your Monthly Active User metric. The per-user metric is not the most useful to customers in terms of deriving value — its take-it-or-leave-it approach actively works against your Daily Active Users number, and thus contributes to your churn rate.

6. Donation

As evidenced by the rise and rise of  Kickstarter - and  Patreon -based ventures, altruism is, if unpredictable, a pretty effective revenue model by itself. Relying on the donations of regular users is a common revenue model for nonprofits, online media (i.e., YouTubers) and independent news outlets.

7. Affiliate

What is  affiliate marketing ? This new, popular model works by promoting referral links to relevant products and collecting commission on any subsequent sales of those products. Leverage your product’s synergy with another product in an adjacent space and you both stand to gain. The affiliate model can be as simple as including in an article an outlink to a book or other product mentioned or offering your customers specialized recommendations relative to purchase history (again, Amazon is a master of this art). Some companies, such as Etsy, even have a  specific program  for their affiliates, where other companies can earn a commission on qualifying sales that result from featuring links to Etsy products and services. The affiliate revenue model is increasingly popular, owing to the way it dovetails effectively with other revenue models, particularly ad-based models.

8. Arbitrage

Applicable mainly to sellers or marketplace-oriented companies, the arbitrage revenue model uses the price difference in two different markets of the same good/service to make a profit. You buy in one market (a security/currency/commodity) and simultaneously sell in another market, at a higher price, what you just bought, pocketing the temporary price difference. Arbitrage is popular with  affiliate marketers , as well as with many cryptocurrency firms, SFOX being a prime example.

9. Commission

This transactional revenue model involves a middleman charging commission for each transaction it handles between two parties or for any lead it provides to the other party. It’s particularly popular with online marketplaces and aggregators, as well as businesses like independent music distributors. It’s particularly easy to get up and running with a commission-based business model because you’re working off of existing products. However, unless your field is well-conditioned for a monopoly, and unless your company is (or can become) that monopoly, you’ll find the commission model  very tough to scale .

10. Data Sales

Ever heard the phrase, “If you can’t see how the money’s made, you’re the product”? That’s data-selling in action. Many companies  selling digital goods  and services could not exist without core underlying data assets. In the data sale revenue model, this data is sold directly to a consumer or business customer. While certain companies will use data sale as their primary revenue model, the use of  data sales  to augment another revenue model is virtually ubiquitous. While some are using it as an  entrepreneurial venture , it is also the subject of considerable justified  public concern  and should be handled with care in the event you decide to go with it as your revenue model.

11. Web/Direct Sales

The old-fashioned revenue model made new, web sales and direct sales involve payment for goods or services through a digital medium. Web sales involve a customer finding your product via outbound marketing (or a web search) and can used for software, hardware, and subscription-based offerings. Direct sales revolve around inbound marketing and is good for handling multiple buyers and influencers in big-ticket markets.

A good revenue model is not just about squeezing as much revenue possible out of a sales cycle; it’s also about balancing your ambitions in the market with your resourcing requirements. A startup revenue model may be significantly different than one for an established business because their resources are vastly different. When choosing your model, factoring in costs is paramount to ensure profitability.

Cost of revenue

The first cost you’ll be likely to factor in is your cost of goods — how much it costs to produce the goods or service that you then sell. For hardware, this can comprise testing and manufacture; for software, it’ll include the whole development cycle. Regardless of what you produce, administrative overheads will also apply. You will find cost of goods a considerably less comprehensive metric than cost of revenue, which is the total cost of manufacturing and delivering a product or service to consumers. That includes everything we’ve just covered, plus distribution and marketing costs. Cost of revenue is more often used in SaaS and other service-oriented industries because it makes the many costs incurred outside of production in SaaS easier to track.

Prototyping costs

Prototyping is a fundamental aspect of any production cycle and, unfortunately, is one of the most expensive. While testing prototypes or beta versions of your new product, even the smallest revisions can necessitate costly changes to your production/development process. This usually comprises a base-level cost, plus iteration costs on top of that. When forecasting prototyping costs, it’s wise to plan for several iterations; it’s highly unlikely you’ll get everything right the first time around, especially if your product is innovative or is composed of a number of features.

Equipment costs

One of the beautiful things about being a SaaS company is that there are no production lines to run. Nevertheless, equipment costs still factor into the bottom line. Firmware,  app development tools , server rental, plus any other administrative services bought on subscription (e.g. Slack or Hubstaff) will play a part in your equipment costs, but, generally, equipment costs should be the easiest of all to forecast.

Labor costs

An underpaid workforce is an unhappy workforce (if it’s a workforce at all); wage costs come out of your bottom line. Based on the interaction of salary and commission in your  compensation plan , as well as the type of commission you offer (entirely open-ended or capped? Will there be accelerators/decelerators involved?), you will have to plan for your expenditure on labor costs differently.

Advertising & marketing costs

Your advertising and marketing costs will be determined by the following:

• The size of your respective advertising and marketing teams
• The scale of exposure you’re shooting for
• Your method of approach to advertising and marketing: undefinedundefinedundefined

With all of those options, how could you possibly be expected to choose? The answer is in your product itself.

Know your market

Where are your customers? How are they accessible to you? If your buyer personas are mainly single customers, address subscription options to them that are expertly targeted to their needs and  how your product can fulfill them . On the other hand, if you’re looking to sell to larger companies who need a customized version of your core product, consider a licensing-based option that will allow you to establish a solid, high-return relationship that has the legs to run for the long term. Knowing your market also means knowing your competitors. Before choosing a revenue model, make sure you have a firm grasp of industry benchmarks: Where is the baseline value for equivalent products to yours in the market? Where does your product sit? Interrogate your product honestly. Not only will a frank assessment of your product’s value save you the mistake of pricing your product too high (or too low), but it will also show you how to capitalize on its value and where your developmental compass should be pointed. Consider the strength of your connections with compatible peer companies. For instance, if you’re running time-management software and have connections to a neighboring company selling compatible HR software, reach out to them. A strong network connection can be leveraged with an effective affiliate revenue model–based strategy.

Know your product

Knowing your product is every bit as important as knowing your market, if not more so. Sometimes, the nature of a product dictates the best revenue model for it by itself. If you have a suite of products, is it most sensible to have them as a subscription service or as one-off purchased products? The smart money in this case, for the sake of your growth and daily-user figures, would be on the subscription option. Again, evaluate your product’s performance honestly. How does your product perform compared with its competitors? How wide is your feature array compared with the rest? An awareness of your product enables you to choose a revenue model that hits the value/willingness-to-pay sweet spot. Consider your options further if your product is not a straightforward software proposition. For example, if your product is platform-based, investigate your advertising prospects to capitalize on your traffic buzz, and think laterally to find possible partners for an affiliate strategy that will give your revenue an added kick.

Pitchfork’s affiliate program with makers of craft beer can be seen on the leftmost tab. Music blog platform Pitchfork sussed out that the only thing their readers like more than left-field music is craft beer, so they introduced an affiliate feature with brewer’s outlet October. It’s a smart exhibition of affiliate revenue scoring.

Expect the unexpected

As your product line changes and as your company grows, your initial revenue model may change. You may begin with a subscription revenue model that then assimilates aspects from the affiliate, advertising, and data sales models with time and opportunity. You might start off as a fledgling independent blog on donation with a little bit of advertising, then find yourself with an audience big enough that you can shun the advertisers, install a subscription model, and keep the integrity of your writing safeguarded. Alternatively, you may begin with subscription, see only a fraction of your potential success realized, and move to a licensing revenue model. The important thing is to be willing to shift your revenue model or bring in additional models to complement what you already use, if the situation calls for it.

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Your revenue model is unique

So many revenue sources, so many revenue models, so little time. There are some fundamental differences between revenue models. For instance, if you’re a SaaS company producing your own software product, you’re unlikely to get all that far with an arbitrage model. Likewise, if your product is a medium or if you’re a seller, a subscription-based revenue model won’t do the trick. A product with a high ceiling for potential revenue is not best served by a donation model. Nevertheless, the choice of a main revenue model out of the batch that do work for your product, and how you then combine them with appropriate aspects of other models, is yours, and yours only. Your product and the market should be in mind at all times while you’re settling on, adding to, and refining your model. After that, bringing in the revenue itself should be as easy as  Citizen Kane  said.

Related reading

Revenue Model Types in Software Business: Examples and Model Choice

• 12 min read
• Last updated: 28 Dec, 2022
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Here's our video breakdown of revenue models

For those exploring the world of business strategy planning, we’ll elaborate on the definition of the revenue model, and the correlation between business models and revenue streams. We’ll also analyze different types of revenue models and look at some examples to scrutinize the pros and cons of each approach. Finally, we’ll reflect on how to choose or develop a model for your business.

What is a revenue model?

A revenue model is a plan for earning revenue from a business or project. It explains different mechanisms of revenue generation and its sources. Since selling software products is an online business, a plan for making money from it is also called an eCommerce revenue model. The simplest example of a revenue model is a high-traffic blog that places ads to make money. Web resources that present content, e.g., news (value), to the public will make use of its traffic (audience) to place ads. The ads in turn will generate revenue that a website will use to cover its maintenance costs and staff salaries, leaving the profit. Revenue models are often confused with business models and revenue streams. To avoid any misinterpretations, let’s quickly define these three terms that form a business strategy.

Revenue model vs business model

A business model (BM) is a broad term outlining everything concerning the main aspects of the business, all of which are contained in the answers to the following questions.

• What value will we create?
• How will we deliver it?
• How will we bring in revenue?
• How will we earn profit?

Numerous forms of business models can’t be classified in a single list because each part is highly individual to the industry, type of product/service, audience, or profitability. Business models are often depicted strategically on a business model canvas . This is a compound representation of all the key elements of a BM.

A  business model canvas template by AltexSoft

So the BM describes how a business will work from the standpoint of value generation. Revenue models, on the other hand, are a part of the business model used to describe how the company gets gross sales.

Revenue model vs revenue stream

A revenue model is used to manage a company’s revenue streams, predict income, and modify revenue strategy. The revenue itself is one of the main KPIs for a business. Measuring it annually or quarterly allows you to understand how your business operates in general and whether you should change the way you sell the products or charge for them. But what are revenue streams ? A revenue stream is a single source of revenue that a business has. There can be many of them. Streams are often divided by customer segments that bring revenue via a given method. The two terms – revenue stream and revenue model – are often used interchangeably, since, from a business perspective, the subscription revenue model will have a revenue stream coming from subscriptions. However, models can name multiple streams divided into customer segments, while the principle of revenue generation (subscription) will remain the same.

Revenue model types

Any start-up, tech company, or digital business may combine different revenue models. The revenue model will look different depending on the industry and the product/service type. Here we will pay more attention to the most common revenue models used in the software industry and online business.

Transaction-based revenue model

A transaction-based model is a classic way a business can earn money. The revenue is generated by directly selling an item or a service to a customer. The customer can be another company (B2B) or a consumer (B2C). The price of the product or service constitutes the production costs and margin. By increasing the margin, the business can generate more income from sales. Selling products or services entails using different pricing tactics. While some of them may be considered separate revenue models, these tactics are often used in pairs. Because pricing tactics can be seen as pricing plans in a software business, we can clearly define the following types. Licensing/one-time purchase. This entails selling a software product by license that can be used by a single user or a group of users. The general idea is to offer a product that requires making only one payment for it, e.g., Microsoft Windows, Apache Server, and some video games. Subscription/recurring payment. Unlike licensing, a user receives access to the software by paying a subscription fee on a monthly/annual basis, e.g., Netflix, Spotify, and Adobe products. Pay-per-use. This pricing tactic is mostly used by different cloud-based products and services that charge you for the computing powers/memory/resources/time used. Examples are Amazon Web Services and Google Cloud Platform. Freemium/upselling. Freemium is a type of app monetization in which a user may access the main product for free, but will be charged for additional functions, services, bonuses, plugins, or extensions, e.g., Skype, Evernote, LinkedIn, and many video games. Hybrid pricing. Sometimes pricing plans are a mixture of more than one. So that freemium plan might morph into some form of pay-per-use tiered plan. After passing some limit in computation or resources, a user can be forced to use or offered another type of pricing. Examples are Mailchimp, Amazon Web Services, and SalesForce. Various combinations of pricing tactics can be used simultaneously, which is more often seen in cloud-based products that offer multiple payment options at once. The revenue model in this case remains based on the transaction and purchases made by the customers. The difference in pricing tactics will modify how the revenue is generated and basically depends on the type of product/service you sell. The pros. You have full control over the pricing strategy. The cons. The cons will depend on the industry/product type and pricing tactics, as the model itself imposes a constant generation of sales with the help of advertising and marketing strategies. The only con we might mention here is the financial burden connected with sales you will carry on your own. Transaction-based revenue model examples. Nearly any company that produces 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.

Advertisement-based revenue model

The advertisement-based revenue model is a plan with which businesses make money by selling ad spaces. It is one of the most standard methods of producing top-line growth, and it’s valid both for online and offline businesses. It’s often used by websites/applications/marketplaces or any other web resource that attracts huge amounts of traffic. The pros. Having a high-traffic resource allows you to monetize the ad space nearly instantly. Often, there is a strong demand for advertising space, especially with organic traffic and platforms with the target audience. The cons. Running advertising campaigns to gain web visibility on various platforms like social networks is a standard marketing activity with targeting instruments more precise than ever. However, advertisements are everywhere, so you might think twice about whether you want to distract a user by placing an ad in your app – even if it is a secondary revenue stream. Ad-based revenue model examples. YouTube, Instagram, Facebook, and Google are just a few prominent examples. All these platforms generate revenue by displaying advertisements to users and charging businesses for exposure. In addition to promotion, these platforms may also generate revenue through other sources, such as premium subscriptions or licensing agreements.

Commission-based revenue models

A commission-based revenue model is one of the most common ways businesses make money today. A commission is a sum of money a retailer adds to the total cost of a product or service. A commission may be charged per marketplace or transaction and can be assigned as a

• flat rate, a fixed sum of money for any type of transaction, e.g., a $450/300/1500 transaction is charged with a $20 commission;
• percent of transaction size, e.g., a $100 transaction is charged with a 10 percent commission – $10; or
• tiered commission, a percent or flat rate that grows based on the transaction volume, e.g., 50,000 transactions are charged a 4 percent commission, 150,000 transactions a 7 percent commission.

Marketplaces and eCommerce platforms, in particular, utilize commissions the most. Another large category includes businesses that connect service providers/renters with consumers. Think of any ride-hailing company, food delivery, online travel agency (OTA) , or alternative accommodation services. The pros. Revenue is easily predictable because of the sheer fee. The cons. There are many problems bound to the concept of a commission, but the major one goes to the scalability of a business that’s attached to a transaction size or volume. In general, dependency on the product supplier’s sales makes generating revenue require upfront investments and competitive superiority. Commission-based revenue model examples. Airbnb is a platform that allows individuals to list and rent their homes or apartments as short-term rentals . It generates revenue by charging a commission on each booking made through its platform. The commission is typically 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.

Markup revenue model

Markup is the type of revenue model with which you buy a product at a certain cost and then sell it for 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 may be a bed bank — a B2B company that purchases rooms from accommodation providers in bulk at a discounted, static price for specific dates, and sells them to OTAs , travel agents, destination management companies, airlines, or tour operators. Pros. Markup revenue models are straightforward, allowing businesses to easily calculate their profit margins on each sale. With this approach, businesses can be flexible with their pricing by adjusting the markup to reflect changes in the cost of goods or changes in market conditions. Cons. While markups provide a great deal of flexibility, some organizations may not have enough resources to manage revenue and apply changes to their markup strategy based on the market state. So they set a uniform markup for all of their products or services. This may lead to prices being too low or too high and businesses may not be able to fully capitalize on the value of certain products. Markup revenue model examples. In addition to bed banks, airline consolidators leverage a markup model to earn revenue: They are brokers that book flight seats in bulk at discount rates and then resell them to travel agencies. Examples are Mondee, Picasso Travel, and Centrav.

Affiliate revenue model

The affiliate model is similar to the commission-based model. The main difference is that, with the affiliate model, you do not sell the product or service on your own platform, but rather redirect the customer to the original provider's platform to make the purchase and earn a commission on any resulting sales. An affiliate model is a contract between a supplier of a product/service and a promoter. A promoter can be another business/media resource/blogger that recommends a supplier’s product. The earnings will come as a percentage of sales or fees for the number of registrations done via referral links. Businesses utilizing the affiliate model include metasearch engines as a unique example. Metasearch tools can be found almost everywhere. Their main difference with retailers is that they don’t sell products directly but offer comparison and search as a value. Advertising and affiliate programs are the main revenue models used to get earnings in this case. The pros. Just like the advertisement-based revenue model, once you have a huge traffic resource, you might apply for an affiliate program to earn money. This will bring you income without any investments because you will basically generate traffic and leads for the affiliate program provider. The cons. Unfortunately, the percentage of affiliate programs promised to the promoter is quite low. Sometimes it fluctuates between 1-2 percent and requires a high volume of sales generated through your links. Affiliate revenue model examples. Blogging and event-promoting platforms like Broadway.com or TheaterMania generate revenue using this model. Among other examples are Amazon affiliate websites, e.g., Cloud Living and ThisIsWhyImBroke.

Interest revenue model

An interest or investment revenue model relates to any type of business that generates revenue in the form of interest on their loans or deposit payments. These are most often banking or electronic wallet companies that work with financial operations. The revenue is generated by making a loan to a customer or by a customer depositing or investing money (or other resources) into the business. At the end of a return period, a percentage of the loan sum will return as revenue. Debit/credit money provided with the bank accounts also relates to this model. That’s just one of the ways financial companies can make money, combining it with transaction fees for using their e-wallet/bank account. The pros. The interest rate provides a clear view of what revenue a business will generate, as the percentage stays unchanged until the return period is over. The cons. The regulations of an interest rate impact both the customer and the business. Sometimes it depends on the economic environment. Think of currency rate changes that influence potential and existing borrowers. Interest revenue model examples. Many banks, credit card companies, and other financial institutions use the interest revenue model. For example, peer-to-peer lending platforms, such as LendingClub and Prosper, generate revenue by charging interest on loans funded by investors.

Donation-based or pay-what-you-want revenue models

This is a revenue model based on investments made by businesses or customers on a voluntary basis. The product or service itself is free to use by default, so that’s the primary value a company brings to the customer. The revenue is generated in the form of donations, or sometimes in the form of “pay-what-you-want.” It’s important to mention that there is a difference between a donation-based business and a charity organization. A donation-based company is still required to pay taxes. The pros. Because of the free access to the product, some companies manage to get increasingly popular, resulting in donations becoming a major part of their revenue. The cons. The model is never used on its own and the revenue generated by it remains a secondary source because of its random/unstable nature. Donation-based revenue model examples. AdBlock generates revenue through donations from users who support the development and maintenance of the software. At the same time, AdBlock offers a premium version of the software for a fee, which includes additional features and support. Among other examples is Wikipedia which relies on donations as a significant source of revenue. Additionally, the platform makes money through grants and partnerships. There are many other revenue models, and a business or project may use more than one revenue model. It is important for businesses and projects to carefully consider their revenue model as it can have a significant impact on the overall success of the venture.

How to choose a revenue model for your business?

Before choosing a revenue model, you need a fully developed business strategy that will include a prepared business model with all its key instances. That means you must take a few steps prior to selecting the revenue model. Define your value proposition. Map out your product strategy by describing what the product is and what value it brings to the customer. Not all products can be sold: Can you recall the last time you upgraded your WinRAR to a full license? Also, you can analyze the future traffic for your app to understand if you can use ads in it. Explore the market state and customer groups. This step is to define your user persona and understand how these users usually buy things. Some markets are inclined to purchase just one product, some are inclined to ignore upgrades or in-app purchases. A good example in this field is the death of music-selling platforms that were totally replaced by subscription-based streaming services like YouTube Music, Apple Music, Spotify, and others. You may also explore the techniques on how to market your product in our dedicated article. Analyze competitors and their products. You’ll need to learn what mechanisms and revenue streams your competitors use and how they manage their costs. This information will probably show you the market’s pitfalls and dead ends. Looking at this simple matrix below, we can analyze the capabilities and needs of your company to help you decide the type of revenue model to use.

How to choose a revenue model framewor k

Depending on your business model, the product or service you’re presenting to the user is a subject of exchange. This is your value proposition on the market, so you are in charge of choosing what you want to get back based on the market factors, target audience, etc. Paid value proposition. In most cases, your value proposition costs money to use. Whether it’s a service or a software product, a customer will need to pay in some form to gain access to your value. Your revenue model in this case will be based on transactions. So develop pricing tactics that will depend on the nature of the product, the type of audience you’re trying to reach, the type of deployment, specifics of product usage, etc. Free-to-use value proposition. If the value proposition doesn’t require money to use or you choose it to be free, then you need a third party to generate revenue for you. This could be anything based on the previously mentioned types, whether it’s ad space, donations, affiliate programs, or reselling. The combination of the two will basically present you with the revenue streams that will focus on each of the customer segments. In the case of the paid value proposition, each pricing plan will be a separate revenue stream.

Maximizing Profitability: Explore Effective Revenue Models for Your Business

Choosing the right revenue model can help you earn more and create an effective pricing strategy. Explore the different types of revenue models here.

Imagine you're walking down the street on a hot summer day and see the neighborhood kids setting up a lemonade stand. Nothing sounds better on a day like this than an ice-cold lemonade. You approach their stand and find the price is $2 for a cup. While you know it wouldn't cost $2 to make just a glass of lemonade at home, you are willing to pay this price because you are thirsty and also want to support the kids.

From a business perspective, these kids are making a good amount of profit from their lemonade stand. They're actually using a markup revenue model where they increase the price of a cup of lemonade to account for their operating costs. It seems like the perfect model for making money. However, this might not be the case in every business situation. Depending on the scale and complexity of your business model , you need to consider different methods of developing revenue streams.

There are various revenue models implemented by businesses across the board. Many business models are far more complex than a simple lemonade stand and thus require a different revenue model strategy. There are subscription-based, advertising, and commission-based models, to name a few—but what is a revenue model, and how do you choose one?

If you're considering which revenue model to incorporate into your business strategy, keep reading to learn more.

What is a revenue model?

A revenue model is a blueprint for how a company produces income from its services or products. Simply put, it outlines the methods through which a business makes money. There are several components within a revenue model, including how you price your products and which sales channels you choose. A revenue model is established to answer how a company plans to financially optimize its business model.

Revenue models can be seen as roadmaps for understanding how your business will operate financially. They define how a company generates revenue, covers costs, and eventually turns a profit. A revenue model should outline the various sources of income to help guide decision-making related to the overall business strategy.

Benefits of implementing revenue models

Developing a revenue model is an essential step for growing your business. Here are some of the main benefits of implementing revenue models:

Financial sustainability

An effective revenue model establishes consistent income streams, providing financial security and sustainability. Your revenue model should help you understand how much revenue to expect so you can properly plan expenses, growth, and investments.

Pricing strategy

Factors such as market demand, competition, and product costs are considered within a revenue model. Each of these factors can inform your pricing strategy. Based on the revenue model, you can determine which prices maximize revenue while remaining appealing to customers.

