Revenue Models

What are Revenue Models?

Revenue models are the strategies businesses use to generate revenue. They are a critical component of any business plan, as they detail how the company will earn money and how it plans to sustain its financial growth.

A company’s revenue model is closely tied to its pricing strategy — it encompasses how and when a business charges its customers, as well as the type of service or product offered. It also determines how much money a company makes from each sale, as well as what types of customer segments to target for certain products or services.

In that sense, the revenue model (or revenue models) a company uses to monetize underscores its ability to deliver value to its customers.

Synonyms

• Business revenue models
• Sales revenue models
• SaaS revenue models

Revenue Model vs. Business Model

While “revenue model” and “business model” are sometimes used interchangeably, the former is a subset of the latter. While a revenue model is an integral part of a company’s financial strategy, a business model provides a holistic view of its approach to achieving its objectives.

A business model is a comprehensive view of an organization’s strategy, including its value proposition, target market, competitive advantage, key resources, and operational processes.

While the revenue model focuses on generating income, the business model addresses how the company creates, delivers, and captures value for its customers and stakeholders.

While revenue models play a role, a business model also includes elements such as branding, marketing, customer experience, and product development.

Revenue Model vs. Revenue Stream

A revenue stream is a specific source of income, such as customer purchases or subscription fees. A revenue model describes the way in which multiple revenue streams are combined to generate overall company revenue.

For example, a B2B software company might have three distinct sources of revenue:

• One-time purchases
• Recurring subscriptions
• Additional services like training or consulting

Its overall revenue model would include details on how the company plans to price and sell these services for revenue optimization.

Types of Revenue Models with Examples

To better understand the concept, it helps to look at revenue model examples. Here are the most common ways businesses find potential customers and generate income:

Recurring Revenue Model

A recurring revenue model — also called a subscription revenue model — involves customers paying regularly (i.e., monthly, quarterly, or yearly) for access to a service or product.

Technology companies, streaming services, subscription boxes, and other organizations that provide ongoing value to buyers often use it because it provides a consistent income stream.

Netflix is one example of a company that uses recurring revenue. It charges users a monthly subscription fee for access to its streaming library and exclusive content.

Since recurring models generate predictable revenue, they’re often seen as the most reliable and scalable monetization strategy.

SaaS Revenue Model

A SaaS revenue model is a special type of subscription model specifically meant to address the nuances of Software-as-a-Service (SaaS) businesses.

The two main components of SaaS revenue models are the platform itself and its microservices and add-ons.

Rather than charging customers a flat subscription fee, SaaS platforms often use pricing tiers based on usage and features. They do this to target a larger pool of potential buyers — they offer a cost-effective solution to buyers who don’t need all the software’s features, then scale the product to its full potential for larger or more intricate companies.

Microservices and add-ons build on a platform’s core capabilities, and customers can access them for an extra charge. They fit right in with the software’s main components but aren’t essential for its functionality.

SemRush embodies the SaaS revenue model in its entirety — its SEO and keyword research platform is available to individuals, small businesses, agencies, and enterprises at varied price tiers, while add-ons like content creation and social media marketing are available for added fees.

Service-Based Revenue Model

Service-based revenue models encompass everything a service-based business may use as a source of revenue

Common revenue models for professional services businesses include the following:

• Individual projects. Agencies and consultants often charge customers for one-off projects, like website design or user research.
• Monthly retainers. Professional service providers who want the reliability of monthly recurring revenue (MRR) offer clients the option to pay a flat monthly fee for ongoing support or services.
• Hourly rates. Businesses selling services that are hard to quantify or scale charge based on the number of hours worked on an individual project.

In some cases, service businesses offer all three. Digital marketing agencies are a great example of this — they generally offer ad hoc consulting, sell monthly retainers, and are willing to make exceptions for long-term engagements or large-scale projects.

Transaction Revenue Model

Businesses use the transaction revenue model when they need to charge customers each time they access a service or use a product (or if their products only require one-time purchases).

For example, an ecommerce store that sells physical goods or digital products uses the transaction revenue model by charging buyers each time they make a purchase.

