In this ever-increasing competitive and dynamic market environment nowadays, it is crucial for any startup to have a detailed business model and revenue model.
Business models look at the bigger picture and outline the general objectives and how to implement them in key aspects of the business. The revenue model is also imbued into the business model and looks at how a company can extract the maximum amount of revenue from its customers.
In this article, the aim is to give you a full run-down on how it works with a business model versus a revenue model.
What is a Business Model?
A business model has several components which outline the long-term and short-term objectives of the firm, to enable maximum business revenue. Business Models should be detailed and pragmatic, as they will give a clear, defining goal for not only employees and stakeholders but will also attract investors. At its heart, a business model has 4 key components.
Components of a Business Model:
- What product or service a company will sell- the business will have to come up with an exceptional and good quality product to market to customers.
- Method of promoting that product or service- Companies have to state how and why their products are better, which also has to be stated in a way that stands to differentiate from the rival products or services.
- What kind of costs the firm will have to endure- firms will have to accurately consider what their required expenses are. They need to take into account startup costs, promotional costs, fixed costs, working capital, etc. Over or underestimating the costs will have disastrous effects, as it will then have an impact on pricing strategy. Failure to allocate the optimum price will mean the product is either too cheap, which will incur losses for the business, and setting too high a price will not attract any customers.
- How the business expects to return a profit i.e., revenue model- The company has to explore all potential sources of revenue to maximize profit. The revenue model is discussed in depth further below.
Types and Examples of Business Models
Business models have various types and examples, some of which are discussed here.
Subscription Model
A subscription model is when a customer pays a recurring fee in exchange for the use of a good or service. Subscription business models can be applied to traditional brick-and-mortar structured businesses. These can also be used in online businesses.
Examples include Spotify, Netflix, and HoiChoi.
Brick-and-mortar model
This is for the traditional street-side businesses like grocery stores, that interact with customers face to face and provide goods and services in exchange for direct payment.
Nowadays, we are seeing the brick-and-mortar business model being shifted online, instigated by the pandemic where grocery shopping can be done online.
Franchise model
A franchise is a kind of license that grants franchisees access to product trademarks, business, and product knowledge as well as other benefits from the franchiser.
Firms can capitalize on the name brand to gain a significant customer base, which in turn will create exorbitant amounts of revenue. Although a large portion of the profits will have to go back to the franchiser.
In recent years, Bangladesh has seen a surge in franchise models such as Domino’s, Burger King, Body Shop, Skechers, and many more.
Razorblade Model
The razor-razorblade model is a pricing tactic in which a dependent good is sold at a loss (or at cost) but the paired complementary good generates the profits. Such as toothbrushes and toothpaste.
A similar model, which is immensely popular online exists called ‘freemiums’, where an app can be used for free, but further exclusive upgrades included in the app have to be purchased. E.g. YouTube Premium, Grammarly, and Duolingo.
What is a Revenue Model?
A revenue model can be seen as the most important part included in a business model. The revenue model gives the structure of how a company generates revenue for its business, resources required for each revenue model, how much they will potentially earn from customers, and how sustainable the revenue generation is.
Types and examples of revenue models
The revenue stream is a company’s source of revenue. A firm can have one or multiple revenue streams depending on its size and the most suitable way to maximize profit. We will be looking at several revenue models, with the advantages and disadvantages each revenue stream carries.
Ad-based Revenue Model
This entails providing ad space for other businesses to promote their products, on your website, app, or even newspapers.
It is a simple and easy model to gain revenue from. Sites such as Facebook, YouTube, and Google rely heavily on these models and provide substantial revenue for the company as well as its content creators.
Many viewers are needed to make adequate revenue. The ad-sense online provides a meager $5-10 for every 1000 viewers. Moreover, if a site/app has too many ads this can be off-putting to the user, which would discourage them from visiting the website again.
Subscription Revenue Model
The subscription model is a popular revenue model for businesses nowadays. This is when a business provides customers with a specific product or service, which users can pay for on a month-to-month or even year-to-year basis.
The year-to-year basis is given at a discounted price month to month, which can boost subscriptions. The sports subscription video streaming service DAZN has a $20 monthly subscription, but customers only have to pay $100 if they switch to an annual subscription.
This model generates a recurring and stable revenue stream. This model requires a large customer base which puts pressure on the firm to make its products innovative and extraordinary.
Affiliate Revenue Model
Another revenue model trending for online businesses, which can also be considered multi-layered. This works when third-party firms, usually online, promote and sell products of other businesses. The firm would receive commissions for the sales of those products but also have the added benefit of gaining revenue from ads. Evaly, Daraz, and Amazon use these models.
These type of models are more reliable and makes more money than ad-based revenue models. For a startup, the amount of money that can be made depends on the business niche, the market size, and the audience.
Transactional Revenue Model
This type of model is the most direct form of revenue stream. A business will provide goods or services and customers will pay for them.
A simple and quick form of transaction and revenue source. Due to its directness, users will choose firms that provide the best service at the lowest cost. If the market has high levels of competition, prices will fall and in turn, the business will not have a high profit/revenue margin.
Looking at both business and revenue models we can see how they are both integral for business planning, providing a clear path to success. You can choose which one would be the best for your own business and have a clear concept on the choice between business model versus revenue model.