Profitability analysis

Revenue models show how your business generates revenue. Understanding the costs incurred by creating your products or services, along with the generated revenue, allows you to analyze the profit margin of your business. Subsequently, you can make informed decisions to improve your resource allocation and pricing strategy.

Scalability

Growth is key to your business revenue model thriving. Implementing a revenue model provides insight into the scalability potential of your business. You can easily assess potential revenue growth by attracting more customers and introducing new products or services. Knowledge is power—the more information you have about how your business operates, the better you can plan for the future and make smarter investments.

Decision-making

A sound revenue model produces meaningful insights to influence strategic decision-making. Your revenue model indicates which products or services generate the highest income, enabling you to better allocate resources and focus on areas with the highest profitability potential.

Investor confidence

A smart revenue model will inspire investor and stakeholder confidence. Potential investors will be impressed by a well-defined revenue model that demonstrates a clear plan for generating multiple revenue streams.

Types of revenue models

There are various revenue models that can be implemented based on your specific business operations and needs. Understanding when and how to choose different types of revenue models will help you better calculate revenue growth rates.

Here are just a few revenue model examples:

Advertisement-based

An advertising revenue model is a popular type of revenue model. The main source of income is generated by displaying advertisements. In this model, your company sells advertising space to other businesses or brands who want to advertise with your customer base and users. How your business earns revenue is by charging advertisers for ad placements.

Pros of advertising-based revenue models

• Successful advertisement-based revenue models typically generate significant income.
• An advertising model can greatly boost revenue streams if you have a large user base or a popular platform.
• There's a low barrier to entry, meaning it's relatively easy to set up and requires minimal investment upfront.
• This revenue model also offers flexibility and opportunities for diversification since you can provide many ad types and have a full roster of advertisers.

Cons of advertising-based revenue models

• Advertisers aren't guaranteed.
• You need to attract advertisers who are willing to pay for placements on your platform.
• The advertising market constantly fluctuates, meaning your revenue may fluctuate whenever advertisers reduce their budgets and don't buy ad space.
• You must also consider user experience and how incorporating display ads will impact your engagement.

YouTube is well-known for using an advertising model. Content creators on the platform can monetize their content by displaying ads on their videos. YouTube earns revenue by selling advertising space to companies that want to reach a vast audience. In this case, content creators can also receive a share of the ad revenue based on several metrics, including clicks, view time, and impressions.

The affiliate model is a more common type of revenue model. It's where a company or person makes a profit by promoting and selling products on behalf of another business. In the affiliate revenue model, an affiliate acts as the middleman between potential customers and the products or services.

Pros of affiliate revenue models

• Affiliate models are generally low-risk and cost-effective.
• As an affiliate, you don't need to create your own products, nor do you handle inventory or customer segments.
• It offers the potential for passive income by earning commissions without active involvement.
• You can also generate income from various affiliate partners, making this model great for diversification and scalability.

Cons of affiliate revenue models

• As an affiliate, you have little to no control over the products or services you promote. This means that negative customer experiences may harm your reputation.
• This type of model also creates revenue dependence on partners.
• Generating a profit with affiliate marketing may be easy, but intense competition and market saturation can make it difficult to generate significant income.

Affiliate marketing is a common revenue model. Amazon Associates is an example of an affiliate revenue model that allows individuals or businesses to make money through commissions on Amazon products they promote. Amazon provides unique affiliate links that lead to participants earning a percentage of the sales on products they advertise.

Commission-based

Similar to the affiliate model, commission-based revenue models allow companies to generate revenue by receiving a commission from each transaction it facilitates. Again, the company acts as a mediator between sellers and buyers.

Pros of commission-based revenue models

• The commission-based revenue model can be extremely scalable.
• The more users you gain, the more transactions will occur, leading to an increase in revenue growth.
• Another benefit of this model type is risk-sharing between the company and the sellers.

Cons of commission-based revenue models

• One of the major downsides to this model is dependency on transaction volume. If there are few transactions happening, the opportunities for generating revenue significantly decrease.
• You'll also experience limited control over pricing, which can lead to price competition among sellers and lower commission rates.

Airbnb uses a commission-based model. The platform makes money by connecting individuals with accommodation. Airbnb earns a commission on every booking made on the platform, making the company reliant on users securing lodging through their platform in order to generate revenue.

Another popular revenue model is donation-based. This strategy is implemented by soliciting and accepting voluntary donations instead of selling services or products.

Pros of donation revenue models

• One of the main benefits of a donation revenue model is the flexibility of revenue generation.
• Organizations can receive revenue streams from diverse donors.
• It's one of the most common revenue models implemented by charitable organizations and comes with tax benefits.

Cons of donation revenue models

• The downside of relying on donations is having an unsteady and uncertain revenue stream.
• Organizations are dependent on donors and are also required to spend money and time on fundraising.
• There are certain stipulations associated with receiving donations and how that money can be used

The Red Cross uses a donation revenue model. As a global humanitarian organization, the Red Cross relies on voluntary contributions to fund its services and programs. The Red Cross doesn't sell products, but they provide services for the community. The donation model is used to support the execution of these services.

The markup model entails a pricing strategy of marking up the cost or adding a margin on top to ensure financial viability. This strategy is used to cover expenses and generate profit despite external factors.

Pros of markup revenue models

• A markup revenue model is simple in practice.
• It doesn't require complex calculations and ensures the profit calculation is straightforward and transparent.
• The markup model also offers flexibility in pricing, meaning businesses can adjust the markup percentage depending on market conditions, supply, competition, and more.

Cons of markup revenue models

• The markup model can be difficult to implement in competitive markets.
• Competing while maintaining profit margins can be challenging when competitors implement aggressive pricing.

The retail industry generally relies on the markup model. There are specific production costs associated with making a pair of shoes. Retailers typically purchase the shoes from wholesalers at a fixed price. Then, they add a markup percentage to determine the selling price so it covers operating expenses and allows the retailer to earn money.

An interest revenue model refers to businesses generating income by earning interest. In this case, companies are making money by leveraging interest rates rather than making direct sales.

Pros of interest revenue models

• Interest models allow companies to earn passive income and diversify their revenue streams.
• This revenue model is also highly scalable and can benefit from changes in interest rates, leading to enhanced earning potential.

Cons of interest revenue models

• There's a level of risk associated with the interest revenue model. Risks include borrowers defaulting on loans, interest rate fluctuations, regulatory and compliance laws, and intense market competition.

Credit card companies use the interest operating model. They lend money to borrowers and earn interest back based on interest rates. These companies manage credit and loan portfolios while taking advantage of interest rates to increase profitability.

Subscription

A subscription revenue model relies on customers who subscribe and pay for your products or services. Customers pay fees to access the company's collection of products or services, allowing for steady revenue sources. The subscription-based revenue model allows a company to generate revenue by offering long-term subscriptions, resulting in consistent income such as monthly recurring revenue .

Pros of subscription revenue models

• The subscription model provides a reliable and predictable revenue stream.
• Customers pay in regular installments, allowing businesses to easily forecast finances.
• This revenue model also promotes customer retention and loyalty while lending itself to upselling and cross-selling opportunities.

Cons of subscription revenue models

• Acquiring customers with the subscription model can be challenging, meaning you may need to spend more time and money on marketing and sales.
• Customers can also cancel their subscriptions, leading to an increase in customer turnover.

Netflix is one of the most popular subscription revenue model examples. Users pay a monthly fee to access the streaming platform. Revenue generation results from monthly subscriptions. Not all subscription models are successful, but Netflix is the best example of how a subscription model can succeed in making money.

Which revenue model is right for you?

Choosing which revenue model is right for your business will depend on a variety of factors, such as your target audience, operating costs, and overall business model.

The first step for choosing a revenue model is to understand your market and the needs of your target audience. For example, media organizations will have different audiences than healthcare companies. Conduct market research to understand your customers and their needs, preferences, and pain points. These findings will inform your business strategy and how you decide to conduct business operations.

The next step is to specify your value proposition by clearly defining the unique value of your product or service. Identify key benefits and determine what sets your business apart from the competition. Consider how your business performs in terms of innovation, convenience, and quality. Communicating these benefits clearly and concisely enables your target customers to connect with your company.

Know your product or service inside-out. Understanding how your product functions, what it offers to target customers, and what your mission is will help you determine your company's business model. The ultimate goal is to generate revenue, so the more you understand your product or service, the better you can make sound business decisions.

There are several common revenue models to choose from. Online businesses, such as an e-commerce platform, might consider an advertising revenue model to diversify income streams. A local bakery may opt for other revenue models more suitable for their needs and production model. Select a revenue model after thorough research and consideration to ensure a steady and effective revenue stream.

Grow your profits with the right revenue model

Business models rely on generating income. The best way to grow your profits is to choose a revenue model that fits your company's unique needs. A company's revenue streams are dependent on more than just direct sales. Make sure to consider all different revenue model types when developing your strategy. A smart strategy is essential for a scalable business .

Whether you're just getting started or considering a switch in your revenue model, you can land more sales by leveraging market insights . Unlock your full earning potential by exploring the different tools and resources available for choosing a revenue model and growing your business. Rely on actionable data to make informed business decisions and hit your targets.

The Leading Source of Insights On Business Model Strategy & Tech Business Models

Revenue Models: The Advanced Guide To Revenue Modeling

Revenue modeling is a process of incorporating a sustainable financial model for revenue generation within a business model design. Revenue modeling can help to understand what options make more sense in creating a digital business from scratch; alternatively, it can help in analyzing existing digital businesses and reverse engineer them.

Table of Contents

Myth: A revenue model is a business model

I noticed over the years of research I’ve put into business modeling how pervasive the confusion between revenue and business model is.

In the startup world, those are often used as synonyms.

Which is fine as long as it doesn’t limit the understanding of what you can do within a business model.

Indeed, a revenue model actually does inform the business model, and it often influences it from the foundation.

However, those are not the same. In fact, in many cases, a revenue model and stream are the only building blocks of an overall business model.

Take the case of Netflix, which for years has been running with a subscription business model, and that much much later on (only in 2021), Netflix started to roll out an ad-based revenue model.

Changing a revenue model is not just about changing the way you make money, but it implies changing a set of assumptions within a business model.

Going back to the case of Netflix, adding the ad-supported tier within its business model, requires an understanding of the implications that might carry on the overall business model.

Thus, Netflix is not just about running ads on top of its platform. It’s about understanding how the streaming ad ecosystem works, how to integrate it within its business model, and what consequences that might have on a current subscription model.

That is why, if you’re on Netflix when you start running ads, it’s not just about how and how much money you can make from it; it’s about asking a few fundamental questions about the overall business model, such as:

• What’s the impact of advertising on the overall business model?
• How is advertising different from subscriptions?
• What scalability advertising has vs. subscriptions?
• What margins do we have with advertising vs. subscriptions?
• Is advertising helping us build a better acquisition funnel?
• Who are the key players within the advertising ecosystem?
• How do we build a scalable advertising platform?

In other words, my argument here is if you plug in a new revenue stream, that is not a business model.

And it’s not just about how you make money; that is also about how that stream integrates within the overall business model and how it changes its distribution , marketing , and financial model.

With this holistic understanding, you are not constrained by a narrowed definition.

Revenue modeling as the avenue into the business model

Once you take into account the above, then, of course, you know that revenue modeling can be an avenue into a business model.

Thus, an understanding of the revenue model will help you:

• Reverse engineering any business (by starting the analysis by simply following the money).
• Speed up the experimentation process by plugging in new revenue models for your business.
• Start building or scaling a business model!

What is a business model?

What is a revenue model?

For the sake of this guide, we’ll look at a key distinction: symmetrical vs. asymmetrical in several contexts.

Remember that all classification methods have flaws and we can only take them into account as long as they help us better tune an existing business model .

I decided to use this classification, but any alternative classification works as long as we are able to grasp and understand the possibilities we have in terms of business model design.

Symmetrical vs. Asymmetrical business models

Business models can be of various types.

For that matter, there might be as many business models as the companies we have in the marketplace.

In this guide, we’ll use as reference symmetry vs. asymmetry to distinguish across two main business models categories.

In this particular case, we’ll look at revenue modeling by keeping a key distinction between symmetry and asymmetry from three different perspectives.

Cash: who pays the bill?

In many cases, platform business models success depends upon two key players:

• Users : who don’t pay for some or all the services offered by a platform (on the user-side), but they help the platform build it’s a core asset
• Customers : who pay for the services offered (on the customer-side) to take advantage of the core asset of the platform

In such a business model, the platform assembles the anonymized data of its users who get a free service in exchange.

The assembled data gets processed (by the platform AI and algorithms) and it’s used to scale the platform, build a valuable core asset that can be financed by a set of customers willing to pay for it.

Asymmetrical: users ≠ customers

The asymmetry here stands in the fact that users and customers are two separate entities (asymmetrical cash model: users ≠ customers).

Think of how Google sells ads to companies, while its core products are all free to users.

Symmetrical: users = customers

Thus, in a symmetrical revenue model, users and customers are the same entity (symmetrical cash model: users = customers).

Think of how Netflix’s users are also its customers.

However, it’s worth highlighting how Netflix has now launched an ad-supported version, which starts at $6.99 and is an ad-supported tier.

This is an interesting business model transition. Indeed, for all its life, Netflix has relied on a linear and symmetrical revenue model, where users were also customers.

As of now, that is still true. In fact, in the ad-supported tier, users are still paying customers. However, it’s worth emphasizing that users are now advertisers’ target.

Thus, by October 2022, as Netflix started to roll out its ad-supported plan, the company also started to move into an asymmetrical business model type.

Why is Netflix moving toward an asymmetric business model? The answer is simple: Scale!

To reach a subsequent stage of scale, where the company can successfully reach a billion users, an ad-supported business model can help with that.

Information: does the user know how the platform makes money?

If there is information asymmetry, it means there is one of the parties knows more than the other side.

Asymmetrical: hidden revenue generation

In a hidden revenue generation model , the users of the platform ignore how it makes money while the platform knows a lot about its users.

Symmetrical: revealed revenue generation

In a symmetrical model, revenue generation is revealed, thus enabling the customers to know what they get for the service paid.

Scale: does the platform retain its margins as it scales?

Scale is the ability of a company to grow exponentially while keeping its margins growing with the platform’s revenues.

Symmetrical and Linear: margins tighten as the platform scales

In a linear symmetrical revenue model as the platform scales its margins tighten up, thus reducing the profitability of the platform.

Asymmetrical and Non-linear: margins keep growing as the platform scales

In a non-linear asymmetrical revenue model as the platform scales margins keep growing, thus keeping the platform highly profitable.

Revenue model examples

In this chapter, we’ll see some revenue model examples you can use or borrow to build your business model .

Ad-supported

Subscription-based

Consumption-based

Commission-based

Hidden Revenue

Razor and blade

Hybrid revenue models

A good example of a business model that has different revenue models is Amazon. Based on each side of its business, Amazon has different revenue streams and models:

Within the Amazon core consumer e-commerce platform, there are two main types of revenue streams:

• Amazon-branded products : on those products which are labeled and sourced by Amazon, the company sells them directly to consumers. Therefore, this is part of the revenue model, where Amazon has the highest margins and more control.
• Amazon’s third-parties   products : those are products that  Amazon  hosts on its own e-commerce platform. Those products benefit from Amazon’s e-commerce visibility and sustained traffic. At the same time, Amazon will have the advantage of increasing the variety of products available in its stores, thus making them more appealing to consumers. However, compared to the branded product, Amazon will have less control and reduced margins. Indeed, Amazon will split the revenues with third-party sellers.

To enable more capabilities to third-party e-commerce stores, and at the same time, guarantee a better experience on its e-commerce (and we can argue also to have more control and margins) Amazon introduced over the years the third-party seller services:

• Amazon third-party seller services:  fulfilled by  Amazon , perhaps enables sellers to host their inventories, and deliver with  Amazon , thus collecting a royalty as a result of the sales made on the platform. Here, the revenue model is flipped. Indeed, Amazon will collect most of the revenues coming from the product sales (remember that Amazon also takes care of storing the inventory and fulfilling it to customers) and the seller will collect a royalty, thus a % of the sale.

Other revenue streams comprise:

• Product advertising:  Amazon  is the most popular product search engine. Over the years it gave the options to e-commerce built on top of Amazon, to gain more visibility both on an impression or on a click-through rate basis. This means that Amazon sells advertising with a bidding model (similar to Google Ads) .
• Amazon Prime:  born as an attempt by  Amazon  to increase the repeat business on the e-commerce platform, Prime turned into a real streaming entertaining business, competing with other companies, like Netflix. This revenue stream follows a subscription-based model .
• Amazon AWS:  Amazon  AWS turned into a cloud infrastructure able to support many small, medium, and enterprise customers. The revenue model here runs primarily based on a consumption basis. Therefore, with a logic of pay-as-you-go.

Revenue model vs. cost structure

To complete the picture, it’s critical to trace the difference between the revenue model and cost structure.

And from there, how the two elements come together to help build a viable business model.

The cost structure is tightly connected to the revenue model. Each revenue stream might carry

Remove model and distribution

In many cases, having a more holistic view of how the revenue model and cost structure interact is critical also to assess when a revenue model goes beyond making money alone.

Don’t get me wrong; a revenue model does focus primarily on how to make money for a business.

However, in some cases, a revenue model might bring in the money as a side-effect of building distribution for the business.

Let’s take a few examples.

When you look at Spotify’s business model , there is no doubt that the premium members’ revenue stream (for now) is the one that most contributes to the business.

Above, you can see how the premium membership revenue is many times over that of the ad-supported tier.

And there is more to it.

Even if we look at it from a cost structure standpoint, the premium membership revenue has a much lower cost compared to the ad business.

Indeed, Spotify, in 2021, generated €8.46 billion in revenues from the premium members’ revenue stream.

And of that, an almost 30% gross profit margin.

On the other hand, in the same period, Spotify generated €1.2 billion in revenue from the ad-supported stream at a 20% gross profit margin.

Does that mean the ad-supported revenue stream is not as good as the premium members?

If you look at it from a revenue generation standpoint alone. That is what you can imply.

However, you do understand that the ad-supported side of the business also represents the marketing funnel, which helps Spotify get recognized by hundred of millions of users across the world.

And that many of these free, ad-supported members become, over time, paid subscribers.

You can get a more comprehensive picture.

As the ad-supported side of the business is not only a revenue stream but it’s also a marketing and distribution channel.

In addition, the ad-supported side of the business, if scaled up, can also enable Spotify to generate much more revenues, in the future, at much wider margins.

Indeed, advertising networks, compared to membership networks, work better as they are scaled up!

That is why it’s critical to develop a holistic mindset to grasp the complete picture of how companies’ business models work.

This is the essence of business engineering .

Breaking down the wall between product and distribution

The lesson we learned from the Internet playbook and way of doing business is the aspiration, over time, to break the walls between product and distribution .

In short, the product becomes both a revenue generator and a marketing /distribution channel.

When you combine the two, that is when you’re able to build an incredible growth engine that will enable a company to establish a scalable business model built on solid moats!

Key Highlights:

• Revenue Modeling Defined : Revenue modeling involves creating a sustainable financial plan for generating income within a business model. It aids in analyzing existing digital businesses, reverse engineering them, and designing new digital ventures.
• Distinguishing Revenue Model and Business Model : While often used interchangeably, a revenue model and a business model are not the same. A revenue model is a foundational element within a business model that informs and influences various aspects of the business.
• Netflix Case Study : The example of Netflix demonstrates how changing a revenue model (adding an ad-based tier) impacts the entire business model. This shift requires considerations about the impact on the overall model, differences from subscriptions, scalability, margins, acquisition funnel, ecosystem players, and platform scalability.
• Holistic Approach to Revenue Modeling : Revenue modeling goes beyond just making money; it involves understanding how a new revenue stream integrates with the business model, impacting distribution, marketing , and financial aspects.
• Importance of Asking Fundamental Questions : When introducing a new revenue stream, it’s crucial to address fundamental questions about its effects on the overall business model, differences from existing streams, scalability, margins, and more.
• Avenue into Business Model Design : Revenue modeling serves as an entry point to designing a business model. It helps in reverse engineering businesses, accelerating experimentation with new revenue models, and facilitating the process of building or scaling a business.
• Business Model Defined : A business model is a comprehensive framework that systematically creates long-term value for an organization by delivering value to customers and capturing value through monetization strategies. It guides understanding, design, and testing of business assumptions.
• Revenue Model Defined : A revenue stream is a foundational component of a business model, representing the economic value customers pay for products and services. It influences how a business model functions and delivers value.
• Symmetrical vs. Asymmetrical Business Models : Asymmetrical models don’t directly monetize users but leverage user data and technology, often having a key customer pay to sustain the core asset. Google’s data-driven ad monetization is an example of an asymmetrical model.
• Various Business Model Types : Business models come in different types, such as scalability, incubator, pivot, freemium, open source, seed funding, cash flow, accessibility, blue ocean, churn, evangelist, growth hacking, MVP, leaner MVP, product-market fit, business engineering, and more.
• Transitional Business Models : Transitional models are used to enter markets, gain traction, and shape long-term scalability visions.
• Revenue Streams Matrix : Classification of revenue streams based on customer interactions and ownership of those interactions aids in revenue modeling.
• Pricing Strategies : Developing pricing models that align with customer needs and financial sustainability is an integral aspect of revenue modeling.
• Considerations in Designing Business Models : A holistic understanding of revenue modeling is crucial, as it influences distribution, marketing , financial models, and other key aspects of a business model.
• Applying Holistic Approach to Business Growth : Utilizing revenue modeling for designing innovative revenue strategies contributes to business growth and sustainability.

Other Case Studies

What is revenue and business model?

Most business people tend to confuse the revenue model with the business model . While the revenue model informs a business model, those are two separate things. The revenue model is one of the building blocks of a business model. Yet a business model comprises many other aspects such as distribution, cost structure, financial structure, and more.

What is revenue model example?

Examples of revenue models that work on the Internet are ad-supported, subscription-based, consumption-based, and SaaS. Those revenue models help web companies to grow and scale their business models .

What is the best revenue model?

In the Inernet era, a revenue model that proved quite effective is the ad-supported business model, where companies like Google provide free tools to billions of people across the web. Those free tools are paid for by companies who advertise on Google. Google opened the way for many other companies to use a similar model to finance the web.

Other Key Components of a Business Model

Value Proposition

Cost Structure

Pricing Strategies

Financial Structure

Technological Modeling

Distribution Channels

Marketing Channels

Other Revenue Model Case Studies

BuzzFeed Business Model

Farfetch Business Model

How Does Revolut Make Money

eToro Business Model

Oracle Business Model

Zalando Business Model

How Does E-Trade Make Money

Tinder Business Model

ClassPass Business Model

Reddit Business Model

Read Also: Amazon Business Model , Google Business Model , Netflix Business Model , Airbnb Business Model , Spotify Business Model , Dropbox Business Model .

Other business resources:

• What Is Business Model Innovation
• What Is a Business Model
• What Is A Heuristic
• What Is Bounded Rationality
• What Is Business Development
• What Is Business Strategy
• What is Blitzscaling
• What Is a Value Proposition
• What Is a Lean Startup Canvas
• What Is Market Segmentation
• What Is a Marketing Strategy
• What is Growth Hacking

More Resources

About The Author

Gennaro Cuofano

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What is a Revenue Model? Types of Revenue Models Explained

A company’s revenue model refers to the methods it uses to generate income from its products or services. The revenue model outlines how a business plans to earn money and get paid by its customers. It is a key component of the overall business model.

