The revenue model is one of the most important aspects of a startup: it’s how a startup makes money and delivers value. The simplest way to find the right model for your startup is to focus on the competition and customer insights. Revenue models aren’t limited to startups, and being familiar with the different options can help you to decide which type is the best model to serve your customers depending on the type of business you have or the problem that you’re trying to solve. Here are 6 revenue models to know.
An on-demand revenue model makes money for every completed transaction. This is a viable option if the problem you are looking to solve is frequent but inconsistent. It doesn’t change the way people used to solve a problem, but your startup can make the process more efficient, like in the case of Uber and Lyft. Three known examples of on-demand startups include the aforementioned ride-sharing services, Airbnb, and Instacart.
Ecommerce startups make money for every item sold based on their margins, accounting for costs like manufacturing, distribution, and marketing. Through the growth of online shopping, almost ten percent of retail sales in the United States now come from ecommerce. This number is expected to grow as more and more buyers rely on the internet for their purchases.
A marketplace has three parts: a supply, a demand, and an intermediary. Startups typically create a platform that serves the intermediary. Marketplaces make money for facilitating transactions between the demand and supply sides. Uber, while being on-demand, also implements a marketplace business model and keeps about 25% from every ride.
Membership sites offer their paying members special perks, products, or services for a fixed, often monthly fee. There are many examples of this, ranging from subscription boxes like BarkBox and Dollar Shave Club to services like Amazon Prime and YouTube Premium.
Licensing and Software as a Service (SaaS)
These are both ways that proprietary and unique digital products can be delivered to consumers and businesses. The difference between the two lies in the possession of the product. Licenses are usually owned and operated by the users while SaaS products are accessed through a web browser. The right model for your startup will depend on factors like your product, customer needs, the market, and your competition.
Freemium is both a revenue model and a pricing strategy wherein users have access to core product functionality for free while giving them access to more features if they upgrade to paid plans. Dropbox and Mailchimp are notable examples, and the benefit of freemium is that it’s also an effective user acquisition strategy that can provide you with leads without an upfront cost.
Something worth noting is that your startup need not adhere to just one model. Amazon started as an e-commerce site for books and grew into a tech and retail giant that now implements all six revenue models. LegalZoom® is another example. The legal document website expanded from an ecommerce and on-demand model to a membership model based on recurring revenue with the introduction of its Legal Service Plan. On the insurance side, LegalZoom also partnered with Mylo, Lockton’s digital insurance agency, to offer customers expert advice as well as an efficient way to compare top-rated insurance products from multiple carriers and easily purchase coverage for business, group health, home, auto, life and individual health.
New models will evolve as your business grows. When starting out, start with the model that delivers the highest value that takes, so to speak, the least amount of innovation. Your customers will help to dictate what they need and how.