What do revenue models mean?
Revenue models are the plans that companies use to make money. They are essential to any business plan because they explain how the company will make money and keep growing financially.
The pricing strategy and income model of a business are closely linked. The pricing strategy includes how and when the business charges its customers for its service or product. It also figures out how much money a business makes from each sale and which groups of people to sell particular goods or services to.
In this way, a business’s income model (or models) to make money shows how well it can give its customers value.
Like words
- How businesses make money
- Profit models for sales
- SaaS business models
Model of Revenue vs. Model of Business
People sometimes use the terms “revenue model” and “business model” to refer to the same thing, but “revenue model” is a subset of “business model.” A company’s income model is essential to its financial strategy, but a business model shows how it plans to reach its goals.
When you look at a business model, you can see the whole plan of the company, including its value proposition, target market, competitive advantage, essential resources, and operational processes.
The business model discusses how the company makes, delivers, and captures value for its customers and stakeholders, while the revenue model is about making money.
While revenue models play a part, a business model includes elements such as branding, marketing, customer experience, and product development.
Model of Revenue vs. Stream of Revenue
You make money through revenue streams like customer sales or subscription fees. A revenue model shows how different sources of income are combined to make up the company’s general income.
As an example, a business-to-business software company might have three different ways to make money:
- Buying things just once
- Subscriptions that keep going
- Extra services, like training or advice
Its general revenue model would show how the business plans to price and sell these services to make the most money.
Different ways to make money, with examples
It helps to see examples of income models to grasp the idea better. These are the most popular ways for businesses to find new customers and make money:
Model for Recurring Revenue
Customers pay regularly (for example, once a month, three times a year, or yearly) to receive a service or product in a recurring revenue model, also known as a subscription revenue model.
Technology companies, streaming services, subscription boxes, and other organizations that provide ongoing value to buyers often use it because it provides a steady income stream.
One company that uses recurring income is Netflix. Users must pay a monthly fee to access its library of streaming videos and other material unavailable anywhere else.
Recurring models are often considered the most stable and scalable way to make money because they bring in steady income.
SaaS Business Model
A software-as-a-service (SaaS) revenue model is a particular subscription model made to work with the unique needs of SaaS companies.
SaaS revenue models comprise two major parts: the platform itself and its microservices and add-ons.
Most SaaS platforms don’t charge a flat monthly fee. Instead, they use price tiers that depend on how much you use the platform and its features. This way, they can reach more possible customers. For those who don’t need all the software’s features, they offer a cheaper option. They make the product work best for more extensive or complicated businesses.
Add-ons and microservices build on the core features of a platform, and customers can pay extra to use them. They work well with the main parts of the program but aren’t necessary for it to work.
The entire SemRush business plan is based on the SaaS revenue model. Its SEO and keyword research platform is priced differently for individuals, small businesses, agencies, and enterprises, and you can pay extra for add-ons like content creation and social media marketing.
Service-Based Model for Making Money
A service-based business can make money in a lot of different ways. These are all called service-based income models.
The following are common ways for professional services businesses to make money:
Projects for one person. Customers often pay agencies and consultants for one-time tasks like designing a website or doing studies on users.
Retainers every month. If a professional service provider wants to be sure of monthly recurring income (MRR), they let clients pay a flat monthly fee for ongoing services or support.
Rates per hour. Companies that offer services that are hard to measure or scale charge by the hour for each job they work on.
There are times when service businesses give all three. Ad hoc consulting is something that digital marketing companies do a lot of. They sell monthly retainers and will make exceptions for long-term projects or engagements.
Model for Transaction Revenue
The transaction revenue model is used by businesses that need to charge customers every time they use a service or product or if their goods only need to be bought once.
One example of a transaction revenue model is an online store that sells digital or physical things and charges customers every time they make a purchase.
Online stores that deal with transactions often offer extra benefits like free shipping or early access to new goods in their catalog in exchange for memberships or subscriptions.