Understanding different types of revenue models is crucial for entrepreneurs and business owners. The right revenue model aligns with the core value proposition and allows a company to maximize profits.

In this post, we’ll break down what a revenue model is, explain the most common revenue model types with examples, and distinguish between a revenue model and an overall business model.

Let’s dive in!

What is a Revenue Model?

A revenue model refers to the ways a company makes money from the products or services it offers. It details how the business plans to generate revenue streams and get paid by its customers.

In simple terms, the revenue model answers this critical question:

“How does this company make money?”

It encompasses the sales, pricing, and payment methods for exchanging value between a business and its customers.

A good revenue model aligns tightly with the core value proposition offered. It ensures the company can efficiently monetize the value it provides to customers.

The revenue model works in conjunction with other components of the overall business model:

• Value Proposition  – The core products/services offered and the primary customer needs fulfilled
• Revenue Model  – How the company charges customers and earns income from the value proposition
• Cost Structure  – The major costs incurred in operating the business model
• Key Activities & Resources  – The operational elements needed to execute the business model

While the revenue model focuses specifically on how a company makes money, the full business model covers how it creates, delivers, and captures value overall.

Types of Revenue Models

There are various categories and types of revenue models companies can adopt. The most common revenue model examples include:

1. Transactional

In a transactional model, the business earns money each time a customer makes a purchase. Payment is exchanged directly in return for the product or service.

Transactions can be one-time purchases or recurring purchases on a subscription basis. They may involve a simple fixed price or dynamic pricing.

• Retail companies earn revenue from point-of-sale purchases
• SaaS companies earn revenue from recurring subscription fees
• Uber earns revenue per ride provided to the customer

2. Usage-based

In a usage-based model, the customer pays based on how much they utilize a product/service. The revenue earned scales directly with usage volume.

Common usage metrics include minutes used, data consumed, storage space occupied, or seats filled. Usage can be metered and billed at regular intervals or paid on demand.

• Cloud computing services like AWS charge based on compute resources used
• Telecom companies charge per minute and data used
• Airlines earn revenue based on seats flown

3. Advertising

In an advertising model, companies earn revenue by selling ad space to third parties. Ads are displayed alongside the company’s content or services to users.

Various online and offline mediums carry advertising, including search engines, social media, mobile apps, billboards, TV, and radio.

• Facebook and Google earn the most revenue from advertising
• Media companies earn revenues by selling ad placements
• Free apps and sites monetize via ads while users enjoy free content

4. Commission

In a commission model, a business facilitates transactions between two parties and takes a percentage as the fee. Commissions are paid when a transaction is completed.

Common examples include brokers, agents, marketplaces, and advisors. The commission rate varies across industries.

• Real estate brokers take a ~3% commission on home sales
• Insurance agents earn commissions for new policies written
• Travel booking sites charge commissions on hotel/flight bookings

5. Licensing

With licensing, companies earn revenues by granting customers permission to use their intellectual property. Licenses provide rights to intangible assets like brands, content, data, or technology.

Licensing allows the IP owner to retain ownership while monetizing via recurring license fees. Types of licenses include trademarks, patents, copyrights, or franchises.

• Fast food chains license their brand name to franchisees for an ongoing fee
• Entertainment companies license content rights to streaming platforms
• Disney earns revenue by licensing its character IP for toys, games, apparel, and more

Retailers, distributors, and manufacturers earn revenues through price markups applied when goods exchange hands along the supply chain.

Each middleman in the chain adds a markup on top of their costs to cover logistics and profits. Markups result in higher end-user prices.

• Clothing brands mark up wholesale prices 2-3x when selling to retail stores
• Distributors mark up goods from the wholesale price when selling to retailers
• Retail stores mark up goods sold to consumers, on top of distributor & brand markups

7. Service Fees

Companies earn revenues by charging service, support, or consultation fees around a product, service, or asset. Service revenues recur over time, often via subscriptions.

Types of services generating fees include maintenance, tech support, training, consulting, and financial advice. The fee amount varies based on the effort required.

• Plumbers, lawyers, and consultants bill hourly or fixed fees for services
• Robinhood charges monthly fees for premium services to traders
• Investment managers charge recurring fees based on assets under management

In a rental model, companies earn revenues by temporarily renting out physical products, spaces, or other fixed assets to customers at an hourly/daily/monthly rate.

The same assets can generate rental income over extended periods between uses by multiple customers. Rental flexibility often offsets higher costs vs. ownership.

• Car rental companies generate revenues by renting out vehicles
• Equipment rental companies rent out tools, machinery, electronics, furniture, etc
• Venue owners earn revenues by renting out event spaces

With leasing, companies earn revenues by renting products to customers for extended contract periods (typically 2+ years).

At the end of the lease, assets are returned to the owner instead of sold outright. Leasing can enhance product accessibility via lower regular payments spread over time rather than large one-time fees.

• Auto companies lease vehicles to consumers over multi-year contracts
• Airlines and freight carriers lease planes and transport equipment
• Businesses lease computers, servers, printers, and other tech gear

10. Crowdfunding

Crowdfunding platforms help companies or entrepreneurs raise funds from a large pool of backers or investors in exchange for future products, equity, rewards, or repayment.

The platforms facilitate crowdsourced fundraising from the public via websites like Kickstarter, Indiegogo, and GoFundMe. The platforms themselves earn revenues by taking a percentage of funds raised.

• Smartwatch startup Pebble raised over $10M via Kickstarter crowdfunding
• Local concert promoters crowdfund venue rental costs upfront via fan contributions
• Charities crowdfund donations from the public to fund operations and causes

This covers the major types of revenue models leveraged across industries. Companies often utilize hybrid revenue models encompassing two or more streams. The ideal mix aligns with core business operations.

Now let’s distinguish the revenue model from the overarching business model.

Revenue Model vs. Business Model

The revenue model represents just one component of the complete business model. But what exactly is the difference?

The business model is the company’s core logic for creating, delivering, and capturing value. It’s a holistic view of how the entire business works and earns profits.

The business model canvas, pioneered by Alexander Osterwalder, outlines nine interconnected building blocks making up the full business model:

Business Model Canvas template by Alexander Osterwalder

While each component interacts to form the overall model, the revenue model specifically focuses on how a company plans to earn income from the value it provides customers.

The revenue model is just one piece of the broader business model puzzle. But it’s a critical piece, as profits ultimately fuel operations and growth.

Let’s contrast some key differences:

The business model:

• Encompasses all activities related to providing value and earning profit
• Includes pricing but also production, service delivery, internal operations, etc.
• Outlines the complete experience from the customer’s perspective

The revenue model:

• Focuses specifically on how a company charges for value exchanged
• Details just the monetization and payment components
• Defines the financial value exchange from the company’s perspective

In summary, the business model is comprehensive, while the revenue model simply covers pricing and income generation.

However a well-constructed revenue model aligns cleanly with the overall business model. Revenues should stem directly from fulfilling the core value proposition and delivering real customer benefits.

Constructing a Robust Revenue Model

When designing a revenue model, key objectives include:

• Maximizing income  – The model should optimize monetization of the value delivered to customers
• Profitability  – Revenues should surpass operational costs to achieve profitability
• Scalability  – The model should support increased revenues as the business grows
• Sustainability – Income levels must remain relatively stable and predictable from period to period
• Feasibility  – The model should align with capabilities and not create unrealistic operational burdens

Common pitfalls like over complexity, hidden costs, confusing pricing, or inconsistent revenues can undermine the model. Periodic re-evaluation helps keep the model aligned with evolving market dynamics.

Taking the time to engineer an intelligent revenue model directly fuels a company’s chances of success. An ineffective model almost guarantees failure out of the gates.

While on the surface it appears simple, designing a robust revenue model requires deep market analysis and creative thinking. But the effort pays dividends over the long-term life of a business.

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Key Takeaways

• A company’s revenue model outlines how it earns income from the value proposition delivered to customers
• The revenue model details how products and services are monetized through sales, pricing, and payment methods
• It is a key component of the full business model but focuses specifically on revenue generation
• Various revenue models include transactional, usage-based, advertising, commission, licensing, markups, service fees, rental, leasing, and crowdfunding
• The revenue model directly impacts profitability, scalability, sustainability, and operational feasibility
• A well-designed revenue model aligns cleanly with the overall business model and market dynamics

Carefully considering different revenue model types and constructing an optimized model provides a blueprint for monetization as a business scales. Periodic tuning keeps the model aligned as markets evolve.

While just one piece of the overall business puzzle, the revenue engine sits at the core of how companies create value for stakeholders.

Partha Chakraborty

Partha Chakraborty is a venture capitalist turned entrepreneur with 17 years of experience. He has worked across India, China & Singapore. He is the founder of Tactyqal.com, a startup that guides other startup founders to find success. He loves to brainstorm new business ideas, and talk about growth hacking, and venture capital. In his spare time, he mentors young entrepreneurs to build successful startups.

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8 Most Popular Startup Revenue Models Explained

• October 1, 2022
• Forecast your business

There have different ways to earn revenue. A business’ revenue model is very important as it is a component of its business model: which product/services it sells to whom and how.

You might haven’t yet decided which revenue model to opt for. Or you might simply be wondering which is one is best for your business. In this article we explain you what are the 8 revenue models and their pros and cons. Read on.

What is a revenue model?

A revenue model defines how a business generates revenue. For instance, a clothing shop sells clothes to its customers for a one-time fixed payment. Instead, Netflix charges its customers a recurring fee, every month, so they can continue watching content on their platform. Both companies make money, yet differently.

Revenue model vs. revenue stream

You might have heard of revenue stream (instead of revenue model). Whilst both terms are similar, they don’t exactly mean the same thing:

• Revenue model : how a business generates revenue
• Revenue stream : a business’ source of revenue

For instance, while a business might have a subscription revenue model, it might have 2 different revenue streams: subscription “Premium” and “Corporate”.

Instead, the clothing store above has a transaction-based revenue model. Yet, it might have 3 revenue streams: shirts, trousers and accessories.

Can a business have different revenue models?

The short answer is yes. For instance, a software company (e.g. Enterprise SaaS) might offer subscriptions to all its customers. In addition it can also provide on-demand consulting services to some of its customers: its sales team might offer onboarding and training paid services for instance. Therefore, the software company is combining 2 revenue models: a subscription and a service-based revenue model.

Why a business might have different revenue models?

Multiplying the sources of revenue a business has can make it more resilient. Indeed, revenue models have different characteristics which make them more or less prone to risks and, ultimately, impact growth.

Combining different revenue models can also bring other benefits, among others:

• It broadens the types of products and services a company might offer, expanding revenue
• It might increase profitability, as some revenue models may be more profitable than others

1. Subscription revenue model

Subscription businesses have become quite popular over the past 10 years. Originally a new form of licensing (see below) created by the first software companies, subscription revenue business now spans virtually all industries globally. Whether sold to businesses (B2B) or consumers, subscription businesses are everywhere: gym memberships, phone subscriptions, SaaS, ecommerce subscription, etc.

• Scalable : once you have created a product (e.g. software) for one customer, you can sell it to another without any additional production costs
• Predictable : because customers are paying a fee periodically, revenue is easier to forecast
• High customers acquisition cost : due to competition from other players, the costs to acquire one customers are usually quite high. See our article on CAC and LTV for SaaS businesses for more information
• High retention costs : because customers keep paying until they churn, subscription businesses typically as much (if not more) in customer retention than customer acquisition.

Expert-built financial model templates for tech startups

2. Transaction revenue

Transaction revenue is the oldest, and most common source of revenue model. Typically, a business that uses transaction-based revenue falls into one of the 3 following categories:

• Companies which produces and sells the products to a reseller
• Direct-to-consumer (DTC) businesses which produces the products and sell them straight to the end consumer
• Companies who buy products / services from a company to sell it to another, or to an end-consumer instead. These businesses do not manufacture nor produce anything, they simply make money from the spread between the supply cost and the sale price.
• Low customer acquisition cost
• Simple sales process
• Difficult to scale
• Margins might be low for some businesses (e.g. retail, airlines) and profitability requires a very large volume of orders
• Can be subject to cyclicality and/or seasonality

3. Ads revenue

• Can be very profitable in the long term . Indeed, the costs to produce content (videos, articles) and maintain a website or a blog for instance can be limited. As such, the running costs are very low: once content is produced, maintenance is limited
• Scalable : the larger the audience, the more revenues you generate. If your blog, website or youtube channel starts to benefit from network effects , growth can be exponential
• Low startup costs : building a targeted audience doesn’t necessarily need substantial investment upfront. Instead, you will have to invest in curated, targeted content for your audience which you will need to publish periodically. As such, ad revenue businesses can be one people businesses (e.g. Youtube channels)
• Audience needs to be targeted , else publishers will not agree to pay attractive price for your ad space. Remember: publishers are buying ad space to generate revenues for themselves, or their clients. If publishers do not see a minimum ROI on their investment, they will go somewhere else
• Large volume is required to start generating meaningful revenues . Average eCPM varies between channels (videos, rewarded videos, articles, etc.) yet is in average $4-$10 : you will need 1,000 ad impressions to generate only $4-$10 in revenue
• Building an audience typically takes time .

4. Commission (affiliate) revenue

The transaction can be done either on your website (e.g. marketplace) or processed on another merchant’s platform (e.g. affiliation).

The commission can either be variable (a percentage of the value of the product or service) or fixed (fixed fee per transaction).

Like ads, commission and affiliate revenue business models are often not the primary source of revenue for a business. Instead, it can be a very attractive additional source of revenue. For instance, a IT consulting firm selling advisory services might resell some of its leads (the newsletter signups for example) to a software company it partnered with. By doing so, the IT advisory company may earn a 20% revenue share with the software company.

• Similar to ad revenue, it can be very profitable in the long term . Indeed, you need to build an audience first to acquire leads. Yet, maintenance costs can be quite low and therefore commission revenue highly profitable (note this is especially true for affiliation businesses)
• No inventory costs : because you act as intermediary between a supplier and a buyer, you do not hold any inventory. This significantly reduces your risks
• Commissions rates can vary significantly . They can be as high as 20-30% for marketplaces, and lower than 5% for some affiliation businesses. The level of commission you manage to negotiate with the seller depends on your bargaining power which itself is a function of your audience: the larger and more targeted your audience is, the higher the commission rate

5. Service-based revenue

• Virtually no startup costs . Starting your own advisory services firm needs very little upfront investment. Usually, a website and, if any, some digital ads costs are enough to acquire customers. Some freelancers on marketplaces such as Upwork or Fiverr do not even have any website, for them startup costs are close to zero
• Highly profitable . Because you are selling your expertise (your time), typically you do not have any ongoing expenses nor production costs: a significant part of revenues are profits (usually >90% profit margin)
• Origination can be costly . Because service-based businesses typically provide customised solutions, each new customers requires time to assess workload, define the job scope and draft a contract. All of this time spent originating transactions cannot be spent elsewhere, and therefore is a cost to take into account
• It is not scalable . Because revenue is a function of the time spent, more revenues mean more manpower. By definition it isn’t scalable at all.
• After-sale customer requests can be tricky to manage . Customers might ask for follow-up questions, discuss potential amendments or even tweak the original job scope. Often, a service contract might generate more work than expected, and therefore be less profitable.

6. Interest revenue model

• Interest revenue business models often have very little variable costs . Because you’re charging an interest for lending capital (to an individual or a business), the only variable costs are processing, clearing and currency conversion fees.
• Whilst you typically have very low variable costs, interest revenue business models typically have high fixed costs instead . These fixed costs mostly are salaries. Think about banks: they need substantial manpower to review business opportunities (e.g. loan applications for example) and run the business.
• This business model is only viable at scale : you typically need a lot of volume (for example you would need to process many loans) to be profitable. This is due to 3 factors: low interest rates, high fixed costs and credit risk
• Credit risk : when you run an interest revenue business model, you need to factor in that a certain percentage of your customers will default

7. Leasing model

The most common businesses that use a leasing model include: real estate companies, equipment or car rental businesses , etc.

• Little variable costs (see interest revenue model above)
• Lower risk of default : because you’re leasing a physical asset, this asset has a value. Therefore, unlike interest revenue, if your customer isn’t able to pay interest, you can always get back the asset and sell it at salvage value
• Unlike interest revenue model, there are some variable costs related to the assets you lease (installation, maintenance, etc.)

8. Licensing

For instance, Microsoft has historically sold access to its most common softwares (e.g. Word, Powerpoint, Excel) as licenses (vs. subscriptions)

• Like subscriptions, it’s very scalable . You can sell as many licenses as you want without increasing production costs.
• Unlike subscription revenue, you earn a fixed time fee. As such, there is no retention and limited upsell opportunities
• Because you need to charge a higher upfront fee vs. the subscription fee you would typically charge for the same product, you may lose customers to your subscription competitors . Indeed, some customers may not be able to afford to pay a high upfront fee and/or may be reluctant vs. a smaller annual/monthly fee

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4 Most Popular Startup Revenue Models: A Detailed Comparison

For startups at every stage, generating revenue can be a challenge. Even when you have a great idea and an innovative product, it can be difficult to turn those into sustainable revenue streams. The truth is, there’s no one-size-fits-all answer when it comes to startup revenue models. In fact, some of the most successful startups have found creative ways to monetize their products and services. From subscription-based models to freemium strategies, startups are constantly testing and refining their revenue models to find the perfect fit. So, if you’re trying to decide which startup revenue model is right for you, read on. We’ll explore some of the most popular and effective strategies used by startup founders today.

What is a Startup Revenue Model

A startup revenue model is essentially the strategy that a startup uses to generate revenue and sustain its operations. It defines how the startup plans to make money. I also impacts how it will price its products or services, and how it will distribute and sell them. Having a clear understanding of their revenue model is crucial for startup founders. It helps them identify potential revenue streams, understand their costs, and determine their profit margins.

In addition to providing a roadmap for generating revenue, a well-defined revenue model is also important for attracting investors. Investors want to see that a startup has a clear plan for making money and achieving long-term sustainability. They want to see that the startup has a viable business model that can scale and generate ROI. A startup with a clear revenue model is more likely to attract investors and secure funding.

Furthermore, a well-defined revenue model can help startups achieve long-term sustainability. By understanding their revenue streams and profit margins, startups can optimize their operations. This allows them to make informed decisions about pricing, distribution, and marketing. It can help them generate more revenue and reduce their costs, ultimately leading to increased profitability and sustainability.

Overall, having a clear revenue model is essential for startup founders to achieve success. It helps them generate revenue, attract investors, and achieve long-term sustainability. By understanding their revenue model and continually refining it, startups can set themselves up for success and build a strong foundation for growth and expansion.

What’s the Difference: Business Model vs Revenue Model vs Revenue Stream

While often used interchangeably, there are distinct differences between business model, revenue model, and revenue stream:

Business model: A business model is the overall strategy a company uses to create and deliver value to customers while generating revenue and achieving profitability. It encompasses the entire framework of a company’s operations, including its target market, value proposition, pricing strategy, distribution channels, and cost structure. A business model is essentially the blueprint for how a company plans to create and capture value.

Revenue model: A revenue model is the specific strategy a company uses to generate revenue. It focuses solely on the ways a company will generate income, such as through product sales, advertising, licensing, or subscription fees. Revenue models are often closely tied to a company’s business model. However, they are more narrowly focused on the revenue generation aspect.

Revenue stream: A revenue stream is a specific source of revenue within a company’s revenue model. It represents the actual money coming into the company from a particular source, such as sales of a specific product, licensing fees, or advertising revenue. A company may have multiple revenue streams within its overall revenue model.

In summary, a business model is the overarching strategy for creating and capturing value. Conversely, a revenue model is the specific strategy for generating revenue. And a revenue stream is a particular source of revenue within the overall revenue model. Understanding the differences between these concepts is important for startup founders, as it can help them develop a comprehensive strategy for growth and success.

To learn more about startup revenue models, see if you qualify for membership to join Founders Network .

4 Most Popular Revenue Models for Startups

There are several popular revenue models that startups can use to generate income and achieve profitability. In this section, we’ll explore some of the most popular types of revenue models for startups. We’ll also detail how they work, their pros and cons, and provide examples of startups that have successfully implemented them. These revenue models include:

• Subscription-based model
• Freemium model
• Advertising model
• E-commerce model

Each of these models has its own strengths and weaknesses, and the most effective revenue model for a startup will depend on its industry, target market, and product or service offering. By understanding the different types of revenue models available, startup founders can make informed decisions about how to generate revenue and achieve long-term sustainability.

Subscription-based Model

The subscription-based model is a revenue model in which customers pay a recurring fee, typically on a monthly or annual basis, to access a company’s product or service. It differs from a transactional revenue model where customers typically pay for products or services on a one-time basis. This model has become increasingly popular in recent years, particularly in the software and media industries, as it provides a predictable and recurring source of revenue for startups. For example, all new software entrants and 80% of historical vendors are offering subscription-based financial models.

• Provides a recurring and predictable source of revenue, which can be beneficial for startups seeking stability and long-term sustainability.
• Builds customer loyalty and retention, as customers are incentivized to continue paying for the service in order to maintain access.
• Can provide opportunities for upselling and cross-selling additional products or services to existing customers.
• Can be difficult to acquire new customers, as the subscription model requires a higher level of commitment and investment from the customer than a one-time purchase.
• Requires ongoing investment in product development and customer support to maintain customer satisfaction and retain subscribers.
• Can be vulnerable to churn, as customers may cancel their subscriptions if they no longer see value in the service or if a competitor offers a better alternative.

Examples of startups using the subscription model:

Birchbox , a beauty subscription service, delivers a personalized selection of beauty products to customers each month for a recurring fee.

Ruzuku , an online course platform that offers a subscription-based pricing model for access to its course creation and management tools.

Calm , a meditation and relaxation app that offers a premium subscription with access to additional features and content.

Freemium Model

The freemium model is a revenue model in which a basic version of a product or service is offered for free, with the option to upgrade to a premium version for a fee. This model is commonly used by software and app-based startups. However, it can be applied to a wide range of industries. Ideally, freemium conversion rates are between 2-5% , although typically, the conversion rate is around 1%.

• Offers a low barrier to entry for potential customers, allowing startups to reach a wider audience and potentially acquire more users.
• Can build customer loyalty and engagement, as users have the opportunity to try the product or service before committing to a purchase.
• Provides opportunities for upselling and cross-selling premium features or services to existing customers.
• Can be difficult to convert free users to paid customers, as they may be satisfied with the basic version of the product or service and not see the value in upgrading.
• Requires ongoing investment in product development and customer support to maintain customer satisfaction and encourage upgrades.
• Can be vulnerable to churn, as free users may leave if they no longer see value in the basic version or if a competitor offers a better alternative.

Examples of startups using the freemium model:

Hootsuite , a social media management tool, offers a free version with limited functionality, but charges a fee for access to more advanced features and reporting tools.

HubSpot , a marketing and sales platform, offers a free CRM tool as well as paid versions with additional features and capabilities.

