The revenue model is the part of the business model that describes how an organization makes money. Before I present some popular revenue models, I would like to briefly discuss the differences that exist between analog and digital business models.
The fact is that analog business models are sometimes suited to different revenue models than digital business models. Analog products are classically often paid for by direct revenue, for example at the point of sale or in e-commerce, by customers when they purchase them.
In the case of digital products, it is often the case that a distinction has to be made between customers and users. Facebook is good example of this distinction. All the people who use Facebook and post messages and videos there are users and do not pay this service. Facebook’s customers, on the other hand, are companies that place ads on the platform to reach us, the users. And these companies then pay for these advertising campaigns, from which a revenue model for Facebook can be derived.
This revenue model is also known as hidden revenue and is one of 60 business model patterns described by researchers in the University of St. Gallen in the Business Model Navigator concept. Most of these 60 patterns are either revenue models or serve to retain customers.
It has been proven by Schumpeter that 80% of all innovations are a recombination of already existing knowledge. Therefore, it is advisable, even when developing revenue models, to draw on what has already been successful elsewhere:
1. Subscription Revenue Model
Here Startups offer customers a monthly or an annual subscription to a service. They pay for it over a period of time, usually month to month or even year to year. This makes for a steady revenue for the Startup.
Exemple: Netflix is a great example of this model. On a monthly basis, customers pay to access a very large library of entertainment content.
2. Pay per use
Means that the service is not billed as a lump sum, but according to its effective use. This means that the customer only pays for what he actually needs and the cost remains flexible.
Example: Careem, the ride hailing Startup charges the customer for every kilometer of driving distance.
3. Freemium
The basic version of an offer is provided free of charge, whereas a premium version is charged for. The free version is intended to attract enough users so that a sufficient number will pay.
Example: This is particularly suitable for digital products. Canva, for example, offers limited number of features for free. If you need more, you have to pay for it.
4. Leverage customer data
At the heart of this pattern is the collection of customer data in order to be able to use it profitably. This commercialization occurs either through direct sale to third parties or through the company’s own use.
Example: Facebook uses customer data to efficiently present personalized third-party ads on social network sites.
5. Digitalization
Describes the possibility of offering existing products or services in a digital variant, which has advantageous characteristics over the physical variant, such as lower production costs, greater topicality, wider reach or faster distribution.
Example: In addition to print editions, some magazines also offer a digital version that can be read on an iPad, for example. They usually appears earlier, have a later editorial deadline, contain various multimedia content and are somewhat cheaper than the physical magazine.
6. Hidden revenue
Here, a company generates its main revenue not from a product it offers, but from the commercialization of an advertising space attached to it.
Example: Google is able to maintain its free services through cross-financing via ads. This enables companies to buy targeted ads that appear in Google’s search results.
7. Revenue sharing
Refers to the practice of companies sharing revenue with stakeholders. The goal is to establish a symbiotic relationship through which a mutual increase in revenue is achieved.
Example: Uber. The revolutionary on-demand transportation service operates a platform that allows people to offer ride services, from which Uber earns a share.