What is a Revenue Model? Types of Revenue Models Explained
A company’s revenue model refers to the methods it uses to generate income from its products or services. The revenue model outlines how a business plans to earn money and get paid by its customers. It is a key component of the overall business model.
Understanding different types of revenue models is crucial for entrepreneurs and business owners. The right revenue model aligns with the core value proposition and allows a company to maximize profits.
In this post, we’ll break down what a revenue model is, explain the most common revenue model types with examples, and distinguish between a revenue model and an overall business model.
Let’s dive in!
What is a Revenue Model?
A revenue model refers to the ways a company makes money from the products or services it offers. It details how the business plans to generate revenue streams and get paid by its customers.
In simple terms, the revenue model answers this critical question:
“How does this company make money?”
It encompasses the sales, pricing, and payment methods for exchanging value between a business and its customers.
A good revenue model aligns tightly with the core value proposition offered. It ensures the company can efficiently monetize the value it provides to customers.
The revenue model works in conjunction with other components of the overall business model:
- Value Proposition – The core products/services offered and the primary customer needs fulfilled
- Revenue Model – How the company charges customers and earns income from the value proposition
- Cost Structure – The major costs incurred in operating the business model
- Key Activities & Resources – The operational elements needed to execute the business model
While the revenue model focuses specifically on how a company makes money, the full business model covers how it creates, delivers, and captures value overall.
Types of Revenue Models
There are various categories and types of revenue models companies can adopt. The most common revenue model examples include:
1. Transactional
In a transactional model, the business earns money each time a customer makes a purchase. Payment is exchanged directly in return for the product or service.
Transactions can be one-time purchases or recurring purchases on a subscription basis. They may involve a simple fixed price or dynamic pricing.
Examples:
- Retail companies earn revenue from point-of-sale purchases
- SaaS companies earn revenue from recurring subscription fees
- Uber earns revenue per ride provided to the customer
2. Usage-based
In a usage-based model, the customer pays based on how much they utilize a product/service. The revenue earned scales directly with usage volume.
Common usage metrics include minutes used, data consumed, storage space occupied, or seats filled. Usage can be metered and billed at regular intervals or paid on demand.
Examples:
- Cloud computing services like AWS charge based on compute resources used
- Telecom companies charge per minute and data used
- Airlines earn revenue based on seats flown
3. Advertising
In an advertising model, companies earn revenue by selling ad space to third parties. Ads are displayed alongside the company’s content or services to users.
Various online and offline mediums carry advertising, including search engines, social media, mobile apps, billboards, TV, and radio.
Examples:
- Facebook and Google earn the most revenue from advertising
- Media companies earn revenues by selling ad placements
- Free apps and sites monetize via ads while users enjoy free content
4. Commission
In a commission model, a business facilitates transactions between two parties and takes a percentage as the fee. Commissions are paid when a transaction is completed.
Common examples include brokers, agents, marketplaces, and advisors. The commission rate varies across industries.
Examples:
- Real estate brokers take a ~3% commission on home sales
- Insurance agents earn commissions for new policies written
- Travel booking sites charge commissions on hotel/flight bookings
5. Licensing
With licensing, companies earn revenues by granting customers permission to use their intellectual property. Licenses provide rights to intangible assets like brands, content, data, or technology.
Licensing allows the IP owner to retain ownership while monetizing via recurring license fees. Types of licenses include trademarks, patents, copyrights, or franchises.
Examples:
- Fast food chains license their brand name to franchisees for an ongoing fee
- Entertainment companies license content rights to streaming platforms
- Disney earns revenue by licensing its character IP for toys, games, apparel, and more
6. Markups
Retailers, distributors, and manufacturers earn revenues through price markups applied when goods exchange hands along the supply chain.
Each middleman in the chain adds a markup on top of their costs to cover logistics and profits. Markups result in higher end-user prices.
Examples:
- Clothing brands mark up wholesale prices 2-3x when selling to retail stores
- Distributors mark up goods from the wholesale price when selling to retailers
- Retail stores mark up goods sold to consumers, on top of distributor & brand markups
7. Service Fees
Companies earn revenues by charging service, support, or consultation fees around a product, service, or asset. Service revenues recur over time, often via subscriptions.
Types of services generating fees include maintenance, tech support, training, consulting, and financial advice. The fee amount varies based on the effort required.
Examples:
- Plumbers, lawyers, and consultants bill hourly or fixed fees for services
- Robinhood charges monthly fees for premium services to traders
- Investment managers charge recurring fees based on assets under management
8. Rental
In a rental model, companies earn revenues by temporarily renting out physical products, spaces, or other fixed assets to customers at an hourly/daily/monthly rate.