Zoom , a video conferencing platform, offers a free version with limitations on call duration and participant numbers, but charges a fee for access to additional features and increased capacity.

Advertising Model

The advertising model is a revenue model in which a company generates income by displaying advertisements to its users or customers. This model is commonly used by media and content-based startups, as well as social media platforms and search engines.

• Can provide a significant source of revenue for startups with a large user base or audience.
• Can provide opportunities for targeted advertising, allowing advertisers to reach specific demographics or interest groups.
• Can be a low barrier to entry for users, as they can access the product or service for free and are only exposed to advertisements.
• Can be disruptive or annoying to users, potentially leading to reduced engagement or usage of the product or service.
• Can be challenging to attract and retain advertisers, particularly for startups with a smaller user base or audience.
• May require ongoing investment in ad technology and infrastructure to effectively monetize user data and deliver targeted advertising.

Examples of startups using the advertising model:

Google , the search engine giant, generates the majority of its revenue through advertising by displaying targeted ads to users based on their search queries and online activity.

Facebook , the social media platform, generates revenue through advertising by displaying ads in users’ news feeds and targeting ads based on user data and interests.

Chegg , a student-focused education technology company, generates revenue through advertising by displaying ads to its users alongside its textbook rental and homework help services.

E-commerce Model

The e-commerce model is a revenue model in which a company generates income by selling products or services online through a website or mobile app. This model is commonly used by retail and consumer goods startups, as well as service-based startups that offer online bookings or subscriptions.

• Provides a direct channel to customers, allowing startups to reach a global audience and potentially increase sales and revenue.
• Can provide opportunities for personalized marketing and product recommendations based on customer data and behavior.
• Can allow for greater flexibility in pricing and promotions, as well as the ability to offer a wider range of products and services.
• Requires ongoing investment in website development, online marketing, and e-commerce technology to effectively monetize online sales.
• Can be vulnerable to fraud and security breaches, potentially leading to financial losses and damage to customer trust.
• Can be highly competitive, particularly in saturated markets or with well-established online retailers.

Examples of startups using the e-commerce model:

Amazon , the world’s largest online retailer, generates revenue by selling a wide range of products directly to customers through its website and mobile app. On average, Amazon charges a seller who uses their site 15% of the sale.

Warby Parker , an online eyewear retailer, generates revenue by selling prescription glasses and sunglasses directly to customers through its website and mobile app.

Freshly , a meal delivery service, generates revenue by selling prepared meals and snacks directly to customers through its website and mobile app.

In-depth Side-by-Side Comparison of Startup Revenue Models  

It’s important to note that no single revenue model is the “right” choice for all startups. The best revenue model for a given startup will depend on its target market, competitive landscape, and overall business strategy.

It’s also worth considering that many successful startups use a combination of revenue models to generate income and build a sustainable business.

Can You Use Multiple Revenue Models?

Combining multiple revenue models can be a smart strategy for startups. It enable them to diversify their income streams and build a more sustainable business over the long term. Look for financial models that work well together and complement each other. For example, a subscription-based business could also offer add-on products or services for one-time purchases. Similarly, an e-commerce business could generate additional revenue  by incorporating an affiliate revenue model. 

When it comes to deciding when to combine revenue models, there’s no one-size-fits-all answer. However, some situations where combining revenue models can be particularly effective include:

When one revenue model alone isn’t enough to generate sustainable revenue: For example, a startup may start with a subscription-based model but later add e-commerce or advertising to supplement its income.

If different revenue models can serve different customer segments: A startup may have a subscription-based model for its core customers, but also offer a pay-per-use option for occasional users.

When expanding into new markets or verticals: A startup may add a new revenue model as it expands into a new market or vertical, in order to better meet the needs of that specific audience.

Examples of startup companies that have successfully combined multiple revenue models include:

Dropbox: A freemium-based model combined with subscription plans and enterprise licensing.

Uber: A pay-per-use model combined with dynamic pricing, surge pricing, and affiliate marketing through partnerships with credit card companies.

The New York Times: A subscription-based model combined with advertising and branded content partnerships.

Amazon: An e-commerce model combined with affiliate marketing, subscription-based services (e.g. Amazon Prime), and advertising through Amazon Advertising.

In each of these cases, the combination of revenue models has allowed these companies to generate diverse income streams and build a more sustainable business over time.

Choosing the Right Revenue Model for Your Startup

Choosing the right revenue model is crucial for the success of any startup. However, it can be a daunting task for many founders. With so many different revenue models to choose from, it can be difficult to know which one is the best fit for your business. Factors such as the nature of your product or service, target market, and competition can all play a role in determining the most effective revenue model. And this can change over time. A startup might start out using a transactional revenue model and shift to a subscription model later on. 

In this section, we will provide tips on how to figure out the right revenue model for your startup. 

Consider your target market and their willingness to pay

Understanding your target market and their willingness to pay is critical when choosing a revenue model for your startup. Without a clear understanding of your market, you may end up choosing a revenue model that doesn’t align with your customers’ needs. This can lead to low adoption rates, low customer retention, and ultimately, low revenue.

To determine the most appropriate revenue model for your target market, here are some steps you can take to research and analyze your market:

Define your target market: Start by defining who your ideal customer is. Consider factors such as age, gender, location, income, interests, and pain points. This will help you narrow down your market and identify the revenue models that are most likely to resonate with your target audience.

Conduct market research: Once you’ve defined your target market, conduct market research to gather insights on their behavior, preferences, and willingness to pay. You can use surveys, focus groups, interviews, and online analytics tools to gather data.

Analyze your competitors: Analyze your competitors’ revenue models and pricing strategies to see what’s working well in your industry. Look for gaps in the market that you can fill with your own revenue model.

Experiment and test: Once you’ve gathered data on your target market and competitors, experiment with different revenue models and pricing strategies to see what resonates best with your audience. Test different pricing levels, features, and messaging to see what drives the most revenue.

Monitor and adjust: Keep an eye on your revenue streams and adjust your revenue model as needed. Monitor customer feedback and make changes to your pricing and features to better align with your customers’ needs and preferences.

Consider the value your product or service provides

When choosing a revenue model for your startup, it’s important to consider the value that your product or service provides to your customers. The value of your offering can impact the pricing strategy you use, the target market you focus on, and the revenue model you ultimately choose.

To determine the value of your product or service, consider the following factors:

Unique selling proposition: What makes your product or service unique? What problem does it solve for your customers? Understanding your unique selling proposition (USP) can help you determine the value your product or service provides to your customers.

Benefits to customers: What benefits do your customers receive from using your product or service? How do these benefits compare to other products or services in the market? Understanding the benefits your offering provides can help you determine the price point and revenue model that will be most effective.

Market demand: How much demand is there for your product or service in the market? How does this demand impact the value of your offering? Understanding the market demand for your offering can help you determine the appropriate revenue model to use.

Once you’ve determined the value of your offering, you can use this information to choose the most appropriate revenue model. For example, if your product or service provides high value and is in high demand, you may consider using a premium pricing model or a subscription-based model to capture the most revenue. If your product or service provides lower value or is in a competitive market, you may consider using a freemium or advertising model to generate revenue.

Consider the costs associated with each revenue model

When choosing a revenue model for your startup, it’s important to consider the costs associated with each revenue model. Understanding the costs can help you determine the most effective revenue model to use and ensure that you are generating a profit.

To calculate the costs of each revenue model, consider the following factors:

Development costs: How much does it cost to develop and maintain your product or service? This includes costs such as research and development, software development, and marketing expenses.

Operating costs: What are the ongoing operating costs associated with your revenue model? For example, if you are using a subscription-based model, you will need to consider the costs of customer support, server maintenance, and billing.

Transaction costs: What are the transaction costs associated with each revenue model? This includes costs such as credit card processing fees, shipping costs, and commissions paid to third-party providers. 

Once you’ve calculated the costs associated with each revenue model, you can determine the most effective revenue model to use. For example, if you have high development costs and low operating costs, a one-time purchase model may be the most effective revenue model. If you have high operating costs and low transaction costs, a subscription-based model may be the most effective revenue model.

It’s important to note that the costs associated with each revenue model can impact your overall revenue. For example, if you choose a revenue model with high transaction costs, such as a marketplace model, your profit margins may be lower. On the other hand, if you choose a revenue model with low operating costs, such as a freemium model, you may be able to generate higher profits over time.

Test and experiment with different revenue models

Testing and experimenting with different revenue models is crucial for determining the most effective model for your startup. It allows you to gather data and insights to make informed decisions about which revenue model will generate the most revenue and profit for your business.

Here are some tips and strategies for testing and experimenting with revenue models:

Conduct customer research: Ask your customers what they are willing to pay for your product or service, and which revenue model they prefer. You can use surveys or focus groups to gather this information.

Start small: Test out different revenue models on a small scale before fully implementing them. For example, you can offer a limited-time discount for a subscription-based model to see if customers are interested in paying for your product or service on a recurring basis.

Monitor key metrics: Track key metrics such as revenue, customer acquisition cost, customer lifetime value, and churn rate for each revenue model you test. This will help you evaluate the effectiveness of each model and make informed decisions.

A/B testing: Use A/B testing to compare different revenue models. For example, you can offer a one-time purchase option and a subscription-based model to different groups of customers to see which generates more revenue.

Iterate and optimize: Use the data and insights you gather from testing and experimenting to iterate and optimize your revenue model. Continuously improve your revenue model to ensure that it is generating the most revenue and profit for your business.

It’s important to note that testing and experimenting with revenue models can take time and resources. However, the insights and data you gather will be invaluable in helping you make informed decisions about which revenue model to use for your startup.

FAQs About Startup Revenue Models

How do i properly price my products or services for maximum profitability.

Pricing your products or services for maximum profitability can be a complex process. Here are some steps to help you:

Understand your costs: Before you can price your products or services, you need to know your costs. This includes the cost of materials, labor, overhead, and any other expenses associated with producing or delivering your product or service.

Research your market: Understand your competitors and the market demand for your product or service. Analyze their pricing strategies and determine how you can differentiate yourself to stand out.

Determine your value proposition: Identify the unique value that your product or service provides to customers. This can include features, quality, convenience, or any other aspect that sets you apart from your competitors.

Consider your target customer: Understand your target customer and what they are willing to pay for your product or service. Conduct customer research to determine their preferences, buying behavior, and price sensitivity.

Develop pricing strategies: Once you have a clear understanding of your costs, market, value proposition, and target customer, you can develop pricing strategies that align with your business goals. Some common pricing strategies include cost-plus pricing, value-based pricing, and dynamic pricing.

Test and optimize: Test your pricing strategies to see how customers respond. Monitor key metrics such as sales volume, revenue, and profit margins, and optimize your pricing based on the results.

Continuously evaluate and adjust: Pricing is not a one-time decision. Continuously evaluate your pricing strategy and adjust it as necessary to ensure maximum profitability.

How can I forecast and track my startup’s revenue over time?

Forecasting and tracking your startup’s revenue over time is crucial to understanding the health and growth of your business. Here are some steps to help you forecast and track your startup’s revenue:

Define your revenue streams: Identify all of the ways in which your startup generates revenue. This could include sales of products or services, advertising revenue, subscription revenue, or any other revenue streams.

Estimate revenue for each stream: For each revenue stream, estimate how much revenue you expect to generate. Use historical data, market research, and other relevant information to inform your estimates.

Create a revenue forecast: Once you have estimated revenue for each stream, create a revenue forecast that projects revenue over a specific period of time (e.g., monthly, quarterly, or annually). Use a spreadsheet or other tool to create the forecast, and update it regularly based on actual results and changes to your business.

Track actual revenue: Track your actual revenue over time, and compare it to your revenue forecast. Use this information to identify areas where your revenue forecast may be inaccurate, and adjust your forecast accordingly.

Analyze revenue trends: Analyze revenue trends over time to identify patterns and opportunities for growth. Look for changes in revenue from each stream, as well as changes in overall revenue.

Use key performance indicators (KPIs): Use KPIs such as customer acquisition cost, customer lifetime value, and revenue per customer to track the effectiveness of your revenue generation efforts.

Iterate and adjust: Use the insights you gain from forecasting and tracking your revenue to make adjustments to your business strategy, revenue streams, and pricing strategies. Continuously iterate and adjust your revenue model to maximize revenue and profitability.

Can I pivot my revenue model if it’s not working as expected?

Yes, you can pivot your revenue model if it’s not working as expected. In fact, many startups pivot their revenue model as they evolve and learn more about their market and customers.

However, it’s important to approach a revenue model pivot with caution and careful planning.

Overall, pivoting your revenue model can be a complex and challenging process. However, it can also be a necessary step in ensuring the long-term success and sustainability of your startup. With careful planning, research, and testing, you can pivot your revenue model effectively and position your business for growth and profitability.

How can I scale my revenue model as my startup grows?

Scaling your revenue model is an important consideration as your startup grows. Here are some strategies to help you scale your revenue model:

Focus on customer acquisition: As your startup grows, you’ll need to acquire new customers to maintain revenue growth. Consider investing in marketing and advertising to reach new audiences and expand your customer base.

Increase pricing: As your product or service gains more market traction and provides more value to your customers, you may be able to increase your prices. This can help you maintain or even increase revenue while also positioning your startup as a more premium offering.

Diversify revenue streams: Consider adding additional revenue streams to your business model as your startup grows. This can include offering complementary products or services, expanding into new markets or geographies, or developing new revenue models altogether.

Improve operational efficiency: Look for ways to improve the efficiency of your operations to reduce costs and increase revenue. This can include automating processes, streamlining supply chain management, and improving customer service.

Invest in technology: As your startup grows, technology can help you scale your revenue model more effectively. Consider investing in tools and platforms that can help you automate processes, improve customer engagement, and streamline operations.

Continuously monitor and optimize: Continuously monitor and optimize your revenue model as your startup grows. Regularly analyze metrics such as customer acquisition cost, customer lifetime value, and revenue per user to identify areas for improvement and fine-tune your revenue model accordingly.

How do I handle seasonal fluctuations in revenue?

Handling seasonal fluctuations in revenue can be challenging. Here are several strategies that can help:

Plan ahead: Analyze historical data to identify patterns in revenue fluctuations and plan ahead for seasonal changes. This can include adjusting inventory levels, staffing, and marketing efforts to align with seasonal trends.

Diversify revenue streams: Consider diversifying your revenue streams to minimize the impact of seasonal fluctuations. This can include offering complementary products or services that are in demand during different seasons. It can also include expanding into new markets or geographies that have different seasonal patterns.

Develop promotions and sales: Consider developing promotions and sales that align with seasonal trends to encourage customers to make purchases during slower periods. This can include holiday-themed promotions, special offers for off-season products or services, or bundled packages that offer savings during slower periods.

Focus on customer retention: During slower periods, it’s important to focus on retaining existing customers. Consider offering loyalty programs, personalized promotions, and excellent customer service to build loyalty and encourage repeat business.

Maintain cash reserves: Maintaining sufficient cash reserves can help your startup weather seasonal fluctuations in revenue. This can include setting aside a portion of profits during high revenue periods or securing a line of credit to help cover expenses during slower periods.

How can I use data to optimize and improve my startup’s revenue model?

Using data to optimize and improve your startup’s revenue model can be a powerful way to drive growth and increase profitability. Here are some steps you can take to use data effectively:

Collect and analyze data: Start by collecting data on your customers, sales, and revenue. Use tools like Google Analytics, customer relationship management (CRM) software, and accounting software to track key metrics and identify trends.

Identify opportunities for improvement: Analyze the data you collect to identify opportunities for improvement. Look for trends and patterns that can help you identify areas where you can increase revenue, reduce costs, or improve customer satisfaction.

Test and experiment: Use A/B testing and experimentation to test different revenue models, pricing strategies, and marketing tactics. This can help you identify what works best for your business and optimize your revenue model over time.

Use predictive analytics: Use predictive analytics to forecast future revenue and identify potential opportunities or challenges. This can help you plan ahead and make strategic decisions to optimize revenue.

Continuously monitor and adjust: Continuously monitor your revenue and use the data you collect to adjust your revenue model as needed. Regularly review your revenue metrics and make adjustments to pricing, marketing, and other factors to optimize revenue.

How can I effectively communicate my revenue model to potential investors and partners?

Effectively communicating your revenue model is essential when seeking investment or partnership opportunities. Here are some tips on how to do it effectively:

Keep it simple: Start by keeping your explanation of your revenue model simple and concise. Avoid using technical jargon or complex terms that may be difficult to understand.

Use visuals: Visual aids such as charts and graphs can help make your revenue model more understandable and memorable. Use these tools to illustrate your revenue streams, pricing strategy, and customer acquisition costs.

Provide examples: Use real-world examples to help investors or partners understand how your revenue model works. Use case studies or customer success stories to demonstrate how your revenue model has worked in the past.

Highlight scalability: Emphasize how your revenue model is scalable and can grow as your business expands. Highlight potential growth opportunities and how your revenue model can be adapted to accommodate them.

Address potential challenges: Be transparent about any potential challenges or risks associated with your revenue model. Explain how you plan to address these challenges and mitigate risk over time.

Be confident: Finally, be confident when presenting your revenue model. Show investors and partners that you believe in your business and revenue model and that you are committed to making it a success.

What is a good revenue model for a startup school?

A revenue model for a startup school would depend on the specific services offered and the target market. However, here are a few potential revenue models that may be effective:

Tuition-based model: The most straightforward revenue model for a startup school is to charge tuition fees for students. This can be done on a per-course basis, per semester, or as a flat rate for the entire program. This model is best suited for schools that offer formal, structured programs.

Membership-based model: Another option is to charge membership fees for access to a range of resources and services, such as online courses, workshops, mentorship, and networking events. This model is best suited for schools that offer a variety of services to entrepreneurs and startup founders.

Commission-based model: A commission-based model involves taking a percentage of the revenue generated by startups that are incubated or accelerated by the school. This model is best suited for schools that offer more hands-on support, such as mentorship, networking, and funding connections.

Corporate partnership model: A school could also partner with corporations and charge for services such as customized training programs, hackathons, or innovation challenges. This model is best suited for schools that have established relationships with large corporations or have a niche focus in a specific industry.

How and when should startups validate their revenue model(s)?

Startups should validate their revenue model as early as possible, preferably during the idea validation stage. Validating the revenue model means determining whether customers are willing to pay for the product or service and whether the revenue generated will be sufficient to sustain the business.

There are several methods that startups can use to validate their revenue model:

Conducting customer interviews: Startups can conduct customer interviews to understand their needs and willingness to pay for the product or service. This can provide valuable insights into the target market and help determine the most effective revenue model.

Creating a minimum viable product (MVP): An MVP is a simplified version of the product or service that allows startups to test the market and get feedback from customers. By launching an MVP and measuring customer response, startups can validate their revenue model and make any necessary adjustments.

Conducting A/B testing: A/B testing involves creating two versions of the product or service and testing them with different groups of customers. This allows startups to determine which version generates more revenue and optimize the revenue model accordingly.

Running pilot tests: Startups can run pilot tests with a small group of customers to validate their revenue model. This can involve offering a free trial or discounted pricing to attract customers and measure their response.

It’s important for startups to validate their revenue model as early as possible to avoid wasting resources. By using these methods to validate the revenue model, startups can increase their chances of success.

What are some of the best revenue models for app-based startups?

App-based startups have a unique advantage of being able to leverage various revenue models due to the nature of their platform. Here are some of the best revenue models for app-based startups:

In-app Advertising: This revenue model involves displaying ads within the app to generate revenue. App developers can earn money either through click-throughs or impressions. Examples of apps that use this revenue model are Instagram and Snapchat.

In-app Purchases: This revenue model involves offering users the ability to purchase digital or physical goods within the app. Examples of apps that use this revenue model are gaming apps like Clash of Clans and Candy Crush.

Subscription-based: This revenue model involves charging users a monthly or yearly fee for access to premium content or features. Examples of apps that use this revenue model are Spotify and Netflix.

Freemium: This revenue model offers a basic version of the app for free, but charges for access to premium features. Examples of apps that use this revenue model are Dropbox and LinkedIn.

Sponsorship: This revenue model involves partnering with brands to promote their products or services within the app. Examples of apps that use this revenue model are Nike Training Club and McDonald’s Happy Studio.

What are the most unusual but effective revenue models used by internet startups?

There have been some creative and unusual revenue models that internet startups have employed over the years. Here are a few examples:

Affiliate revenue model: Some startups earn revenue by promoting other companies’ products and earning a commission for each sale they generate.

Pay-what-you-want: This model allows customers to pay what they think a product or service is worth, rather than a fixed price.

Donation-based: Some startups rely on donations from users or supporters to fund their operations.

Commission-based: Some startups act as intermediaries between buyers and sellers and take a commission for each transaction they facilitate.

Crowdfunding: This model allows startups to raise capital by soliciting small contributions from a large number of individuals.

Freemium with a twist: Some startups offer a free version of their product, but instead of charging for premium features, they ask users to donate to a charitable cause.

Which Startup Revenue Model is Right for You?

In conclusion, having a clear and effective revenue model is essential for the success of any startup. It helps founders to generate revenue, attract investors, and achieve long-term sustainability. Choosing the right revenue model requires careful consideration of factors such as the target market, the value proposition of the product or service, and the associated costs. It is also important to continuously seek out new revenue streams and experiment with different revenue models.

As a startup founder, you can benefit from joining communities such as Founder’s Network , where you can connect with other founders and gain mentorship. By leveraging the knowledge and experience of others, you can gain valuable insights into revenue models and improve your chances of success. Keep in mind that validating your revenue model early on and tracking revenue over time can also help you make informed decisions about the direction of your startup.

In today’s highly competitive business landscape, having a well-defined revenue model is more critical than ever. By selecting the right revenue model and continuously seeking out new revenue streams, you can ensure the long-term success of your startup.

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How To Pick The Best Revenue Model For Your Startup

Everything seems to evolve and change so quickly these days. Just as you have settled on a particular business strategy, a new one gives you pause for thought. 

But let’s not get distracted. Stick to the main, tried, and tested practices through your startup process, and have a solid foundation to build on. Revenue models are a great example of getting the basics right.

The best, most popular, and most common revenue models for startups in 2022 are not hugely different from the old ones, and there is a reason for that; they work! Let’s take a look at what they are, explore the pros and cons, and help determine the best fit for you.

What Is A Revenue Model?

A revenue model is an important concept in business that can make or break your startup’s success. An efficient revenue model is basically just a solid monetization system for your startup, allowing you to build and manage your company’s revenue streams that are both sustainable and profitable. In simple terms, a revenue model describes the method you employ to bring in revenue for the business. 

But just how important is it? Well, let’s use a simple analogy to nail the point home; If your business’s product or service is the company’s heart, the revenue model would be the circulatory system. The lifeblood. You can’t have one without the other.

Without a proper revenue model in place, you will obviously find it quite a challenge to sustain healthy revenue streams, affecting key aspects of the business such as sales, finance, marketing, and operations

A successful startup revenue model addresses

• Revenue generation techniques
• Offerings of values
• Revenue sources
• Target consumers of the product

10 Most Common Revenue Models

1. services .

A sub-genre of the transactional revenue model, perfect for startups looking to generate revenue by offering services based on their expertise and time. Startups who use this business model charge customers on a project or retained basis. 