Transaction-based businesses also often set up subscriptions or memberships for additional benefits, such as free shipping or early access to new products in their catalog.

Some software licenses are available transactional, such as music production software, media libraries, and design tools. But have switched to monthly and annual recurring revenue to maximize their income.

Affiliate Revenue Model

Affiliate revenue is revenue generated from promoting another business’s products or services. Affiliate programs are a way to share revenue growth with partners who help drive sales and leads.

By joining an affiliate program, businesses can make money through referral fees and commissions when customers purchase the affiliated company’s products.

Affiliate revenue models are popular among bloggers, social media influencers, and other content creators who use their platforms to drive sales for partner companies.

Some businesses monetize entirely from affiliate revenue while others use it as a portion of their overall revenue strategy. Crazy Egg, Neil Patel’s web analytics software company, has a popular blog that performs well on search engines.

Although the company’s main goal is to sell its software product, its blog (which contains affiliate products throughout) is a way to boost the brand’s credibility while creating new revenue sources from each article.

Ad-Based Revenue Model

Ad-based revenue is a different type of revenue model — it’s based on providing companies with access to an audience in return for a fee.

This model generally works like this: A business will place ads on another company’s website, and the publisher (the owner of the website) will get paid each time someone clicks on or views the ad.

Ad revenue is typically performance-based, but can also be transactional.

• Performance-based advertising: When a business wants to advertise on social media, search engines, or websites, they generally pay for performance. This means that the publisher will be paid a certain amount for each click (cost-per-click, or CPC) or impression (cost-per-mille, or CPM).
• Transactional advertising: Alternatively, some businesses use a flat fee to secure ad space (such as on national TV). Publishers and advertisers negotiate the details of the agreement, including how long the ad will run for and what type of content it should contain.

Google Adsense is one of the most popular ad-based revenue models — businesses can join the program, create ads, and place them on websites that are part of the Google Network. Publishers then receive a portion of the ad revenue each time someone clicks or views an ad.

Usage-Based Revenue Model

There are a few types of businesses that use usage-based pricing (UBP):

• Telecom
• Utiliites
• Cloud computing
• SaaS

In a UBP model, businesses charge customers based on how much of the service they’re using.

For example, telecoms charge customers for the amount of data used each month. Utilities companies may also use a usage-based revenue model to bill customers for their water or energy consumption.

Some companies adopt a usage-based volumetric model — that is, they charge the customer upfront based on expected usage and have a set limit before they start charging extra fees (or overage).

Cloud computing and SaaS companies often use a hybrid UBP model — customers can access certain features for free, but must pay to access additional resources or unlock advanced features.

Ecommerce Revenue Model

Since ecommerce sales account for 15.1% of all retail sales and a quickly growing proportion of software sales, the ecommerce revenue model is far more abstract than most.

At its core, the premise of an ecommerce revenue model is simple: Sell online.

How exactly a business chooses to do this is often the difference between success and failure.

Some busiensses use the ecommerce marketplace model (like Amazon or eBay) — where they operate as a third party that facilitates the exchange of goods or services between two parties — or provide customers with an end-to-end ecommerce experience by creating their own website (like Shopify and BigCommerce).

Individual vendors and retailers also use a combination of the two models, where they operate an online store and have products listed on ecommerce marketplaces.

Licensing Revenue Model

Licensing is when a company pays another business for the rights to use their intellectual property or brand.

This is used in a variety of industries differently:

• Entertainment. Television shows, movies, video games, and music are all sold as licenses.
• Software. Software companies also use licensing models to monetize their products. Companies like Adobe offer monthly subscription-based software licenses that give customers access to the software’s most current features.
• Resellers. Some companies take this a step further by bringing on value-added resellers (VARs), which are organizations that purchase a certain number of licenses from the original vendor and resell them to customers (or pay a licensing fee to the parent company each time they make a sale).
• Internal assets. Businesses can also use a license to create resalable assets, such as stock images and videos. These assets are then sold at a fraction of their original cost — allowing the business who created them to generate additional revenue streams without having to recreate new assets each time.

Freemium Model

The freemium model is a strategy businesses use to attract a larger target audience, some of whom will hopefully convert to paying users.

