How will your startup generate revenue?
That is a critical question for an entrepreneur to answer.
Read on to learn how you can use the concept of revenue models to answer that question and subsequently optimize your revenue-generating strategy.
First, a clarification on terms you might have heard. There are distinctions between business models, financial models and revenue models.
- Business models are the overall operational design of the startup taking into consideration aspects like revenue, cost, customers, products, processes and assets. Early stage entrepreneurs often use this model to manage their business and use a tool called the business model canvas as a lean startup method.
- Financial models are a detailed summary and process of expenses and earnings typically used for financial decision making. Founders leverage financial experts or programs like QuickBooks with spreadsheets, charts, budgets, and planning. Financial models are an input into business models.
- Revenue models are a framework that represents how a startup generates revenue. It depicts the exchange of value between the startup and the consumer. Revenue models also provide an input into financial models.
Your job is to frame your unique revenue model as the map to optimize your revenue.
Your revenue model is how you plan to generate money. As an early stage entrepreneur, give due diligence to frame your model as the optimal method to generate revenue.
Here are examples of universal revenue models to guide your design:
- Direct revenue model: Examples are food cart and consulting. The product or service is offered directly to the consumer for the exchange of money. For a food cart, the customer gives money directly to the food cart operator for the yummy dessert.
- Freemium revenue model (free+premium): Examples include Spotify and LinkedIn. A startup offers a version of its product or service to the consumer for free.
Then the startup offers other more valuable versions of the product/service to the consumer for a premium. More value may mean no ads or additional services like unlimited, or higher quality like premium features.
- Advertising revenue model: Examples include magazines and Facebook and Spotify. The startup offers value to a consumer for free like Facebook, or even for a charge like a magazine subscription. Then the startup exposes that consumer to advertising and charges the advertising company for that exposure.
Advertising revenue models can be an add-on to basically any other model, particularly the Spotify example in Freemium.
Another example can be a restaurant hanging a sign in a strategic location (like right above the urinal), and in doing so, it generates revenue by charging a fee for that space. That restaurant would then benefit from both a direct and advertising revenue model.
- Marketplace revenue model. Examples include the farmers market, Uber, and eBay. The startup creates value by building a marketplace to bring together multiple different consumers who between them exchange value.
For instance, Uber is creating a way for car owners to exchange rides for money. That startup channels revenue back to itself for bringing those consumers together.
Revenue can come back through various channels like an entry fee to the market (ticket or subscription to enter market), one-time charge to engage in the market (table space at the market), or commission based for market use (Uber or eBay).
Jay Markiewicz is an entrepreneur and executive director of entrepreneurship programs at Virginia Commonwealth University’s School of Business. He can be reached at email@example.com.