Some software licenses, like those for music creation software, media libraries, and design tools, can be bought and sold. However, they have moved to recurring revenue (monthly and yearly) to make the most money.
How Affiliates Make Money
Affiliate revenue is money made by marketing the goods or services of another company. Associates help you make more money, and you can share that growth with partners who bring you more sales and leads.
Businesses can make money through affiliate programs by getting referral fees and commissions when customers buy goods from the affiliated business.
Bloggers, social media stars, and other content creators like affiliate income models because they let them use their platforms to promote partner companies and make sales.
Affiliate income isn’t the only way some businesses make money; for others, it’s just one part of their overall revenue plan. Neil Patel runs a web analytics software company called Crazy Egg. It has a famous blog that search engines like.
Even though the company’s primary goal is to sell its software, its blog (full of ad links) helps build trust in the brand and brings in extra money with each post.
Using ads to make money
An alternative way to make money is through ads. In exchange for a fee, you give advertisers access to your audience.
Advertisements from one business will be put on the website of another business. The writer, or owner of the website, will get paid every time someone clicks on or looks at the ad.
Ad income is often based on how OK ads are displayed, but it can also be based on transactions.
When a company wants to advertise on websites, search engines, or social media, they usually pay based on how well the ads do. Cost-per-click (CPC) or cost-per-mille (CPM) means the writer will be paid a set amount for each click or impression.
Transactional advertising: Other than that, some companies charge a flat fee to get ad space, like on national TV. Publishers and advertisers discuss the deal’s specifics, like how long the ad will run and what material it should have.
Businesses can join Google Adsense, make ads, and put them on websites that are part of the Google Network. This is one of the most popular ways to make money with ads. The publishers then get a money cut from the ads every time someone sees or clicks on one.
Revenue Model Based on Usage
The following types of companies use use-based pricing (UBP):
- Cell phones
- Useful Things
- Using the cloud
- SaaS
Customers are charged based on how much of the service they use on a UBP plan.
Cell phone companies, for instance, charge people based on how much data they use each month. A usage-based revenue plan is another way utility companies may charge customers for the water or energy they use.
Some businesses use a usage-based volumetric model, meaning they charge the customer upfront based on how much they think they will use and have a set limit before charging extra (or overage) fees.
A hybrid UBP model is standard in cloud computing and SaaS companies. This means that customers can use some features for free, but they have to pay to use more resources or open advanced features.
How E-commerce Makes Money
E-commerce sales make up 15.1% of all retail sales and have quickly become a significant part of software sales. This makes the e-commerce income model much less concrete than most.
To make money with e-commerce, you only have to sell things online.
A lot of the time, how a business does this makes all the difference between success and failure.
Some businesses use the e-commerce marketplace model, like Amazon or eBay, where they act as a third party that helps two parties trade goods or services. Others create websites like Shopify or BigCommerce to give customers a whole e-commerce experience.
Individual sellers and stores also use a mix of the two models. For example, they might run an online store and list their goods on e-commerce sites.
Revenue Model for Licensing
When one business pays another business to use its name or intellectual property, this is called licensing.
This is used in different ways in different fields:
Fun and games. Licenses can be bought for TV shows, movies, video games, and songs.
Computer software. To make money from their goods, software companies also use licensing models. Software companies like Adobe let users get the newest features of their products by subscribing to a monthly plan.
People who sell things. Some businesses go one step further and hire value-added resellers (VARs). VARs buy a set number of licenses from the original provider and then sell them to customers. They do this while paying a licensing fee to the parent company every time they make a sale.
Things that belong to the company itself. A business can also use a license to make things that can be sold again, like stock photos and movies. Then, these assets are sold for a small part of what they cost to make. This lets the company that made them make more money without having to make new assets all the time.
Model of Freemium
Businesses use freemium to reach a wider audience, hoping that some will become paying customers.