The idea behind freemium pricing is users with simple needs can enjoy a minimalist product without charge, while customers with more complex needs will pay for access to additional features and services.

The freemium model is popular in the tech industry, where companies use it to attract new users and convert them into paid customers.

Dropbox offers both free and premium versions of its file-sharing app. The free version has limited storage space while the paid version offers unlimited. Some users will never need more than the free version’s capacity, but scaling companies already familiar with Dropbox’s services will eventually upgrade and pay for the advanced features.

How to Determine Which Revenue Model to Use

Your revenue model is an opportunity for product differentiation and value creation. There are four key questions you should ask yourself when deciding which model makes the most sense for your business:

1. What does your ideal customer profile (ICP) look like? Defining your ICP is a critical first step in understanding how your target buyers will respond to different revenue strategies.
2. How do your products/services compare to others in your vertical? Every business has competitors, so you need to look carefully at how the nuances of your offerings could justify a similar or different revenue model.
3. How can you capture value through your revenue model? Ultimately, your main goal should be to make your customers’ lives easier. Consider how well-defined revenue models within your specific market are and how they benefit the end-user.
4. Are there additional opportunities to capture revenue? Aside from selling a product or service, there are usually other opportunities to capture additional revenue. The Hundreds has been a popular streetwear brand for decades, well-known for manufacturing and printing all their clothes in-house. Now, its competitors use the brand’s facility for screenprinting and embroidering services.

In some industries, the best revenue model to use will already be clear. B2B SaaS vendors, for instance, already maximize revenue by charging by the month or year compared to one-time license sales, and buyers find the predictable monthly cost easy to budget for.

What isn’t well defined for B2B SaaS vendors, however, is the product offering. Companies need to decide which features should be included in each subscription tier and how much those tiers should cost — something that’s more about trial and error more than an exact science.

Technology Trends to Execute Complex Revenue Models

Subscription Management

Recurring revenue businesses need to use subscription management software when setting up their billing plans. Typical features of subscription management tools include:

• Subscription onboarding and customization tools
• Automated billing and invoicing
• Dunning management
• Contract renewal workflows
• Reporting on customer revenue and churn
• Accounting integration for reporting
• Customer self-service portals

A subscription management platform puts subscriber relationship management on autopilot. By automating the most tedious processes associated with the subscription business model, companies can streamline their customer experience and increase retention.

Configure, Price, Quote (CPQ)

CPQ software is a combination of several technology tools that simplify the pricing and quoting process. It helps businesses create accurate quotes quickly and easily, which can help them stand out among competitors.

CPQ includes the following:

• Comprehensive catalogs of products/services with up-to-date pricing information
• Dynamic product recommendations based on customer preferences
• Quote, proposal, and contract generation and management
• Real-time order validation
• Configurable pricing rules
• Integration with ecommerce platforms and digital self-service
• Continuous data flow between ERP (products) and CRM (customers)

CPQ enables businesses to respond quickly and accurately to customer requests. It also allows sales team members to focus on other tasks like relationship building, instead of generating quotes all the time.

Billing

A billing platform helps businesses manage the revenue cycle from start to finish — by automating billing, collections, and payment processes. Typical features of a billing platform include:

• Automatic invoicing and payments
• Multi-currency support
• Discounts and promotions
• Recurring/subscription billing setup and management
• Fraud prevention tools
• Integrations with accounting systems

Billing platforms cover the accounting and invoicing side of the revenue cycle, and they can be integrated with subscription management or ecommerce platforms to completely streamline revenue operations.

Revenue Management Software

Revenue management software automates the internal processes a business needs to carry out to run revenue. It includes features like:

• Revenue forecasting capabilities to predict future revenue
• Data collection tools to track financial performance
• Analytics dashboards for tracking KPIs
• Price elasticity research and testing
• Tools for creating promotional campaigns
• Real-time monitoring of customer demand patterns
• Optimization of sales prices based on market conditions

The main benefit of revenue management software is it improves a company’s revenue intelligence. This lessens their workload while helping them analyze their financial health more accurately.

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