Customer relationships are an important aspect of this model. The revenue you generate solely depends on your level of expertise and how well you can meet your client’s needs. 

This model is perfect if you’re a startup offering graphic design or consultation services. It’s a great way to start, but this model alone will not be enough for your startup to grow in the long run.   

• Only minimal investment is needed
• Revenue starts generating immediately
• Scalability issues

The markup model is one of the oldest yet most reliable revenue models. It is commonly used by companies who act as mediators for example Amazon or Ali Baba resellers and vendors etc. Businesses using this model purchase goods or services from a supplier, sell for a higher price, and generate revenue from the profit. 

For example, a product sold by your company for $150 would return a 50% margin, if purchased for $100.

This model can be grouped into 2 sub-genres,

• Retail: Selling of goods to customers through multiple channels to earn profit
• Wholesale: Selling or distributing goods to retailers, other wholesalers, and professional, business, and institutional business users. 
• Helps develop a perfect pricing strategy
• Easy formulation and implementation
• Too much competition makes it difficult to generate revenue

3. Advertising

If your startup gets many visitors on your digital channels, then you can use an ad-based revenue model. Businesses pay to advertise their products and services on high-traffic sites. Provided you have a reasonable amount of traffic, you might be able to monetize through advertising space. It is commonly paired with a service-based and affiliate revenue model.

The 2 most common forms of this model are,

• Cost Per Click (CPC): Revenue is generated when visitors click on ads even if they don’t buy.
• Cost Per Mile (CPM): Also called ‘cost per thousand’. Advertisers pay a fixed price for every 1000 ad impressions. 

You can either work directly with businesses or through third parties like Google Adsense, AdThrive, and Amazon Native Shopping Ads. Blogs and media companies with a huge following profit the most from the advertising revenue model.

• Revenue starts generation automatically once ads are set up
• Fairly simple process with an easy way to increase revenue 
• Fluctuations in revenue

4. Pay Per User (PPU)

PPU is a revenue model from which a startup can benefit and can also seem attractive to potential customers.  

77% of customers  face difficulty in their purchasing decisions. The main reason for this is uncertainty about whether the features of the product/service will satisfy their needs. A PPU-based model will remove purchasing doubt from the equation. Because rather than buying the product, the customers are leasing it. 

Under this model, the business has ownership, and customers only pay for the usage. A simple example of this model can be laundromats. It is commonly used by cloud-based, telecom, and credit card services.

To utilize its full potential, your startup needs to have, 

• Simple distribution and billing processes
• Ability to manage per-use costs
• Low barriers to customer adoption
• Gives startups information regarding how customers use their products/services
• Lowers entry barrier for customers —> increasing startup’s market share
• Guilt on not utilizing overall features causes some customers to exit

5. Subscription 

Also called the recurring revenue model. The subscription model breaks the cost of a startup’s service/product into fixed weekly, monthly, or yearly payments. When a customer subscribes, the revenue is deferred and paid in installments. Revenue accumulates with every new subscriber. Revenue is grown exponentially as long as you gain more customers than lose them.

A simple example of this model can be a gym. While people can opt for a Day Pass, most of them have a fixed monthly or yearly subscription. 

By introducing personalized offers, you can make your product/service seem even more attractive to the customer using this model. Unlike advertising and PPU, the revenue stream for this model is more predictable and stable. 

Netflix, Hull, and Amazon Prime are good examples of well-known subscription-based revenue models.

• Stable recurring revenue in the long term
• More word-of-mouth marketing —> Less marketing costs
• Uncertain revenue in the startup phase

6. Affiliate Revenue Model

This model is one of the easiest ways to make a passive income stream. You can use this model in two ways to generate revenue,

• Promote other’s products/services on your website
• Make others promote your startup’s product/service

When a consumer purchases the product/service you endorse, you receive a commission – either a percentage or a fixed amount. Many e-commerce marketplaces like Etsy and Amazon offer an affiliate program. But your digital platform would need high traffic to be eligible for them. 

When you find individuals or other brands to promote your website, they use your link on their digital platform, providing a great way to market your startup. This is a great way to market your startup. When consumers buy your product/service, a percentage is given as a commission to the promoters. Your business should have high traffic to generate a good amount of revenue.

• No upfront costs
• Profitable in the long run
• Limited to the size of your products, audience, and industry

7. Freemium

You might wonder how platforms such as Spotify, LinkedIn , or Evernote make a profit, given that their standard features are free. 

Through a ‘Freemium’ model, a service is offered free of charge – but the more appealing, popular features are subscription only. It’s an age old model, actually; bring in potential customers without charge, then upsell with better features. 

You must have stumbled upon a person asking how platforms like Spotify, LinkedIn, or Evernote earn when almost all of their features are free. They run on the Freemium revenue model, where most of their product’s features are free, but their upgrades and premium features are paid. 

The main idea behind the Freemium model is to hook customers to their products and services by offering them for free and then converting them to premium paying customers. 

This is a great model for startup companies looking to attract instant volume and gain quick market penetration. Pair with an affiliate or ad-based revenue model for enhanced profits.

• Large user base
• Pressure-free for customers
• It takes time and money to convert free customers to paying ones

8. Licensing

If your startup has a patented product, you can use that to your advantage through the license revenue model. Income is generated by licensing your product to individuals or companies for a fixed term while retaining full copyright control of your product.

Media and software companies commonly exploit this revenue model. Good examples of this model can be seen through TV adverts, when an advertiser has to pay a fee for using an artist’s music, in a commercial. Licensing software like Adobe is another good example. Franchises such as Starbucks are a form of licensing as well. Having to give confidential information and committing to a long term partnership makes customer interactions quite personal.

• Ongoing, repeated revenue
• Easy entry into foreign markets
• Increased risk of IP theft

9. SaaS 

This revenue model has become quite common among ICT and IT startups. It is a delivery method used by software companies to host the application and all of the data on a cloud. Using this model, focus on delivering cost-effective customer value.

It is often paired up with the subscription model or licensing model. Using the SaaS subscription model, you can bill your subscribers periodically. Once billed, subscribers can use your software through an app, web browser, or one-time download. 

• Scalability and ease of distribution
• Continuous and reliable revenue stream
• Longer conversion funnel

10. Pay Per Seat

Last on our list is pay-per-seat. When using this model, customers are charged based on the number of seats they want to buy. You can see this model being implemented in Upscope and most startups’ famous communication platform, Slack.

Pay-per-seat models usually only target a small market segment. But to take it to the next level and attract more businesses, including startups, you can charge based on the number of seats being used. For example, if you have a client with 200 employees, instead of paying for them all, the client can pay for only the active ones. If you’re a B2B startup, then this model is perfect for you! 

• Simple and predictable pricing strategy for customers
• Higher adoption rate
• Value is measured on the number of users and not on your product. 

How To Choose The Right Revenue Model For Your Startup

By now, you probably have gained insights into all the types of revenue models. The next step is identifying the right model for your startup. Choosing the wrong one can result in a waste of your resources. Here’s a quick guide to help you choose the right one,

• Study The Competition: Take a look at how the most successful businesses in your startup industry generate revenue. Think about adopting the same revenue model – but maybe apply a few tweaks to enhance and improve, where possible.
• Test Out Few Models: No model is perfect. It will take time and several tests before you fine-tune the ideal one. Experimenting with different revenue models allows you to learn and eventually find the best one for you. 
• Study Your Past Data: Failure is fine, providing you ‘fail forward’ and learn from it. If a revenue model isn’t working out, determine why and tweak it. Maybe even change it entirely. Study your startup’s data like cash flow, balance sheet, marketing activity, customer satisfaction, etc. 
• Financial Forecasting: This will help you predict future results based on your data. Predicting your startup’s financial future will help you think ahead and strategize how you can achieve profitability. You can use  our financial projection template  to help you forecast future revenue.
• Keep In Mind The Financial Components: Before choosing a revenue model, you need to calculate the cost of making your product and the cost of doing business. Considering these costs can help you choose a revenue model that will balance out these expenses and give you profit. 

KPI Starter Pack: 7 KPIs Your Startup Needs To Track

KPI metrics are milestones that give you a real-time view of how your startup is progressing. There is no ‘one size fits all’ approach to this – a successful model elsewhere might be the perfect fit for your startup. Let’s take a look at the 7 essential KPIs that you need to track,

Cash Runway:

This highlights how much time your startup can survive at a loss before you run out of money.  This can be calculated  by 

Available Cash Balance / Monthly Burn Rate 

If the cash inflow is less than the outflow, that’s a clear sign your current revenue model isn’t working.

Cost Per Acquisition (CPA):

CPA is an important metric that estimates how much one customer costs to win that particular end result of a sale. It helps measure the revenue impact of your marketing campaign. You can calculate CPA by

Total Campaign Cost / Conversions 

Annual Recurring Revenue (ARR) and Monthly Recurring Revenue (MRR) are important metrics in the subscription revenue model. These two metrics tell us how much recurring revenue comes in, yearly and monthly.

MRR = Revenue Per Unit x Number of Subscribers

ARR = 12 x MRR

Cost Per Lead (CPL):

This metric is similar to CPA but applies to leads that are further down the sales funnel . CPL is the amount of money your marketing campaign has to pay when a user (lead) takes action, i.e., fills out a form or gives contact details. 

For example, a prospect will click on your lead magnet and provide valuable data for you to chase down and convert. It is commonly used with subscription revenue models.

Cost Per Click (CPC): 

CPC measures the price for your startup’s marketing campaign. As a startup looking to increase its customer base using ads, this metric can help you determine how much you would need to pay based on the number of clicks your ads will receive. 

Your goal is to maintain a low CPC while still pursuing high-quality clicks. This will allow more clicks on your budget, leading to more potential leads. 

This is a solid baseline metric that you can use to measure your marketing efforts. It will tell you whether your marketing plan is working or not. 

Net Promoter Score (NPS): 

This KPI indicator will tell you customer satisfaction, loyalty, and excitement. It is generally measured by asking customers questions like ‘On a scale of 0 to 10, how likely are you to recommend this company/product to a friend or colleague?’

Organic Search Reach: 

Reports how many visitors visited a website through organic search results. Organic Search Reach helps to keep track of your SEO performance. 

Revenue Model Template

Revenue model templates can complement any presentation or report that analyzes the sources of cash flows. It helps present the current revenue model’s effects on your startup growth and various sources of income and devise which sources to follow. Following are some great revenue model templates used by thousands of successful startups.

• Powerslide Revenue Model Template:  This template consists of four templates with various infographics. It’s the perfect template to prepare a report on your new product launch and analyze the potential sales market.  
• Sketch Bubble:  The template was made by combining multiple templates creating one that seamlessly explains the topic. The template is quite simple and designed so that you can explain everything about the topic in a crisp and faster manner.
• Slide Kit:  Their editable revenue model templates offer different themes and vector icons, making it easier for you to showcase them.

When combining one of these with a seamless financial projection template, you can easily verify business models and determine which one to choose based on your future revenue forecasts.

Before choosing a revenue model, remember to do your research and study your startup’s financial data. It will help you understand which revenue models are best for your startup. We didn’t cover every revenue model, but we have highlighted the most popular, tried, and tested revenue models that will get your business generating revenue and reaching the big leagues in no time!

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Shanzae Solangi is an enthusiastic content writer with expertise in SEO and keyword research. Her bachelor’s degree in Clinical Psychology mixed with her adept writing skills allows her to successfully enter into the targetted audiences’ mind and create content that could help companies generate leads. Shanzae’s adaptable skills, eagerness for learning and communication skills are the reason for her quick success in the world of content writing. Besides creating powerful content that drives companies' online growth, she holds an administrative role, managing and overlooking several different websites.

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9 popular revenue models for startups

You have your business idea and you’re ready to take your product or service to market. So far so good. Now it’s time to establish exactly how that concept is going to make money by choosing your revenue model.

In this article we’ll explain what a revenue model is and tell you about some of the most popular models used by successful startups. Picking the right revenue model is crucial, so take time to familiarise yourself with the various models and thoroughly research your options.

What is a revenue model?

In simple terms, a revenue model explains the way(s) that your business is going to make money. It provides details of the products or services you’re planning to sell to your customers, how you’re going to sell them and how you’ll price them .

A revenue model is central to your overall business plan, as it underpins the financial wheels on which your startup will move. By creating a clear plan of how to generate revenues, you’re much more likely to succeed and achieve sustainable growth.

With a revenue model in place, you’re then in a position to get the ball rolling with many other aspects of your business, including:

• Focus on a specific target audience
• Create a marketing strategy
• Raise capital

Watch out for… Switching revenue models or implementing the wrong model. This can be extremely damaging for a startup, and often be the reason a business fails. Invest time upfront to ensure you choose the most appropriate revenue model for your business.

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Types of revenue model

With a wide range of revenue models out there for you to consider, it’s important to establish which one is the most appropriate for your business. Here are some of the most popular revenue models…

1. Advertising

Paid advertising is one of most popular revenue models for many broadcasting, print and online media companies. We’ve all seen the full page ads in magazines, watched TV ads and been harassed by endless online ads that often crowd websites.

Effectively, money is generated by your business providing a platform for other brands to display their advertisements.

• Fairly quick and easy to implement.
• Digital platforms (like Google AdSense and Facebook ads) make monetising ads easier than ever.
• Ads can be highly profitable if done right.
• You need a large audience or high volume of traffic to generate decent revenue.
• Nowadays ads put customers off (especially online), which can affect ad performance and subsequent revenue.

2. Affiliate Revenue Model

This is a popular online revenue model and works by getting individuals or other brands to promote your business using links on their own platforms. Those links lead directly to your products or services and when a user then makes a purchase, you pay commission to the affiliate.

• Can work in conjunction with advertising
• Generally more profitable than advertising
• As it’s commission-based there is no upfront cost
• Limited to the size of your industry, your products and audience
• Startups can struggle to gain traction (and therefore revenue) with affiliates

3. Commission revenue model

With commission-based revenue, your startup acts as an intermediary between a service provider and the end customer. By connecting the two you then charge a commission fee based on the service or product being sold.

Commission can be a fixed amount per transaction, or be calculated as a percentage of the value of the purchase.

• Very effective if you have a wide network or have your own popular platform
• Outlay is minimal compared
• Revenue can easily build over time as your network grows
• Requires a good network of service providers and access to a large customer base.
• Can encourage an aggressive sales environment.

4. Pay per use revenue model

A pay per use model is where a business gives their customers access to a potentially unlimited service and simply charges for what they use. Credit cards, telecoms and cloud-based service companies commonly use this revenue model.

The rates that are charged can also be adapted depending on the service being provided, or level of usage. It’s great for getting customers to sign up with no commitment of paying upfront, especially if it’s a new service that they’re not sure how much they’ll use.

• Smaller barrier to getting customers to join.
• No commitment needed.
• More difficult to predict revenue.
• It can be difficult to maintain customers.

5. Subscription revenue model

A subscription revenue model basically breaks down the cost of a service or product over a period of time, usually charging the customer either monthly or annually. Depending on the contract agreements in place, this model can provide a steady flow of revenue over a longer period of time.

Many modern online companies have adopted a subscription model as standard, such as digital giants Netflix and Amazon Prime.

• Generates recurring revenue.
• Can provide more stable revenue over time than single-point sales.
• Potential for additional revenue from customers who no longer use the service but still pay their subscription.
• Subscription payments are generally small so you need a large customer base to generate decent revenue.

Founder story

“Revenue models are an interesting one. I first started out as a consultant, earning a modest income via transactional sales. When I stopped and took a look at what I was doing, I knew I’d never be able to build a really scalable business just selling my time and that’s when I started researching more into different revenue models.

I landed firmly at the door of wanting a subscription revenue model – super scalable and predictable, the only downside was that the subscription payments were much smaller than the money I had been earning transactionally as a consultant, so it was very much like starting from scratch. Take your time to research your preferred revenue model. Think about what you’re ultimately trying to achieve – if it’s a lifestyle business, most will suit your needs but if you’re looking to exit, then transactional revenue will be really  hard  to scale “.

– Eddie Whittingham, Founder

6.Transactional sales revenue model

Transactional sales are one of the most direct ways to make money. This revenue model involves a customer paying a business directly for a product or service. This can be in person, online or via a retail outlet.

For retail sales, your business will need a physical presence to sell to customers. On the other hand, online sales have become a huge generator of revenue for millions of modern companies. For many of them, online sales accounts for 100% of their revenue.

• Customers enjoy the simplicity and familiarity of transactional sales.
• Works for a wide variety of industries, from hardware and physical supplies to software and services like accountants and graphic designers.
• Retail sales offer a great opportunity to raise brand awareness and engage with customers in person.
• Popularity means competition can be fierce.
• Competition leads to price wars which drive down prices and subsequent revenue.
• Retail outlets cost money to set up and run, and generally retail sales across the UK are falling with the dramatic rise of online shopping.
• For online sales, creating a website that’s easily found by customers can be challenging.

7. Freemium revenue model

The freemium model features a basic service that is offered for free and users can pay to access an upgraded version of the service. This revenue model has been made popular in the last 10 years by some of the biggest modern businesses such as Spotify and LinkedIn.

By offering a free service you can attract a large customer base to then convert to paying premium customers. They then gain access to additional features, early releases, special events and additional services.

• Free services provide a very attractive gateway for new customers to experience your business’s offering.
• It’s easier to convert an existing free customer than recruiting new customers to pay directly.
• It’s takes a lot of time and money to reach your initial audience to sign up.
• Converting free customers to paying customers also requires further time and money.

8. Franchising revenue model

Strictly speaking, the franchising revenue model isn’t one you’d normally associate with startups. It involves growing your business and making money selling the rights to your own established brand or business model. The franchisee usually pays a starting fee plus ongoing commission.

As a startup, you may well want to buy the rights to operate a franchised business instead of creating your own brand new business. That way you benefit from the established brand to gain customers easily, whilst running your own business.

• A franchise provides a ready-made brand to build a business from.
• Provides an established customer base.
• You can benefit from any central marketing and advertising campaigns.
• You’re reliant on the central brand (which often provides strict guidelines).
• It’s not your own brand you’re building.
• Commission rates can be high for the more successful franchises.

9. Licensing

The licensing revenue model is based on income generated by a business who allow individuals or other companies to use their copyrighted products or services.

The music industry is founded on a network of licensed music and songs that earn money each time they’re used. Licensing agreements will stipulate the fees, as well as the terms and conditions of how the copyrighted material can be used.

Software as a Service (SaaS) companies operate on a licensing basis, allowing customers to access their cloud services for an agreed fee.

• Generates ongoing, repeated revenue from multiple customers using the same copyrighted material.
• Opportunity to be a high-earning revenue stream with the right material.
• Requires your business to have desirable, copyrighted products or services to license.
• Startups often struggle to gain traction to generate license demand.

Which revenue model is right for my startup?

Sadly that’s not a question we can answer here in one paragraph. Now that we’ve talked you through some of the most popular revenue models, it’s time to do more research. Choose the models that sound like they could work for your business and read up on them.

Do some digging to find out exactly how those models work, or could work for your startup. Remember to focus on your business goals and consider which model will best help you achieve them. Then, once you’re confident you have a winner, off you go…

Keep learning...

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Revenue Model Template for Startups

Choosing a revenue model that fits you perfectly isn’t easy. As the framework of how a startup will generate income, a proper revenue model needs to consider prices, revenue sources, income and expense statements, and many other elements. It’s crucial to get this right, too, because a perfect match needs to help your business out in those diverse aspects. From sales to growth, choosing the right revenue model is especially vital for long term projections. It’s just central to any business model! To help your final choice, we put together the best 5 steps to a revenue model for startups. We hope these aid in making the right kind of difference for your company to make positive game-changing decisions. 

What is a revenue model?

Said plainly for a startup, a revenue model means understanding how the company will make money. In other words, a revenue model is a map out of important business aspects in earning a startup valuable revenue. It’s not the same as a business model , though it’s a significant part of it. 

Popular revenue models provide different benefits. We just need to pick the one that’s best suited for our company. In that sense, even a revenue model template can be a great way to find the model that’s just right for our business. Because, as we said, choosing the right revenue model is critical. That’s primarily the case because picking the wrong one can equal a company failing overall. And we certainly live to avoid that. 

How do you make a revenue model?

Just like building a house needs a blueprint, your business needs a money plan. It's called a "revenue model," and it's all about how your business makes money.

Whether you're starting or running a business, a clear revenue model is super important. It's like your financial map, showing where your money comes from, how much you can charge, and how many sales you might make.

Here, we'll make it simple with four easy steps. These steps will help you understand your business, set prices, and predict how much money you can make.

1. Understand Your Business:

• Begin by gaining a deep understanding of your business, its purpose, and the value it provides. What problem does your business solve? Who are your potential customers, and what do they need?
• Identify your unique selling points (USPs) or what makes your business stand out from competitors.
• Consider your business's strengths and weaknesses, as well as external factors like market trends and competition.

2. Find Income Sources:

• Determine all the possible ways your business can generate income. Common income sources include:
• Selling physical products: If you sell items, think about the types of products, their prices, and the sales volume you expect.
• Offering services: If your business provides services, identify the different services you can offer and how much you can charge for each.
• Subscriptions or memberships: Explore options for recurring income from subscription-based services or membership programs.
• Licensing or royalties: If you own intellectual property like patents or copyrights, consider licensing them to others for a fee.
• Each income source should align with your business's core strengths and customer needs.

3. Set Prices and Predict Sales:

• Determine the prices for your products or services. It's crucial to find a balance between covering your costs and providing value to your customers.
• Estimate how many units of your product or hours of service you can sell within a specific period. This involves forecasting your sales volume.
• Consider factors that can influence your sales, such as marketing efforts, market demand, and seasonality.
• Create different scenarios, like best-case and worst-case, to prepare for different outcomes.

4. Monitor and Adjust:

• Once your business is up and running, closely monitor your revenue and expenses. Track your actual income against your initial predictions.
• Be ready to adjust your revenue model if necessary. If your sales aren't meeting expectations, you might need to revisit your pricing strategy or marketing tactics.
• Continuously analyze market conditions and customer feedback to stay adaptable. A successful revenue model often evolves as your business grows.

Remember that creating a revenue model is an ongoing process. Regularly review and refine your approach to ensure it remains aligned with your business goals and market dynamics.

All these assumptions and more can be solved and monitored using any of the Slidebean Financial Model Templates

Key information to write a revenue model

Let’s define some of the essential pieces of information to start writing a revenue model. First, get all of your sales data along with income and expense statements. Just in case, you can know these by other names, as well. They go by a statement of earnings, for example, a profit and loss statement (P&L for short), and even as a statement of operations. 

In short, the above are documents that reflect your income and expenses , of course. Yet, in the income one, you’ll list revenues from your business offer sales before you subtract any top-line expenses, for instance. This should include net income (or loss) over a specific timeframe. And, contrary to a balance sheet, these don’t just focus on a single moment of your startup’s trajectory. 

Anyways, once those financial documents are handy, you’ll also need to understand the market in which you’re operating and to which you’re inserting. Seek a clear idea of how many customers exist who are likely consumers of your services and products. As this is also a big side topic, we’ll leave you with our Go To Market Strategy Presentation Structure as reference for later, in case you need it. 