Freemium pricing works on the idea that people with simple needs can use an introductory product for free. In contrast, people with more complicated needs will pay for extra features and services.
Companies in the tech industry often use the freemium strategy to get new users and then turn those users into paid customers.
Dropbox’s file-sharing app comes in both free and paid forms. The paid version gives you unlimited room, but the free version only gives you a certain amount. Some users will never need more space than the free version gives them. Still, growing businesses already familiar with Dropbox’s services will eventually pay for the more advanced features.
How to Choose the Right Model for Making Money
Your revenue model allows you to make your offering stand out and add value. You should ask yourself these four essential questions to help you choose the best plan for your business:
- How would you describe your ideal customer (ICP)? Setting your ICP is the first thing you must do to know how your ideal customers will react to different ways of making money.
- How do your goods and services stack up against others in the same field? Your rivals are out there, so you must think carefully about how the differences between your products and services could support a similar or different way of making money.
- How can your revenue plan help you gain value? Your main goal should be to make things easy for your customers. Think about how precise the income models are in your market and how they help the end user.
Can you think of any other ways to make money? In addition to selling a product or service, there are often other ways to make extra money. For decades, The Hundreds has been a famous streetwear brand. They are known for making and printing all of their clothes in-house. The brand’s rivals now use its building for embroidery and screen printing.
Finding the best way to make money will be accessible in some fields. For example, B2B SaaS companies make the most money by charging monthly or yearly instead of selling licenses once. Buyers can easily budget for the monthly cost because it is known beforehand.
On the other hand, the product that B2B SaaS companies offer isn’t well defined. Companies must determine what benefits each subscription level should come with and how much each level should cost. This is not an exact science but a matter of trial and error.
Use of new technologies to carry out complicated business plans
Taking care of subscriptions
Businesses that generate recurring income must use subscription management software to set up payment plans. Some standard features of tools for managing subscriptions are:
- Tools for setting up and customizing subscriptions
- Fully automated billing and invoicing
- The handling of dunning
- Workflows for renewing contracts
- Reporting on customer sales and turnover
- Putting accounting together for reporting
- Self-service platforms for customers
Managing relationships with subscribers is easy when you use a subscription management tool. By automating the most time-consuming parts of the subscription business plan, companies can improve their customer’s experiences and keep them as customers.
Set up, price, and quote (CPQ)
Price and quote software, or CPQ software, is a group of technology tools that make the process easier. It makes it easy and quick for businesses to make correct quotes, which can help them stand out from others in the same field.
The following are part of CPQ:
Complete lists of goods and services with up-to-date prices recorded
- Product suggestions that change based on what customers want
- Making quotes, proposals, and contracts, as well as managing them
- Order verification in real-time
- Price rules that can be changed
- Connecting to e-commerce sites and digital self-service
- ERP (for products) and CRM (for customers) sharing information all the time
With CPQ, companies can quickly and correctly meet customer needs. It also frees up sales team members to do other things, like building relationships, instead of always making quotes.
Getting paid
Companies can handle the whole revenue cycle with the help of a billing tool, which makes the billing, collection, and payment processes automatic. Some common parts of a billing tool are:
- Automatic payments and bills
- Support for multiple currencies
- Sale prices and discounts
- Setting up and managing recurring or subscription bills
- Tools to stop fraud
Accountancy programs can be linked to it.
Billing platforms handle the billing and accounting parts of the revenue cycle. They can be connected to e-commerce or subscription management platforms to make revenue processes run more smoothly.
Software for managing sales
Software for managing income automates the tasks that a company needs to do internally to make money. It has features such as
-The ability to predict future revenue through revenue forecasting
- Tools for gathering data to keep track of financial success
- Analytics screens to keep an eye on KPIs
- Looking into and trying price elasticity
- Tools for making advertising campaigns
- Watching trends of customer demand in real time
- Getting the best buying prices based on how the market is doing
