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 heart of the company, 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.   

Pros

• Only minimal investment needed
• Revenue starts generating immediately

Cons

• Scalability issues

2. Markup

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 generates 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. 

Pros

• Helps develop a perfect pricing strategy
• Easy formulation and implementation

Cons

• Too much competition makes it difficult to generate revenue

3. Advertising

If your startup gets a large number of 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.

Pros

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

Cons

• 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 decision. 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, 

1. Simple distribution and billing processes
2. Ability to manage per-use costs
3. Low barriers to customer adoption

Pros

• Gives startups information regarding how customers use their products/services
• Lowers entry barrier for customers —> increasing startup's market share

Cons

• 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.

Pros

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

Cons

• 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,

1. Promote other's products/services on your website
2. Make others promote your startup's product/service

When a consumer purchases the product/service you are endorsing, 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.

Pros

• No upfront costs
• Profitable in the long run

Cons

• 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.

Pros

• Large user base
• Pressure-free for customers

Cons

• 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.

Pros

• Ongoing, repeated revenue
• Easy entry into foreign markets

Cons

• 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 in which they 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. 

Pros

• Scalability and ease of distribution
• Continuous and a reliable revenue stream

Cons

• 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! 

Pros

• Simple and predictable pricing strategy for customers
• Higher adoption rate

Cons

• Value is measured on the number of users and not on the product you provide. 

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 testing 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 highlight’s 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 

ARR/MRR:

Annual Recurring Revenue (ARR) and Monthly Recurring Revenue (MRR) are important metrics used 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 got 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.

1. Powerslide Revenue Model Template: This template consists of four templates with a wide range of infographics. It's the perfect template to prepare a report on your new product launch and analyze the potential sales market.  
2. 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.
3. 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 figure out which one to choose based on your future revenue forecasts.

Conclusion

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!