Note that the more thorough job you do in gathering all this information, the better your backup will be. And that’s just the kind of support we’re looking to create, to choose the most accurate revenue model that’s right for your startup. 

Once you’ve gathered the above data, make a list of revenue models. Filter them by those you can actually use. What’s important here is that primary and secondary models will matter and come in handy if you offer different services and products. You might quickly need a different model for each product or service offer. 

We’ll now make the steps to writing a solid revenue model for your startup clearer in the following section. 

Revenue model webinar and other useful tools

To learn how to develop a revenue model that’s right for you, there are also webinars and a step-by-step modeling tutorial to integrate. These tools include an easily downloadable and customized financial model spreadsheet you can count in with that. Coupled with more literature on building a financial model for a SaaS Business or our financial model insight webpage, the more resources you can check, the better. They’ll all enable you more and more to extract the best out of your upcoming efforts. 

Financial Modeling Consultants

At Slidebean, we understand the importance of having a solid financial model for your business. That's why we launched this comprehensive course, tailored to empower you with the tools and techniques you need to create accurate and effective financial models for your startup.

In today's competitive startup world, having a strong financial model can give you a significant edge. And what better way to gain that edge than by learning from experts in the field? Our workshop is designed to teach you the tools and techniques needed to create financial models that will help you make informed business decisions and secure funding.

Don't miss this opportunity to take your financial modeling skills to the next level and give your business the boost it needs. Sign up for our workshop today and let's work together to take your startup to the next level.

At Slidebean, we are committed to helping startup founders like you succeed. So, don't wait any longer, register for the Financial Modeling Workshop now and let's get started on building a solid financial foundation for your business.

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18 of My Favorite Sample Business Plans & Examples For Your Inspiration

Published: July 01, 2024

I believe that reading sample business plans is essential when writing your own.

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As you explore business plan examples from real companies and brands, it’s easier for you to learn how to write a good one.

So what does a good business plan look like? And how do you write one that’s both viable and convincing? I’ll walk you through the ideal business plan format along with some examples to help you get started.

Table of Contents

Business Plan Types

Business plan format, sample business plan: section by section, sample business plan templates, top business plan examples.

Ultimately, the format of your business plan will vary based on your goals for that plan. I’ve added this quick review of different business plan types that achieve differing goals.

For a more detailed exploration of business plan types, you can check out this post .

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1. Startups

Startup business plans are for proposing new business ideas. If you’re planning to start a small business, preparing a business plan is crucial. The plan should include all the major factors of your business.

You can check out this guide for more detailed business plan inspiration .

2. Feasibility Studies

Feasibility business plans focus on that business's product or service. Feasibility plans are sometimes added to startup business plans. They can also be a new business plan for an already thriving organization.

3. Internal Use

You can use internal business plans to share goals, strategies, or performance updates with stakeholders. In my opinion, internal business plans are useful for alignment and building support for ambitious goals.

4. Strategic Initiatives

A strategic business plan is another business plan that's often shared internally. This plan covers long-term business objectives that might not have been included in the startup business plan.

5. Business Acquisition or Repositioning

When a business is moving forward with an acquisition or repositioning, it may need extra structure and support. These types of business plans expand on a company's acquisition or repositioning strategy.

Growth sometimes just happens as a business continues operations. But more often, a business needs to create a structure with specific targets to meet set goals for expansion. This business plan type can help a business focus on short-term growth goals and align resources with those goals.

I’m going to focus on a startup business plan that needs to be detailed and research-backed as well as compelling enough to convince investors to offer funding. In my experience, the most comprehensive and convincing business plans contain the following sections.

Executive Summary

This all-important introduction to your business plan sets the tone and includes the company description as well as what you will be exchanging for money — whether that’s product lines, services, or product-service hybrids.

Market Opportunity

Information about gaps in your industry’s market and how you plan to fill them, focused on demand and potential for growth.

Competitive Landscape Analysis

An overview of your competitors that includes consideration of their strengths and how you’ll manage them, their weaknesses and how you’ll capitalize on them, and how you can differentiate your offerings in the industry.

Target Audience

Descriptions of your ideal customers, their various problems that you can solve, and your customer acquisition strategy.

Marketing Strategy

This section details how you will market your brand to achieve specific goals, the channels and tactics you’ll utilize to reach those goals, and the metrics you’ll be using to measure your progress.

Key Features and Benefits

This is where you’ll use plain language to emphasize the value of your product/service, how it solves the problems of your target audiences, and how you’ll scale up over time.

Pricing and Revenue

This section describes your pricing strategy and plans for building revenue streams that fit your audiences while achieving your business goals.

This is the final section, communicating with investors that your business idea is worth investing in via profit/loss statements, cash flow statements, and balance sheets to prove viability.

Okay, so now that we have a format established, I’ll give you more specific details about each section along with examples. Truthfully, I wish I’d had this resource to help me flesh out those first business plans long ago.

1. Executive Summary

I’d say the executive summary is the most important section of the entire business plan. It is essentially an overview of and introduction to your entire project.

Write this in such a way that it grabs your readers' attention and guides them through the rest of the business plan. This is important because a business plan can be dozens or hundreds of pages long.

There are two main elements I’d recommend including in your executive summary: your company description and your products and services.

Company Description

This is the perfect space to highlight your company’s mission statement and goals, a brief overview of your history and leadership, and your top accomplishments as a business.

Tell potential investors who you are and why what you do matters. Naturally, they’re going to want to know who they’re getting into business with up front. This is a great opportunity to showcase your impact.

Need some extra help firming up your business goals? I’d recommend HubSpot Academy’s free course to help you set meaningful goals that matter most for your business.

Products and Services

Here, you will incorporate an overview of your offerings. This doesn’t have to be extensive, as it is just a chance to introduce your industry and overall purpose as a business. I recommend including snippets of information about your financial projections and competitive advantage here as well.

Keep in mind that you'll cover many of these topics in more detail later on in the business plan. The executive summary should be clear and brief, only including the most important takeaways.

Executive Summary Business Plan Examples

This example was created with HubSpot’s business plan template . What makes this executive summary good is that it tells potential investors a short story while still covering all of the most important details.

Our Mission

Maria’s Gluten Free Bagels offers gluten-free bagels, along with various toppings, other gluten-free breakfast sandwich items, and coffee. The facility is entirely gluten free. Our team expects to catch the interest of gluten-free, celiac, or health-conscious community members who are seeking an enjoyable cafe to socialize. Due to a lack of gluten-free bagel products in the food industry currently, we expect mild competition and are confident we will be able to build a strong market position.

The Company and Management

Maria’s Gluten Free Bagels was founded in 2010 by Maria Jones, who first began selling her gluten-free bagels online from her home, using social media to spread the word. In 2012 she bought a retail location in Hamilton, MA, which now employs four full-time employees and six part-time employees. Prior to her bagel shop, Maria was a chef in New York and has extensive experience in the food industry.

Along with Maria Jones, Gluten Free Bagel Shop has a board of advisors. The advisors are:

• Jeni King, partner at Winding Communications, Ltd.
• Henry Wilson, president of Blue Robin, LLP.

Our Product

We offer gluten-free products ranging from bagels and cream cheese to blueberry muffins, coffee, and pastries. Our customers are health-conscious, community-oriented people who enjoy gluten-free products. We will create a welcoming, warm environment with opportunities for open mic nights, poetry readings, and other community functions. We will focus on creating an environment in which someone feels comfortable meeting a friend for lunch, or working remotely.

Our Competitive Advantages

While there are other coffee shops and cafes in the North Shore region, there are none that offer purely gluten-free options. This restricts those suffering from gluten-free illnesses or simply those with a gluten-free preference. This will be our primary selling point. Additionally, our market research [see Section 3] has shown a demand for a community-oriented coffee and bagel shop in the town of Hamilton, MA.

Financial Considerations

Our sales projections for the first year are $400,000. We project a 15% growth rate over the next two years. By year three, we project 61% gross margins.

We will have four full-time employees. The salary for each employee will be $50,000.

Start-up Financing Requirements

We are seeking to raise $125,000 in startup to finance year one. The owner has invested $50,000 to meet working capital requirements, and will use a loan of $100,000 to supplement the rest.

Example 2 :

Marianne and Keith Bean have been involved with the food industry for several years. They opened their first restaurant in Antlers, Oklahoma in 1981, and their second in Hugo in 1988. Although praised for the quality of many of the items on their menu, they have attained a special notoriety for their desserts. After years of requests for their flavored whipped cream toppings, they have decided to pursue marketing these products separately from the restaurants.

Marianne and Keith Bean have developed several recipes for flavored whipped cream topping. They include chocolate, raspberry, cinnamon almond, and strawberry. These flavored dessert toppings have been used in the setting of their two restaurants over the past 18 years, and have been produced in large quantities. The estimated shelf life of the product is 21 days at refrigeration temperatures and up to six months when frozen. The Beans intend to market this product in its frozen state in 8 and 12-ounce plastic tubs. They also intend to have the products available in six ounce pressurized cans. Special attention has been given to developing an attractive label that will stress the gourmet/specialty nature of the products.

Distribution of Fancy's Foods Whipped Dream product will begin in the local southeastern Oklahoma area. The Beans have an established name and reputation in this area, and product introduction should encounter little resistance.

Financial analyses show that the company will have both a positive cash flow and profit in the first year. The expected return on equity in the first year is 10.88%

Tips for Writing Your Executive Summary

• Start with a strong introduction of your company that showcases your mission and impact, then outline the products and services you provide.
• Clearly define a problem, explain how your product solves that problem, and show why the market needs your business.
• Be sure to highlight your value proposition, market opportunity, and growth potential.
• Keep it concise and support ideas with data.
• Customize your summary to your audience. For example, you might emphasize finances and return on investment for venture capitalists, whereas you might emphasize community benefits and minimal environmental impact for progressive nonprofits.

For more guidance, check out our tips for writing an effective executive summary .

2. Market Opportunity

This is where you'll detail the opportunity in the market. Ask and answer: Where is the gap in the current industry, and how will my product fill that gap?

To get a thorough understanding of the market opportunity, you'll want to conduct a TAM, SAM, SOM analysis , a SWOT analysis , and perform market research on your industry to get some insights for this section. More specifically, here’s what I’d include.

• The size of the market
• Current or potential market share
• Trends in the industry and consumer behavior
• Where the gap is
• What caused the gap
• How you intend to fill it

Market Opportunity Business Plan Example

I like this example because it uses critical data to underline the size of the potential market and what part of that market this service hopes to capture.

Example: The market for Doggie Pause is all of the dog owners in the metropolitan area and surrounding areas of the city. We believe that this is going to be 2/3 of the population, and we have a goal of gaining a 50% market share. We have a target of a 20% yearly profit increase as the business continues.

Tips for Writing Your Market Opportunity Section

• Focus on demand and potential for growth.
• Use market research, surveys, and industry trend data to support your market forecast and projections.
• Add a review of regulation shifts, tech advances, and consumer behavior changes.
• Refer to reliable sources.
• Showcase how your business can make the most of this opportunity.

3. Competitive Landscape Analysis

Since we’re already speaking of market share, you‘ll also need to create a section that shares details on who the top competitors are. After all, your customers likely have more than one brand to choose from, and you’ll want to understand exactly why they might choose one over another.

My favorite part of performing a competitive analysis is that it can help you uncover the following:

• Industry trends that other brands may not be utilizing.
• Strengths in your competition that may be obstacles to handle.
• Weaknesses in your competition that may help you develop selling points.
• The unique proposition you bring to the market that may resonate with customers.

Competitive Landscape Business Plan Example

I like how the competitive landscape section of this business plan shows a clear outline of who the top competitors are. It also highlights specific industry knowledge and the importance of location. This demonstrates useful experience in the industry, helping to build trust in your ability to execute your business plan.

Competitive Environment

Currently, there are four primary competitors in the Greater Omaha Area: Pinot’s Palette Lakeside (franchise partner), Village Canvas and Cabernet, The Corky Canvas, and Twisted Vine Collective. The first three competitors are in Omaha and the fourth is located in Papillion.

Despite the competition, all locations have both public and private events. Each location has a few sold-out painting events each month. The Omaha locations are in new, popular retail locations, while the existing Papillion location is in a downtown business district.

There is an opportunity to take advantage of the environment and open a studio in a well-traveled or growing area. Pinot’s Palette La Vista will differentiate itself from its competitors by offering a premium experience in a high-growth, influential location.

Tips for Writing Your Competitive Landscape

• Complete in-depth research, then emphasize your most important findings.
• Compare your unique selling proposition (USP) to your direct and indirect competitors.
• Show a clear and realistic plan for product and brand differentiation.
• Look for specific advantages and barriers in the competitive landscape. Then, highlight how that information could impact your business.
• Outline growth opportunities from a competitive perspective.
• Add customer feedback and insights to support your competitive analysis.

4. Target Audience

Use this section to describe who your customer segments are in detail. What is the demographic and psychographic information of your audience? I’d recommend building a buyer persona to get in the mindset of your ideal customers and be clear about why you're targeting them. Here are some questions I’d ask myself:

• What demographics will most likely need/buy your product or service?
• What are the psychographics of this audience? (Desires, triggering events, etc.)
• Why are your offerings valuable to them?

Target Audience Business Plan Example

I like the example below because it uses in-depth research to draw conclusions about audience priorities. It also analyzes how to create the right content for this audience.

The Audience

Recognize that audiences are often already aware of important issues. Outreach materials should:

• Emphasize a pollution-prevention practice
• Tell audience a little about how to prevent pollution
• Tell audience where they can obtain information about prevention.

Message Content

• Focus the content for outreach materials on cost savings, such as when and where pollution prevention is as cheap as or cheaper than traditional techniques. Include facts and figures.
• Emphasize how easy it is to do the right thing and the impacts of not engaging in pollution prevention.
• Stress benefits such as efficiency or better relations with government, for businesses not primarily concerned with public image.

Tips for Writing Your Target Audience Section

• Include details on the size and growth potential of your target audience.
• Figure out and refine the pain points for your target audience , then show why your product is a useful solution.
• Describe your targeted customer acquisition strategy in detail.
• Share anticipated challenges your business may face in acquiring customers and how you plan to address them.
• Add case studies, testimonials, and other data to support your target audience ideas.
• Remember to consider niche audiences and segments of your target audience in your business plan.

5. Marketing Strategy

Here, you‘ll discuss how you’ll acquire new customers with your marketing strategy. I think it’s helpful to have a marketing plan built out in advance to make this part of your business plan easier. I’d suggest including these details:

• Your brand positioning vision and how you'll cultivate it.
• The goal targets you aim to achieve.
• The metrics you'll use to measure success.
• The channels and distribution tactics you'll use.

Marketing Strategy Business Plan Example

This business plan example includes the marketing strategy for the town of Gawler. In my opinion, it works because it offers a comprehensive picture of how they plan to use digital marketing to promote the community.

You’ll also learn the financial benefits investors can reap from putting money into your venture rather than trying to sell them on how great your product or service is.

This business plan guide focuses less on the individual parts of a business plan, and more on the overarching goal of writing one. For that reason, it’s one of my favorites to supplement any template you choose to use. Harvard Business Review’s guide is instrumental for both new and seasoned business owners.

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8 Types of Business Models & the Value They Deliver

• 26 May 2016

You want to start a company but aren’t sure about a viable business model. How might you create something that people are willing to pay for and could earn you a profit?

Before diving into potential strategies, it’s important to understand what a business is and does. At its heart, a business generates value for its customers. A business model is a specific method used to create and deliver this value.

What Is Value in Business?

A successful business creates something of value . The world is filled with opportunities to fulfill people’s wants and needs, and your job as an entrepreneur is to find a way to capitalize on these opportunities.

A viable business model is one that allows a business to charge a price for the value it’s creating, such that the business brings in enough money to make it worthwhile and continue operating over time. Whatever the business is offering must also satisfy the customer’s needs and quality expectations.

It’s important to note that value is subjective. What’s valuable to one person may not be to another. Moreover, the concept of value excludes any moral judgments about the intrinsic worth of an offering. For example, while most would agree that human life is more valuable than sports, some professional athletes make far more money than the average brain surgeon.

Nonetheless, the concept of value provides a useful bedrock on which to begin building your business model. In particular, consider what forms of value people are willing to pay for. Here are eight potential business models and the forms of value they deliver—as well as the pros and cons of each—to help you get started.

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8 Types of Business Models to Explore

A product is a tangible item of value. To run a successful product-focused business, try to produce the item for as low a cost as possible while maintaining a reasonable level of quality. Once the item is produced, your objective should be to sell as many units as you can for as high a price as people are willing to pay to maximize profit.

Products are all around us. From laptops to books to HBS Online courses (products don’t have to be physical), products are a classic form of value with high upside if you can get them right.

• Pros: Many products can be easily duplicated. Thus, firms can achieve economies of scale after bearing some upfront costs of production.
• Cons: Physical products need to be stored as inventory, which can increase costs. They can also be damaged or lost more easily than, say, a service.

Related: How to Create an Effective Value Proposition

A service involves offering assistance to someone else for a fee. To make money from your service, provide a skill to others that they either can’t or don’t want to do themselves. If possible, repeatedly provide this benefit to them at a high quality.

Like products, services are in abundance, especially in the knowledge economy. From hairdressers to construction workers to consultants to teachers, people with lucrative skills can earn good money for their time.

• Pros: If you have a skill in high demand or a skill that very few others have, you can charge a fair price for your time and stand out in your field.
• Cons: If you don’t charge enough for your services, or many people have your skill, your business may not be as lucrative.

3. Shared Assets

A shared asset is a resource that many people can use. Such resources allow the owner to create or purchase the item once and then charge customers for its use. To run a profitable business around shared assets, you need to balance the tradeoff of serving as many customers as you can without affecting the overall quality of the experience.

For instance, think of a fitness center. A gym typically buys treadmills, ellipticals, free weights, bikes, and other equipment and charges customers monthly membership fees for access to these shared assets. The key is to charge customers enough to maintain and, if needed, replace their assets over time. Finding the right range of customers is the key to making a shared asset model work.

• Pros: This model provides people access to a lot of assets they wouldn’t otherwise have access to. In addition, many people are willing to pay a lot for access to trendy social spaces.
• Cons: Because they don’t own the assets, customers have little incentive to treat your resources well. Make sure you have enough in your budget for quick fixes, if necessary.

4. Subscription

A subscription is a type of program in which a user pays a recurring fee for access to certain specified benefits. These benefits often include the recurring provision of products or services. Unlike a shared asset, however, your experience with the product or service isn’t affected by others.

To have a successful subscription-based offering, build a subscriber base by providing reliable value over time while attracting new customers.

The number of subscription services has exploded in recent years. From magazines to streaming services to grocery and wine delivery subscriptions, businesses are turning to the subscription-based model, often with great success.

• Pros: This model provides certainty in the form of predictable revenue streams, making financial forecasting a bit easier. It also benefits from a loyal customer base and customer inertia (for instance, customers may forget to cancel their subscription).
• Cons: To run this model, your business operations must be strong. If you can’t deliver value consistently over time, you may want to consider a different business model.

5. Lease/Rental

A lease involves obtaining an asset and renting it out for an agreed-upon amount of time in exchange for a fee. You can lease virtually anything, but it’s in your best interest to rent assets that are durable enough to be returned in good condition. This ensures you can lease the good multiple times and, perhaps, eventually sell it.

To profit from leases, the key is to ensure that the revenue you get from leasing the asset before it loses value is greater than the purchase price. This requires you to price the rental of the item strategically and potentially not lease to those who may not return it in good condition. This is why many rentals of high-value items require references, credit checks, or other background information that can predict how someone may return the leased item.

• Pros: You don’t have to have a novel idea to make money using a lease business model . You can purchase assets and rent them to others who wouldn’t buy them for full value and earn a premium.
• Cons: You need to protect yourself from unexpected damage to your assets. One way to do so is through insurance.

6. Insurance

Insurance entails the transfer of risk from a customer to a seller of an insurance policy. In exchange for the insurance company (the seller of the policy) taking on the risk of a specified event occurring, they receive periodic payments ("premiums" in insurance lingo) from the policyholder. If the specified event doesn’t happen, the insurance company keeps the money, but if it does, the company has to pay the policyholder.

In a sense, insurance is the sale of safety—it provides value by protecting people from unlikely, but catastrophic, risks. Policyholders can take insurance out on almost anything: life, health, house, car, boat, and more. To run a successful insurance company, you have to accurately estimate the likelihood of bad events occurring and charge higher premiums than the claims you pay out to your customers.

• Pros: If you calculate risk accurately, you’re guaranteed to make money using the insurance business model.
• Cons: It can be difficult to accurately calculate the likelihood of specific events occurring. Insurance only works because it spreads risk over large numbers of policyholders. Insurance companies can fail if a large portion of policyholders is impacted by a widespread, negative event they didn’t see coming (for example, the Global financial crisis in 2007 and 2008).

Related: 5 Steps to Validate Your Business Idea

7. Reselling

Reselling is the purchasing of an asset from one seller and the subsequent sale of that asset to an end buyer at a premium price. Reselling is the process through which most major retailers purchase the products they then sell to buyers. For example, think of farmers supplying fruits and vegetables to a grocery store or manufacturers selling goods to a hardware store.

Companies make money through resale by purchasing large quantities of items (usually at a bulk discount) from wholesalers and selling single items for a higher price to individuals. This price raise is called a markup.

• Pros: Markups can often be high for retail sales, enabling you to earn a profit on the items you resell. For example, a bottle of water might cost 10 cents to produce, whereas a customer may be willing to pay $1.50 or more for the same bottle.
• Cons: You need to be able to gain access to quality products at low costs for the reselling business model to work. You’ll also need the physical space to store inventory to manage sales cycles.

8. Agency/Promotion

Agents create value by marketing an asset, which they don’t own, to an interested buyer. They then earn a fee or a commission for bringing the buyer and seller together. Thus, instead of using their own assets to create value, they team up with others to help promote them to the world.

Running a successful agency requires good connections, excellent negotiation skills , and a willingness to work with a diverse set of individuals. One example is a sports agent who promotes players to teams and negotiates on their behalf to get the best deal. In return, they typically receive compensation equal to a certain percentage of the contract.

• Pros: You can highly profit from expertise and connections in your industry, be it publishing, acting, advertising, or something else.
• Cons: You only get paid if you seal the deal, so you have to be able to live with some uncertainty.

Setting Your Business Up for Success

These eight types of business models each have pros and cons and deliver value in their own ways. If you’re looking to start a business and need a place to start, one of these could be the best fit for your venture and entrepreneurial skill set .

Interested in honing your entrepreneurial skills? Explore our four-week online course Entrepreneurship Essentials and our other entrepreneurship and innovation courses to learn the language of the business world.

This post was updated on February 19, 2021, and is a compilation of two posts, previously published on May 26, 2016, and June 2, 2016.

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The Markup Revenue Model: How It Works, Pricing Strategies & Examples (2022)

What is a markup revenue model?

A markup revenue model is a way for businesses to generate revenue by adding a surcharge to the cost of goods or services that they sell. In a markup revenue model, businesses purchase goods or services from a supplier at a wholesale price, and then add a markup to the price when they sell the goods or services to customers.

How does a markup revenue model work?