The same assets can generate rental income over extended periods between uses by multiple customers. Rental flexibility often offsets higher costs vs. ownership.
Examples:
- Car rental companies generate revenues by renting out vehicles
- Equipment rental companies rent out tools, machinery, electronics, furniture, etc
- Venue owners earn revenues by renting out event spaces
9. Leasing
With leasing, companies earn revenues by renting products to customers for extended contract periods (typically 2+ years).
At the end of the lease, assets are returned to the owner instead of sold outright. Leasing can enhance product accessibility via lower regular payments spread over time rather than large one-time fees.
Examples:
- Auto companies lease vehicles to consumers over multi-year contracts
- Airlines and freight carriers lease planes and transport equipment
- Businesses lease computers, servers, printers, and other tech gear
10. Crowdfunding
Crowdfunding platforms help companies or entrepreneurs raise funds from a large pool of backers or investors in exchange for future products, equity, rewards, or repayment.
The platforms facilitate crowdsourced fundraising from the public via websites like Kickstarter, Indiegogo, and GoFundMe. The platforms themselves earn revenues by taking a percentage of funds raised.
Examples:
- Smartwatch startup Pebble raised over $10M via Kickstarter crowdfunding
- Local concert promoters crowdfund venue rental costs upfront via fan contributions
- Charities crowdfund donations from the public to fund operations and causes
This covers the major types of revenue models leveraged across industries. Companies often utilize hybrid revenue models encompassing two or more streams. The ideal mix aligns with core business operations.
Now let’s distinguish the revenue model from the overarching business model.
Revenue Model vs. Business Model
The revenue model represents just one component of the complete business model. But what exactly is the difference?
The business model is the company’s core logic for creating, delivering, and capturing value. It’s a holistic view of how the entire business works and earns profits.
The business model canvas, pioneered by Alexander Osterwalder, outlines nine interconnected building blocks making up the full business model:
Business Model Canvas template by Alexander Osterwalder
While each component interacts to form the overall model, the revenue model specifically focuses on how a company plans to earn income from the value it provides customers.
The revenue model is just one piece of the broader business model puzzle. But it’s a critical piece, as profits ultimately fuel operations and growth.
Let’s contrast some key differences:
The business model:
- Encompasses all activities related to providing value and earning profit
- Includes pricing but also production, service delivery, internal operations, etc.
- Outlines the complete experience from the customer’s perspective
The revenue model:
- Focuses specifically on how a company charges for value exchanged
- Details just the monetization and payment components
- Defines the financial value exchange from the company’s perspective
In summary, the business model is comprehensive, while the revenue model simply covers pricing and income generation.
However a well-constructed revenue model aligns cleanly with the overall business model. Revenues should stem directly from fulfilling the core value proposition and delivering real customer benefits.
Constructing a Robust Revenue Model
When designing a revenue model, key objectives include:
- Maximizing income – The model should optimize monetization of the value delivered to customers
- Profitability – Revenues should surpass operational costs to achieve profitability
- Scalability – The model should support increased revenues as the business grows
- Sustainability – Income levels must remain relatively stable and predictable from period to period
- Feasibility – The model should align with capabilities and not create unrealistic operational burdens
Common pitfalls like over complexity, hidden costs, confusing pricing, or inconsistent revenues can undermine the model. Periodic re-evaluation helps keep the model aligned with evolving market dynamics.
Taking the time to engineer an intelligent revenue model directly fuels a company’s chances of success. An ineffective model almost guarantees failure out of the gates.
While on the surface it appears simple, designing a robust revenue model requires deep market analysis and creative thinking. But the effort pays dividends over the long-term life of a business.
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Key Takeaways
- A company’s revenue model outlines how it earns income from the value proposition delivered to customers
- The revenue model details how products and services are monetized through sales, pricing, and payment methods
- It is a key component of the full business model but focuses specifically on revenue generation
- Various revenue models include transactional, usage-based, advertising, commission, licensing, markups, service fees, rental, leasing, and crowdfunding
- The revenue model directly impacts profitability, scalability, sustainability, and operational feasibility
- A well-designed revenue model aligns cleanly with the overall business model and market dynamics
Carefully considering different revenue model types and constructing an optimized model provides a blueprint for monetization as a business scales. Periodic tuning keeps the model aligned as markets evolve.
While just one piece of the overall business puzzle, the revenue engine sits at the core of how companies create value for stakeholders.