In a markup revenue model, a business generates revenue by charging a higher price for the goods or services that they sell, compared to the price they paid to purchase the goods or services from a supplier. This allows the business to cover their costs and make a profit, while also providing value and convenience to customers by offering the goods or services for sale.

To participate in a markup revenue model, businesses must first identify a supplier who can provide the goods or services that they want to sell. Once the business has negotiated a wholesale price with the supplier, they can determine the markup they want to add to the price, and start selling the goods or services to customers.

When a customer makes a purchase, the business will pay the wholesale price to the supplier, and collect the markup from the customer as their profit. This provides value to the business, as they can generate revenue from the markup, and value to the customer, as they can purchase the goods or services at a convenient location and time.

Markup pricing strategies

There are several different pricing strategies that businesses can use for their markups, depending on the type of goods or services they sell and their target audience. Some common types of markup pricing strategies include:

• Fixed markup: A fixed markup pricing strategy adds a fixed surcharge to the wholesale price of the goods or services that the business sells. This can be a good option for businesses that want to provide a clear and simple pricing structure to their customers, and ensure that their markup is consistent and predictable.
• Percentage markup: A percentage markup pricing strategy adds a surcharge to the wholesale price of the goods or services that the business sells, as a percentage of the wholesale price. This can be a good option for businesses that want to align their markup with the value of the goods or services, and provide a fair and scalable pricing structure to their customers.
• Variable markup: A variable markup pricing strategy adds a surcharge to the wholesale price of the goods or services that the business sells, based on factors such as the cost of the goods or services, the demand for the goods or services, and the competition in the market. This can be a good option for businesses that want to adjust their markup based on changing market conditions, and provide competitive prices to their customers.

Marketing channels and strategies for markup businesses

Marketing is an important part of a markup business, as it can help attract new customers and retain existing ones. Some common marketing channels and strategies for markup businesses include:

• SEO: Optimizing your website and content for search engines can help improve your visibility in search results and attract organic traffic. This can be especially effective for markup businesses, as customers are often searching for specific types of goods or services that they can find on your platform.
• Paid advertising: Paid advertising can help you reach new audiences and drive traffic to your website. This can be especially effective for markup businesses, as you can target your ads to potential customers who are interested in your products or services and are likely to make a purchase.
• Social media marketing: Social media platforms can be a powerful tool for markup businesses, as they allow you to connect with potential customers and build relationships with them. You can use social media to share updates, offers, and other relevant content to engage with your audience and drive traffic to your website.
• Partnerships and collaborations: Partnerships and collaborations can be a valuable way to promote your markup business and reach new audiences. By partnering with other businesses or organizations, you can leverage their network and reach to promote your goods or services and attract customers.

Examples of successful markup businesses

There are many successful businesses that use a markup revenue model, across a wide range of industries. Here are a few examples:

• Walmart: Walmart is a leading retailer that uses a markup revenue model to sell a wide range of goods and services to customers.
• Amazon: Amazon is a leading online marketplace that uses a markup revenue model to sell a wide range of products and services to customers.
• Costco: Costco is a membership-based retailer that uses a markup revenue model to sell a wide range of goods and services to members.
• Best Buy: Best Buy is an electronics retailer that uses a markup revenue model to sell a wide range of electronics products and services to customers.

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8 revenue stream examples for your business

Eamonn Curley

The coronavirus pandemic has emphasized the need to diversify revenue streams. Having all your eggs in one basket and depending on one single revenue stream can be risky, especially in the current climate. While you already have your revenue stream, there are ways to identify new opportunities and diversify your income. 

If you can tap into different ways to generate revenue, you can keep your income flowing and put your business in a more secure position going forward. By understanding the revenue streams available, you can dive deep into your business to identify opportunities to make money.

In this article, we’re going to look at how you can target new customers, create new revenue streams and stay ahead of the competition. 

• What is a revenue stream? 
• The importance of revenue streams 
• How to choose the right type of revenue stream for your business 
• 8 revenue stream examples

What is a revenue stream? 

​​Revenue streams are sources where your business generates money. The sources of income vary depending on your type of business. A revenue stream is not a business model, but it does influence your business model and decisions. Here’s a breakdown of the difference between a business model, revenue stream, and revenue model: 

• Revenue stream – the source of your company’s income 
• Revenue model – the strategy of managing the revenue streams 
• Business models – the structure of the company including your revenue model and streams and how everything works together 

Often, when talking about revenue streams, these three terms are used a lot and it’s easy to confuse them. A business can have a single or multiple revenue streams, depending on the business model. When you’re looking at your revenue model, you’re diving deeper into elements like price and your value offering. Your business model takes everything into account, including your revenue streams and model. It’s a way of optimizing your business so that all elements work together to maximize profits. 

An example of a company that has multiple revenue streams is the apparel brand, Lululmeon. First, they have eCommerce and digital sales. But, they also sell wholesale products to health clubs, gyms, and fitness centers to increase brand image. Other streams of revenue include sales from temporary shop locations and showrooms. The brand has also branched out into the home fitness world with the Lululemon Mirror, after buying the fitness startup Mirror last year for $500 million.  

The importance of revenue streams 

Naturally, revenue streams are important because you need an income. It’s no surprise that revenue streams are essential, but they do more than just generate money for your business. You can use revenue streams as a way to evaluate performance across different areas of the business. For any business, revenue is a key performance indicator (KPI). 

By having a clear understanding of your revenue streams, you can track patterns and generate revenue projections across the business. If you can spot changes, trends, or dips in income, you can identify the cause and find out where you need to spend more time. Through a good understanding of the different types of revenue streams, you can identify opportunities to make more money. 

There is a clear need to diversify revenue streams to help reduce risk in an economic downturn. Advances in technology and a shift to digital transformation across most industries mean that there are new ways to diversify your current products and portfolio. From adding a subscription service to offering online workshops and training for customers, you can diversify revenue streams to target new customer segments.

How to choose the right type of revenue stream for your business 

As a startup, you may have to rely on one single source of revenue. But, the quicker you can diversify your revenue streams, the safer your business will be in the long run. Because if your one revenue stream dries up, your business could be in trouble. One of the biggest examples of a company that uses multiple revenue streams to drive growth is Amazon. The online retailer has eCommerce sales, Prime subscription, Amazon Music, AWS, and audible memberships. Of course, you don’t have to be a massive company like Amazon to develop multiple revenue streams. 

The best revenue streams for your business depend on your assets, who your customers are, and your current main source of income. With various types of revenue models and streams available, the right revenue streams can differ. At a high level, a company can generate revenue from transactional revenue from a one-off payment like sales or through recurring revenue like a subscription. 

Here are three factors to consider when choosing your revenue stream: 

• Value proposition – your revenue stream should connect with your value proposition. The value that your product or service delivers should align with your revenue streams. 
• The market – your customer base and market fit will determine your revenue streams. If you target individual customers, a subscription service would make sense. But if you’re a software company, then licensing your service could be more suitable. 
• Competitors – analyze how your competition generates revenue. You can study their strategies, mistakes, and wins to help you determine your own revenue streams. 

A useful tool to help you understand your business model is the Business Model Canvas (BMC). It helps you to visualize and assess your business model and capture value. A BMC includes elements like value proposition, revenue streams, customer segments, and channels to connect the building blocks of your business. Every value proposition should connect with a revenue stream and customer segment. By evaluating your business model as a whole, you can determine the most suitable revenue streams for your business. 

8 revenue stream examples 

There are several ways businesses can make money. Typically, there are pros and cons to each type of revenue stream. Depending on your value proposition and customers, one revenue stream may be more suitable for you than another. Here are eight examples of revenue streams that represent broad categories of ways your business can make money. 

1. Asset sale 

Asset sale or selling assets is one of the most mainstream ways that businesses make money across multiple industries. Your business sells something and then your customers own it. An asset sale also occurs when a business owner sells their company. Usually, it’s a one-off transaction sale. Once the sale is complete, typically, a customer can use the product, resell or even destroy it as they own the asset. The sale of a physical product generates revenue for the business. 

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2. usage fees .

Usage fees are how much a company charges to use its service. The customer pays you based on the amount they use the service. For example, a phone company charges customers for a certain number of minutes and data. Typically, customers pay a monthly fee to access phone service. Another good example is a car rental. The customer pays a car rental company to rent a car for how many miles they travel. A postal carrier charges you to deliver a parcel from one location to another. Essentially, with usage fees, the more customers use a service, the more they pay. 

3. Leasing and renting 

This revenue stream is built around customers using a temporary item for a fixed amount of time. For this, you’re giving customers exclusive use of an asset for a specific amount of time. Examples of businesses that use this revenue stream are Airbnb or car rental companies. 

Another example of this revenue stream is Rent the Runway, which allows members to rent designer clothes for a specific period of time. The designer rental brand offers both a monthly subscription membership and one-off rentals to customers. Memberships start at $135/month and give users access to up to eight items per month. You can see how they are tapping into multiple revenue streams to develop both recurring revenue and transaction revenue from one-off rental purchases. 

4. Advertising fees 

Advertising fees are a revenue stream where you make money by charging to showcase a product, service, or brand on your online or offline company assets. Essentially anywhere you charge a fee to advertise and promote another business. An advertising-based revenue stream is often used by businesses that have websites that attract a lot of traffic. You generate revenue by selling ad space. 

The benefit of this is that if you have a high-traffic space, online or offline, you can monetize it relatively instantly. The downside is that adverts are everywhere nowadays and you want to consider if you want to distract your customers with an advert. Examples of advertising revenue include incorporating Google Adsense on your website or adverts on your podcast or YouTube channel. 

5. Subscription fees 

Many businesses utilize a subscription-based revenue stream. Revenue is generated through customers paying for ongoing access to a service. Examples of companies that use subscription fees are Netflix, Shopify, Adobe as well as gym memberships, and fitness studios.

 In general, these types of revenue streams tend to be lower monthly amounts so customers continue to pay as it’s something you can easily forget about. As a subscription, customers pay a recurring fee to access a service. Other businesses that use this revenue stream are subscription boxes and some eCommerce companies. 

6. Licensing 

Licensing usually involves one-time customer payments that give a single user or group of users access to a software product. While the owner keeps the copyright, the third party can use the content for free. In the last few years, we’ve seen some major players move away from the licensing model to a subscription-based format. 

Companies like Adobe and Microsoft have moved a lot of products to subscription services. But licensing is still a popular option in photography, music, and video games where customers pay to use and access content, while the owner still retains the ownership rights. 

7. Brokerage fees 

When companies match people with a certain service, they can receive a brokerage fee. In a traditional sense, real estate agents and real estate brokers match people with property and receive a brokerage fee. Other examples of businesses that take brokerage fees are Uber, Booking.com, and Airbnb. They all take a fee matching customers to service. 

The benefit of this revenue stream is that you don’t have to deliver the product or service, you simply match the customer with the right business or service. The downside is that this sort of revenue stream really only applies to certain businesses and it takes a lot of time and effort to set up. Any business that acts as an intermediary takes a percentage fee for its services. 

8. Consulting or services 

The people on your team are also an asset. An asset doesn’t have to be a physical item. You can leverage your team in the form of consulting or services. Examples of this include financial advisors and marketing agencies or consultants. These types of businesses can include both retainer and project work. 

Retainer work is similar to a subscription setup where customers would pay a certain amount each month for a specific service. Offering services or consulting is a good way to create a revenue stream without creating brand new assets or developing a new product. 

In summary 

The right revenue stream for your business depends on your value proposition, customers, and your main source of income. While some revenue streams may not be relevant for your business, others could be opportunities to diversify your income and increase future stability. 

A great additional revenue stream is one that doesn’t add too much complexity to your current business model. By evaluating your current assets and surveying your existing customers, you can look to identify a new business revenue stream to expand your company. 

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What is SaaS?

Key characteristics of the saas industry, what is a saas financial model, importance of saas financial models in corporate finance, step-by-step guide to building a saas financial model, tools and software for creating saas financial models, saas industry key performance indicators, challenges and best practices in saas financial modeling, final thoughts on the evolving landscape of saas and corporate finance, additional resources, saas financial modeling: a high-level overview.

How to build a financial model for a Software as a Service (SaaS) company, as well as calculating key metrics that SaaS companies and analysts monitor

SaaS (Software as a Service) is a software distribution model where companies create applications, and clients subscribe to these applications. These software applications are hosted by a vendor and made available to clients over the internet.

The SaaS distribution model is different from the more traditional model of purchasing software one time and having access to it indefinitely.

Under the SaaS model, instead of installing and maintaining software, clients simply access it via the web, freeing them from having to maintain the software in-house. As long as clients are subscribed to a SaaS application, the clients will typically receive new software features as part of the subscription. Again, this is different from the traditional model, where many improvements require the purchase of a newer version.

The SaaS business model results in more stable and recurring revenue compared to the more traditional model of one-time purchases. This recurring-revenue dynamic has led to many software companies switching to the SaaS business model. As an example, Microsoft used to sell its Office product on a one-time basis. However, while Office can still be purchased, Microsoft relies more on its Microsoft 365 subscription. Other SaaS companies include Salesforce, Atlassian, and Dropbox, among many others.

• Subscription-based pricing : As mentioned previously, the SaaS model is based on recurring subscriptions from clients.
• Cloud-hosted applications : SaaS software applications may be hosted in the cloud or at least have significant cloud-based functionality.
• Increased accessibility : Because of the cloud-based functionality, users can access software from various devices as long as they have an internet connection. This is crucial as many businesses have transitioned to work-from-home or a hybrid work schedule.
• Regular updates : One of the major benefits of SaaS is that SaaS businesses will regularly update software, and these updates are typically included in the cost of the subscription so there’s no incremental cost to clients.
• Enhanced scalability : Given the increased accessibility and regular updates, SaaS providers help businesses accommodate changing needs and conditions via greater flexibility.

Key Highlights

• SaaS (Software as a Service) is a software distribution model where companies create applications, and clients subscribe to these applications. The SaaS business model results in more stable and recurring revenue, compared to the more traditional model of one-time purchases.
• SaaS financial models must account for industry-specific metrics, including recurring revenue, customer acquisition costs, and customer churn rates.
• Other key performance indicators include customer lifetime value, burn rate, and the Rule of 40.

A SaaS financial model is simply a spreadsheet, usually built in Microsoft Excel, which forecasts a SaaS company’s financial performance into the future. The forecast is typically based on the company’s historical performance and assumptions about the future, and requires preparing an income statement, balance sheet, cash flow statement, various supporting schedules, as well as outputs of key performance indicators ( KPIs ).

SaaS financial models must account for industry-specific metrics and aspects, including recurring revenue, customer acquisition costs, and customer churn rates. SaaS financial models are powerful tools for decision-making, helping stakeholders understand the financial health, valuation , and growth potential of a SaaS business.

SaaS Financial Model Components

Fundamentally, SaaS financial models follow the same basic format and structure as most other industries in that these models will contain the three core financial statements: the income statement, the balance sheet, and the cash flow statement.

Key considerations when building this type of financial model include:

• Revenue Projections : The SaaS model needs to account for the recurring revenue from subscriptions and may be broken down by different customer segments or pricing tiers. Other revenues may be generated from one-time setup fees or professional and training services.
• Cost Structure : Any model needs to consider both the direct costs of delivering the service (for example, data center capacity and hosting and  direct labor ), as well as other operating expenses such as sales, marketing, research and development, and administrative expenses.
• Key Performance Indicators : Specific SaaS metrics include Monthly Recurring Revenue ( MRR ) and Annual Recurring Revenue ( ARR ), Customer Lifetime Value ( LTV ), and Customer Acquisition Cost (CAC). Additionally, the model should quantify customer retention and churn rates, which are crucial for understanding the sustainability and growth of the business.

SaaS financial models play a crucial role in various aspects of corporate finance:

• Performance Monitoring : By performing variance analysis , stakeholders can identify areas of overperformance or underperformance, allowing for necessary changes to operations.
• Budgeting : Financial models are used for setting realistic budgets and forecasts, as well as helping determine the proper allocation of resources across different departments and initiatives. Models can also be set up to calculate different scenarios, such as a change in customer churn rate.
• Valuation : SaaS companies are often valued on metrics like sales or annual recurring revenue. A detailed financial model can help justify a company’s valuation on revenues, as opposed to more traditional valuations based on cash flows or earnings .
• Fundraising or Exit Planning : A well-constructed financial model is critical when seeking investment or planning an exit strategy . The model should show a clear picture of how the company plans to use funds and generate returns. For founders or investors planning an exit, a robust financial model is necessary for demonstrating the company’s potential to prospective investors.

Like any model, creating a robust SaaS financial model requires a deep understanding of the business model and attention to detail. Below is an overview of creating a robust SaaS model.

1. Revenues : Revenue modeling is one of the most important aspects of any SaaS financial model. Proper revenue modeling should include the following considerations:

• Define customer segments: The customer base should be broken down into relevant segments like industry, geography, pricing tier, etc. However, keep in mind that at a certain level of granularity, there is little additional benefit to better decision-making or more accurate analysis and modeling.
• Project new customer acquisitions: Revenue will naturally increase the more new customers the SaaS company can add so this needs to be factored in the revenue forecast. However, keep in mind that adding new customers is usually driven by sales and marketing efforts, so those costs might increase as well.
• Forecast expansion revenue: In addition to adding new customers, a SaaS company may be able to increase revenue by enticing existing customers to purchase additional products by upselling or cross-selling .
• Model churn: Estimate the rate at which customers cancel their subscriptions. The churn rate is usually expressed as a monthly or annual percentage of existing customers.
• Average revenue per account ( ARPA ): Once the number of customers is forecast, the analyst should then apply an appropriate average revenue per account (or per user) to calculate the dollar revenue amounts.
• Calculate recurring revenue: After estimating all of the above, the model can then calculate the monthly recurring revenue (MRR) or annual recurring revenue (ARR) over time. The formula is as follows (substitute MRR for ARR as needed):

Ending ARR = Beginning ARR + New ARR + Expansion ARR – Churned ARR

• Forecast other revenue: Most SaaS companies will generate other revenue from setup fees or professional services.

2. Expenses : Accurately forecasting expenses is crucial for understanding the profitability and cash needs of the business.

• Cost of sales (COS): The cost of sales for SaaS companies typically includes hosting costs, and customer support, along with any other direct costs associated with delivering the service.
• Customer acquisition costs: Customer acquisition costs include salaries for sales and marketing professionals, as well as advertising spend.
• Research and development: SaaS companies are always innovating so it’s important to fully understand the costs associated with product development, including engineering and related expenses.
• General and administrative: Administrative costs include expenses for finance, human resources, office space, and other overhead costs.

3. Cash flow : Cash flow projections are critical for SaaS companies, especially given the often significant gap between customer acquisition costs and realized revenue.

• Building a cash flow statement normally starts with operating cash flow. Net income from the income statement is adjusted, along with changes in working capital , to calculate operating cash flow.
• Any capital expenditures (CapEx) the company makes is a cash outflow and is considered an investing activity on the cash flow statement. Having said that, CapEx is generally lower for SaaS companies (relative to many other industries and businesses).
• Any financing activities must also be considered. This would include capital raises in the form of debt or equity (or repayments or repurchases of each as well).
• Combine all cash inflows and outflows to calculate the company’s cash position.

While most financial models are built using spreadsheet software, there are also other tools that can streamline the modeling process:

• Microsoft Excel and Google Sheets : These remain the most widely used tools due to their flexibility and broad familiarity. Given their flexibility, they’re excellent for custom models. However, they require a strong understanding of financial modeling principles and formula construction and may be prone to user or data error.
• Specialized SaaS modeling tools : Platforms like PlanGuru, Workday, or Anaplan offer pre-built templates and features specifically designed for SaaS businesses.
• Visualization tools : Software like Tableau or Power BI can be used in conjunction with a financial model to create compelling visual representations of the data and KPIs.

SaaS businesses have a unique set of metrics and KPIs that are important to understanding a company’s financial health and growth prospects. Some of the most important include:

• Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR) : These represent the predictable, recurring revenue generated by the subscription business.
• Customer Acquisition Cost (CAC) : The total cost of acquiring a new customer, including marketing and sales expenses.
• Customer Lifetime Value (LTV) : Although this can be calculated in a few different ways, this metric represents the total gross margin a SaaS business can expect from a single customer over the life of the customer’s subscription.
• LTV to CAC Ratio : This measures the return on investment on customer acquisition costs. A healthy LTV/CAC ratio is typically 3:1 or higher.
• Churn Rate : This is the rate at which customers cancel their subscriptions, usually expressed as a percentage of the customer base.
• Net Revenue Retention (NRR) : This metric shows the revenue retained from existing customers over time, including the impact of customer churn, downgrades, and upsells.
• Gross Margin : The percentage of revenue retained after accounting for the direct costs of providing the service.
• Burn Rate : The rate at which a company is losing cash, which is particularly important for startups that are not yet consistently profitable or cash-flow positive.
• Rule of 40 : The Rule of 40 is a “back-of-the envelope” calculation that says a SaaS company’s revenue growth plus its profit margin should equal 40% or more.

These metrics should be prominently featured in the financial model and used to drive key insights and decision-making.

Building and maintaining a robust and accurate SaaS financial model comes with many challenges.

• Forecasting accuracy : Predicting future performance, especially for early-stage companies or in rapidly changing markets, can be exceptionally difficult.
• Complexity : SaaS models, like many financial models, can become very complex, making them difficult to understand, maintain, and update.
• Balancing complexity with usability : While more detail might provide better insights, it can also make the model unwieldy and more difficult to use.

To address these challenges, consider the following best practices:

• Regularly review and update the model, eliminating unnecessary and cumbersome detail.
• Create the ability to run multiple scenarios to account for uncertainty.
• Use sensitivity analysis to identify which inputs have the biggest impact on KPIs. These inputs should then be heavily scrutinized, given their influence.
• Clearly document assumptions and calculations to make the model easier to understand and audit.
• Build the model in a modular fashion, allowing for easier updates and modifications.

The SaaS industry continues to thrive and evolve rapidly, presenting both opportunities and challenges for financial modeling and corporate finance.

• Shift to product-led growth : Many SaaS companies are adopting product-led growth strategies, where the product itself drives user acquisition, conversion, and expansion. This trend is impacting traditional sales and marketing models, requiring adjustments in how to forecast customer acquisition and growth.
• AI and machine learning integration : As SaaS companies increasingly incorporate AI and machine learning into their products, financial models may need to account for different cost structures and the potential for rapid scaling.
• Usage-based pricing : More SaaS companies are adopting usage-based pricing models, which can complicate revenue forecasting but may lead to better alignment with customer value.
• Remote work impact : The shift towards remote, or hybrid, work has accelerated the adoption of SaaS tools, potentially leading to changes in customer acquisition costs and churn rates.
• Blockchain and decentralized finance : The potential integration of blockchain technology and decentralized finance (DeFi) principles into SaaS business models could lead to new revenue streams and financial structures that will need to be considered when creating a financial model.

Thank you for reading CFI’s guide on SaaS Financial Models. To keep advancing your career and skills, the following CFI resources will be useful:

• Average Revenue Per Account (ARPA)
• CAC Payback Period
• Customer Acquisition Cost
• SaaS Quick Ratio
• Financial Modeling Interview Questions
• See all financial modeling resources
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Ola Business Model

The Ola Business Model is centered around revolutionizing the transportation industry through its innovative ride-hailing services. Like Uber , Ola allows users to book rides through its mobile app, connecting individuals with a network of drivers in their area. With its presence in various countries worldwide, Ola has become one of the leading ride-hailing platforms, providing convenient transportation options for millions of users.

Through the Ola Business Model, users can quickly request rides, track their driver’s location, and make cashless payments. Ola offers different services, including Ola Micro, Ola Mini, Ola Prime Plus, and Ola Share, catering to various customer preferences. In addition, Ola has ventured into other mobility solutions, such as auto-rickshaws, e-rickshaws, and even electric vehicles, making it a versatile player in the transportation ecosystem.

With its user-friendly interface and efficient service, Ola has gained a solid customer base and enjoys significant popularity among commuters. The platform’s success can also be attributed to its competitive pricing, constant innovation, and commitment to enhancing the overall transportation experience for riders and drivers.

A brief history of Ola

The story of Ola begins in Mumbai, India, in 2010. Bhavish Aggarwal, a young entrepreneur, faced an unfortunate incident while trying to book a cab. This incident sparked an idea in Bhavish’s mind, an idea that would revolutionize the transportation industry in India.

Bhavish and his co-founder Ankit Bhati decided to create a platform that would connect commuters with the nearest available cab drivers through a mobile app. This idea gave birth to Ola, a ride-hailing service that aimed to provide convenient and affordable transportation to people across India.

In its early years, Ola faced various challenges. The company had to overcome regulatory hurdles and convince drivers and customers to embrace this new ride-hailing concept. However, with persistence and innovation, Ola gradually gained traction and expanded its services to multiple cities across India.

As it grew, Ola introduced new features and services to enhance the customer experience. The company introduced Ola Prime, a premium service with high-quality vehicles for a more luxurious ride. Ola also launched Ola Auto, Ola Bike, and Ola Rentals, catering to the diverse transportation needs of its customers.

In 2015, Ola took a significant step forward by expanding its operations to international markets. The company entered the Australian market, followed by launches in New Zealand and the United Kingdom. This expansion marked a significant milestone for Ola, solidifying its position as a global player in the ride-hailing industry.

Over the years, Ola has continued to innovate and adapt to changing market dynamics. The company ventured into electric mobility by launching Ola Electric, with a mission to drive the adoption of electric vehicles in India. Ola Electric is focused on building a robust electric vehicle ecosystem, including charging infrastructure and battery-swapping solutions.

Today, Ola operates in more than 200 cities across India and has a vast network of registered drivers. The company has become a household name, synonymous with hassle-free, reliable, and affordable transportation.

As Ola looks to the future, it aims to diversify its offerings further and expand its presence globally. With a strong focus on technological innovation and customer satisfaction, Ola continues to transform the way people travel, making transportation more accessible and convenient for millions of individuals.

Who Owns Ola

Ola has a diverse ownership structure. Based on information from Inc42 as of December 28, 2023, let’s look at the major shareholders and institutions that own stakes in Ola.

Founder and CEO Bhavish Aggarwal has a significant ownership stake in Ola. He holds 136.1 Crore shares, representing 36.94% of the pre-offer equity share capital on a fully diluted basis.

SoftBank’s SVF II Ostrich Fund is another significant shareholder in Ola. They hold 81.04 Crore shares, accounting for 21.98% of the company’s ownership. Tiger Global’s Internet Fund III also has a significant stake in Ola. They hold 22.24 Crore shares, representing 6.03% ownership.

Apart from the founder and CEO and the two significant funds mentioned above, several other institutional investors are involved in Ola. Promoter Group Entities, including ANI Technologies (Ola Cabs’ parent) and Indus Trust, collectively hold 4.35% and 3.85% ownership stakes, respectively.

Among the significant institutional investors in Ola, Alpha Wave Ventures holds a 3.49% stake. Matrix Partners India, through its two funds, has combined ownership of 3.51%. These institutions and mutual funds contribute to Ola’s diversified ownership structure.

Ola Mission Statement

Ola’s mission statement is “to build mobility for a billion people.”

How Ola works

Ola’s business model is centered around connecting customers with drivers through a mobile app, making it easy for users to book a ride whenever and wherever they need it. The company uses technology and data to match customers with nearby drivers, providing them with a seamless ride-hailing experience.

To use Ola’s services, customers must first download the Ola mobile app and create an account. Once registered, customers can input their pickup and drop-off locations and choose from various ride options, such as Ola Micro, Ola Mini, or Ola Share, depending on their preferences and needs.

Ola’s technology platform uses real-time data to match customers with available drivers in their vicinity. The app provides customers with information about the assigned driver, including the driver’s name, photo, vehicle details, and estimated arrival time. Customers can also track the driver’s location in real time as they make their way to the pickup point.

Once the ride is completed, customers can pay for their trip using various payment methods, including cash, credit/debit cards, or digital wallets. Ola’s secure and convenient payment system ensures a hassle-free transaction for customers and drivers.

In addition to providing on-demand transportation, Ola offers several other features and services to enhance the overall customer experience:

• Ola Rentals: This feature allows customers to book a cab for multiple hours or even an entire day. It is handy for customers who need a cab for shopping trips, business meetings, or sightseeing tours;
• Ola Outstation: This feature lets customers book a cab for inter-city travel. Whether a weekend getaway or a business trip, customers can rely on Ola to provide a comfortable and reliable transportation solution;
• Ola Share: Ola’s carpooling service allows customers to share their rides with others heading in the same direction, making it a cost-effective and eco-friendly option for commuting;
• Ola Auto: Ola also offers auto-rickshaws as a mode of transportation, providing customers with a convenient and affordable alternative for short trips.

Ola’s business model, which focuses on leveraging technology and data to provide a seamless ride-hailing experience, has helped the company become one of the leading players in the Indian transportation industry.

How Ola makes money

Ola operates a platform-based business model, connecting riders with drivers through its mobile application. While the app is free, Ola generates revenue through various streams. The following are the primary ways through which Ola makes money:

• Ride-hailing Revenue

Ola earns a significant portion of its revenue from ride-hailing services. Users book rides through the Ola app and pay for the distance traveled and time taken. Ola charges a commission from the driver-partners for providing access to the platform and connecting them with riders. The commission rate varies depending on the location and type of ride;

• Peak Pricing

During peak hours or times of high demand, Ola implements surge pricing, commonly known as peak pricing. This means that the fares increase temporarily to encourage more drivers to be available and meet the increased demand. Ola collects the additional amount charged from users during peak pricing;

Ola has a digital wallet called Ola Money, which allows users to make cashless payments for their rides. Ola earns revenue from the transaction fees charged on payments made through the Ola Money wallet. Users can load money into their Ola Money wallet and use it for rides and other services Ola’s partners offer;

• Ola Rentals and Outstation Rides

Besides regular point-to-point rides, Ola offers services like Ola Rentals and Outstation Rides for longer durations or out-of-town travel. Users can book a vehicle for a few hours, several days, or intercity travel. Ola charges users a fixed fare based on the duration and distance of the rental or outstation ride, generating revenue from these services;

• Advertising and Partnerships

Ola provides advertising opportunities to brands and businesses on its platform . Advertisers can target Ola users with relevant ads based on location, preferences, and other factors. Ola generates revenue by charging brands advertising fees for running their ads on the app;

• Ola Electric

Ola has ventured into the electric vehicle (EV) space with Ola Electric , its subsidiary focusing on electric mobility solutions. Ola Electric offers electric scooters and other EV solutions to customers. With the sale and leasing of electric vehicles, Ola generates revenue from this vertical.

Ola Business Model Canvas

The Ola Business Model can be explained in the following business model canvas :

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Ola Customer Segments

Ola caters to a diverse range of customer segments . The following are the primary customer segments that form Ola’s user base:

• Individual Users: Individual users are Ola’s primary customer segment. These users typically include commuters, tourists, and individuals seeking convenient transportation. Ola provides them with reliable and affordable transportation through its mobile app. Individual users can book a ride with just a few taps, making it a preferred choice for daily commuting or occasional travel;
• Corporate Users: Ola also targets corporate customers who require transportation services for their employees. Ola Corporate provides companies a platform to manage and streamline their employees’ travel expenses. This segment includes businesses of all sizes, from startups to large corporations, looking for efficient, cost-effective transportation solutions;
• Outstation Travelers: Ola caters to the needs of travelers seeking transportation for outstation trips. This customer segment includes individuals or groups planning vacations, weekend getaways, or business trips outside the city. Ola Outstation allows users to book intercity rides conveniently, providing comfortable and reliable transportation options;
• Delivery Partners: Ola’s customer segment extends beyond traditional ride-hailing services to include delivery partners. Ola’s delivery platform, Ola Parcel, connects individuals or businesses with delivery partners to fulfill their delivery needs. This segment contains restaurants, online retailers, and other companies requiring efficient and reliable delivery services;
• Ola Money Users: Ola Money, a digital payment platform, serves as an additional customer segment of Ola. Users can load money into their Ola Money wallets and seamlessly transact within the ecosystem. This customer segment includes individuals who prefer the convenience and security of digital payment options for their Ola rides and other partner merchants.

Ola Value Propositions

Ola value propositions consist of:

• For Individual Users: Ola’s value proposition centers on providing convenient, reliable, and affordable transportation options. They can easily book a ride through the Ola mobile app, choose from various vehicle types, and track their ride in real time. Ola ensures that their vehicles are well-maintained and driven by professional drivers, providing a safe and comfortable journey. With competitive pricing and various payment options, Ola aims to make transportation hassle-free for individual users, whether commuting to work, running errands, or exploring the city;
• For Corporate Users: Ola’s value proposition for corporate users lies in streamlining their employees’ travel needs and reducing their transportation costs. They offer Ola Corporate, a dedicated platform that enables companies to manage and monitor their employees’ rides, expenses, and travel policies. With customized billing, detailed reports, and centralized payment systems, Ola simplifies the management of corporate transportation. Corporations benefit from cost-efficient solutions, hassle-free expense tracking, and increased employee productivity while ensuring a comfortable and reliable mode of transportation for their workforce;
• For Outstation Travelers: Ola’s value proposition is providing outstation travelers with a convenient and reliable intercity travel option. They can book outstation rides in advance, select from various vehicle options, and enjoy doorstep pickup and drop-off. Ola ensures that their outstation drivers are well-versed in long-distance travel and prioritize passenger safety and comfort. With competitive pricing, transparent billing, and the option to customize their journey, Ola aims to make outstation travel seamless and enjoyable for travelers;
• For Delivery Partners: Ola’s value proposition for delivery partners lies in offering them a platform to connect with individuals and businesses requiring efficient and reliable delivery services. They benefit from improved efficiency and access to a broad customer base. Ola ensures seamless order management, real-time tracking, and prompt payment settlements, making it an attractive choice for delivery partners looking for a streamlined and profitable delivery solution;
• For Ola Money Users: Ola’s value proposition revolves around offering them a seamless and secure digital payment option within the Ola ecosystem. They can load money into their Ola Money wallets and make transactions for their Ola rides and at various partner merchants. Ola Money users benefit from the convenience of cashless transactions, exclusive offers, and fast payment processing. With the assurance of data privacy and secure transactions, Ola aims to provide Ola Money users with a hassle-free payment experience within and beyond the Ola platform.

Ola Channels

Ola channels consist of:

• Mobile App: Ola operates primarily through its mobile application, which serves as the primary channel for customers to book rides, track drivers, and make payments;
• Website: Ola also has a website that allows customers to book rides and manage their accounts;
• Call center: Ola provides customer support through its call center, allowing customers to book rides over the phone and seek assistance with any issues they may encounter;
• Partnerships: Ola has partnered with various other platforms, such as travel websites and hotel booking platforms, to allow customers to book rides directly from these platforms.

Ola Customer Relationships

Ola customer relationships consist of:

• Customer Service: Ola aims to provide excellent customer service through various channels, including the mobile app, website, and call center. They strive to address customer queries and complaints promptly;
• Personalization: Ola uses customer data to personalize offers and incentives for frequent customers, providing a more customized experience;
• Loyalty Programs: Ola offers loyalty programs, such as Ola Select, to reward and retain their most valuable customers, providing exclusive benefits and privileges;
• Community Building: Ola engages with its customers through social media platforms, creating a sense of community and encouraging customer loyalty;
• Feedback Mechanism: Ola actively seeks feedback from its customers to improve their services and address any issues or concerns promptly and effectively.

Ola Revenue Streams

Ola revenue streams consist of:

Ola Key Resources

Ola key resources consist of:

• Technology Infrastructure: Ola heavily relies on its technology infrastructure, including its mobile app, website, and backend systems, to facilitate seamless ride booking and management;
• Fleet of Vehicles: Ola’s primary resource is the fleet of vehicles available on its platform, enabling them to meet the ride demand;
• Driver Network: Ola’s extensive network of drivers is a crucial resource, as it ensures the availability of rides for customers across different locations;
• Customer Base: Ola’s existing customer base is a valuable resource, as it provides a steady stream of revenue and potential for growth through repeat business and referrals;
• Brand and Reputation: Ola’s brand image and reputation are essential resources that attract and retain customers, differentiate them from competitors, and build trust in the market.

Ola Key Activities

Ola key activities consist of:

• Operating a ride-hailing platform
• Managing the customer mobile app
• Optimizing driver allocation and route planning
• Ensuring driver quality and training
• Expanding transportation options

Ola Key Partners

Ola key partners consist of:

• Driver partners
• Vehicle manufacturers and dealerships
• Financial institutions
• Mobile network providers
• Mapping and navigation service providers

Ola Cost Structure

Ola cost structure consists of:

• Driver acquisition and onboarding
• Vehicle purchase, maintenance, and insurance
• Marketing and promotions
• Technological infrastructure investments
• Customer service and support expenses

Ola Competitors

Ola faces stiff competition from several key players in the market. Here are some of Ola’s competitors and a concise explanation of their business models:

• Uber: One of Ola’s biggest rivals, Uber is a global ride-hailing giant . It operates on a similar model to Ola, connecting riders with drivers through a mobile app. However, Uber has a more extensive international presence and has diversified into various other services like food delivery and freight;
• Meru Cabs: Meru Cabs is a popular Indian taxi service that competes directly with Ola. It operates through a fleet of owned and operated vehicles and offers various options, such as sedans, hatchbacks, and luxury cars. Meru primarily focuses on catering to corporate clients and has a strong presence in major cities across India;
• Grab: Based in Singapore, Grab is a central ride-hailing platform operating in Southeast Asian countries. It offers a wide range of services, including car rides, bike rides, taxis, and even food delivery. Grab’s extensive service range and strong regional focus make it a significant player in the Asian market;
• Didi Chuxing: Didi Chuxing, originally a Chinese ride-hailing platform, expanded its presence globally by acquiring Uber’s operations in China. Didi operates similarly to Uber and Ola, offering ride-hailing services through a mobile app. With its massive user base and strong financial backing, Didi is a formidable competitor for Ola in domestic and international markets;
• Go-Jek: Go-Jek is an Indonesian ride-hailing company that started as a motorcycle taxi service. It has since expanded to offer various services, including car rides, food delivery, and on-demand services like cleaning and massage. Go-Jek’s unique service offerings and dominance in the Indonesian market make it a significant challenger for Ola.

These competitors present formidable challenges to Ola, especially considering their market expertise, financial backing, and advanced technology.

Ola SWOT Analysis

The SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis is crucial for evaluating a company’s business model and strategic position. Understanding Ola’s SWOT analysis provides valuable insights into its operations.

By examining its strengths, weaknesses, opportunities, and threats, we can comprehensively understand the factors influencing Ola’s success and potential challenges.

Ola Strengths

• Strong market presence: Ola is one of the leading ride-hailing platforms in India, with a significant market share and a presence in multiple cities across the country;
• Diverse service offerings: In addition to regular cab services, Ola offers options like Ola Auto, Ola Bike, Ola Rentals, and Ola Outstation, catering to different customer needs;
• Technological innovation: Ola has invested in developing a robust technology platform, including a user-friendly mobile app, real-time tracking, and cashless payment options, which enhances customer experience;
• Competitive pricing: Ola’s fares are often more competitive than traditional taxi services, making it an attractive option for budget-conscious customers;
• Strong brand image: Ola has established a strong brand presence and enjoys high brand recall among customers in India.

Ola Weaknesses

• Dependent on driver-partners: Ola relies on a large fleet of driver-partners who are not direct employees, which can sometimes result in issues related to driver behavior, availability, or reliability;
• Regulatory challenges: Ola operates in multiple cities, making it susceptible to regulatory hurdles and compliance issues imposed by local authorities, which can negatively impact its operations;
• Dependency on urban centers: Ola’s services are predominantly available in urban areas, which limits its ability to reach customers in rural or less densely populated regions;
• Inconsistent service quality: Due to its dependency on driver-partners, service quality can vary across different rides and sometimes lead to customer dissatisfaction.

Ola Opportunities

• Expansion into new markets: Ola can expand its services beyond India into other countries with growing ride-hailing markets, potentially increasing its customer base and revenue streams;
• Growth potential in new customer segments: Ola can offer tailored services and incentives to cater to specific customer segments, such as corporate clients or tourists.

Ola Threats

• Intense competition: Ola faces competition from other local and international ride-hailing platforms, which offer similar services and are vying for a larger market share;
• Changing regulations: The regulatory landscape for ride-hailing services is constantly evolving, and any changes or restrictions imposed by authorities can threaten Ola’s operations;
• Economic downturns: During economic slowdowns or recessions, consumer discretionary spending tends to decrease, potentially impacting Ola’s ride bookings and revenue;
• Technological advancements: Rapid technological advancements and disruptive innovations in the transportation sector, such as self-driving cars or flying taxis, could threaten Ola’s traditional ride-hailing business model.

Ola’s business model is a testament to its innovative approach in the ride-hailing industry. By leveraging technology, Ola has delivered convenience and accessibility to millions of customers in India and abroad. Their emphasis on driver-partner empowerment and a seamless user experience has helped them gain a competitive edge in the market. 

Moreover, their diverse range of services, including auto-rickshaws, bikes, and electric vehicles, highlight their commitment to sustainability and catering to the needs of a diverse customer base.

Ola’s continued focus on constant innovation and expansion into new markets solidifies their position as a leader in the ride-hailing industry. The company’s business model exemplifies a customer-centric approach that emphasizes efficiency, convenience, and sustainability.

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I love understanding strategy and innovation using the business model canvas tool so much that I decided to share my analysis by creating a website focused on this topic.

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Smart automation: ai’s impact on operational efficiency.

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Atal Bansal is the Founder and CEO at Chetu , a global U.S.-based custom software solutions and support services provider.

AI “smart” or “intelligent” automation seems unstoppable because it promises to save money, minimize human error, and produce faster results. The impact on workers and the workplace will be dramatic.

Goldman Sachs reports that “two-thirds of occupations could be partially automated by AI.” McKinsey echoes this sentiment in an article: “Current generative AI and other technologies have the potential to automate work activities that absorb 60 to 70 percent of employees’ time today.”

What we are seeing with smart automation is the digital equivalent of Henry Ford’s assembly line when he added a conveyor belt to bring the “developing car” to the workers, allowing Ford to build a car in 90 minutes instead of 12 hours.

Given the likelihood of cost savings and increased operational efficiency, many companies are turning to smart automation. This technology could upend the job market and revolutionize the workplace by enhancing productivity.

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Smart automation technology will impact various aspects of business operations, especially repetitive and time-intensive tasks like entering data, which are susceptible to human error. It can also generate data-driven insights and find patterns from large datasets that human workers might take days, weeks, or even longer to accomplish, if at all.

State-of-the-art technologies are already automating repetitive tasks like payroll processing, data entry, inventory management, patient registration, invoicing, claims processing, and more. AI and Robotic Process Automation (RPA) have taken on everyday manual tasks that employees previously did, leaving companies with the choice of eliminating jobs or giving workers more time to focus on more productive tasks.

While automation excels at repetitive tasks, it can transform business operations. For instance, rather than having workers manually count inventory, AI can automatically track inventory in real time as consumers buy products. Businesses would be able to anticipate demand for popular products and eliminate disruptions due to shortages. AI also reduces downtime because it can predict maintenance problems, allowing managers to take proactive action to minimize work interruptions. This helps produce faster turnaround times, improve resource allocations, and reduce costs.

AI and machine learning (ML) algorithms also provide companies with data-driven insights. By analyzing vast amounts of data, these technologies can find patterns and trends, which leads to more informed decision-making. Previously, companies often had information overload that they struggled to analyze efficiently.

Real-World Smart Automation Examples

Many companies have already embraced smart automation because of its potential benefits. Here are two companies that are using smart automation to save time and money:

• JPMorgan Chase (JPCM) leverages AI in its COiN (COtract INtelligence) platform, which automates tasks like “interpreting loan applications.” The automated system can “process 12,000 contacts annually and save approximately 360,000 hours of review for the firm's legal teams.”

• Walmart has implemented an AI-ML-driven inventory management system that uses “historical data” and “predictive analytics” to “save time from the moment of purchase to their front door.”

Mitigating Risks And Maximizing Rewards

To successfully implement smart automation and avoid problems with employees, companies need to plan and have a clear vision of their goals. They will need a cross-functional team that includes executives, managers, workers, and your IT team or consultant to minimize risks and to assuage the workforce on their future.

Automation.com lists significant challenges that companies will have to overcome, including:

•Lack of IT readiness: Many companies may not have the IT skills in house to manage smart automation integration. They will either need to upskill their IT staff, perhaps expand it or bring aboard a software solutions provider that understands their industry and the technology required.

•Lack of a clear vision: This problem stems from a lack of a total strategy. To develop a clear vision, Automation.com recommends the active involvement of C-Suite executives and the creation of a centralized “Center of Excellence” that will set “standards and [provide] guidance to business units engaged in specific initiatives.”

Because of the benefits of these real-world examples, many workers fear technology will take their jobs. Undoubtedly, horse-and-buggy drivers suffered tremendous job losses with the advent of cars. But with technology also came new jobs. Instead of a horse and buggy, society needed taxicab drivers.

So, how will AI, a generational technology, change the workplace?

McKinsey research indicates that jobs requiring “physical and manual skills” will continue their downward trend but they will still “continue to be the single largest category of skills (measured by time spent), shrinking from 31 percent of workers’ time in 2016 to 25 percent in 2030 across the United States and Western Europe.”

As a result, businesses will seek workers with “higher cognitive skills,” like “creativity, critical thinking, decision making, and complex information processing.”

To minimize the potential disruption to the workforce, companies, employees and governments can take proactive measures to reduce job loss. Companies can offer retraining programs to workers, and employees can seek training needed for new careers, which already existing federal programs may subsidize. Government can do its part by providing financial incentives to companies that use AI to help workers. One idea floating around Congress is a “ displacement tax , levied on employers when a worker’s job is automated but the person is not retrained, which could make businesses more inclined to retrain workers.”

While Congress holds hearings and proposes legislation, smart automation is already a reality in today’s business world. The question is not whether many companies will switch to smart automation but when. This technology is inevitable. It will be up to companies that want to stay competitive and their workforce to adapt to the latest industrial revolution or be left behind.

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