How to Create a Revenue Model in 7 Steps
One of the most important things you can do to ensure the financial health of your business is to create an infallible revenue model. Your revenue model gives you a necessary understanding of your cash flow and needs and is your way of demonstrating - to yourself and to potential investors - how you plan to earn revenue and maximize your profitability.
1. Choose a revenue model approach that is best for your company and background.
For example, if you have a team of engineers with good business sense, a technology model - where you identify where you are in your R&D model and where you expect to be in the next phase and into the future - will be a good fit for your company. Depending on your company type, it may make sense to have revenue projections that are linear in nature or ones that are exponential (in other words, do you want to mitigate capital risk and start small and build from there or prove your revenue model at scale?). Ultimately, you want to choose a model that helps you to direct your development efforts.
2. Your revenue model should allow you to communicate your value.
What is special about your offerings? Your revenue model should show what is unique about you. For example, if you offer the kind of service that customers will subscribe to, this is a selling point.
3. Identify potential investors strategically based on your revenue model.
If you’re looking for funding, it helps to identify strategic investors who are knowledgeable in your space. Make development choices that speak strongly to investors and build your pitch around these choices. Think big picture and long-term and try to find like-minded investors, financiers who aren’t just looking for profit short-term but are willing to wait for ROI to be realized.
4. Project out into the foreseeable future.
Investors want to know what the time horizon looks like, when there is going to be money to be seen, what the next major milestones are and when are you going to start making revenue? And this is important information for you too, of course. But you can’t predict with any level of certainty too far out - no further than 12-24 months. Farther out, it just becomes a ludicrous exercise where you have meaningless numbers on the page. You can plan your marketing future with Accelo's project tracking and project management tools and we invite you to start a free trial to see how this works.
5. Understand that your revenue model is always evolving.
The overall architecture of your approach may not change much over time, but you should continually be refining your model and forecasting. There are many revenue models to choose from. For example, if you’re a service-based business, you can sell services individually or offer a subscription model. Just keep an open mind and accept the fact that you may need to pivot your revenue model at some point if it’s not working to support your business.
6. Identify the key variables for your company.
Your variables will be process specific and will depend on what stage you’re in. Basically, you’re looking to find those variables that have the most impact on your revenue - and figure out what they are most sensitive to. You need to be able to isolate these particular variables so that you can address them individually. Analyze input and research values to identify if they are good where they are or if they need work. A sensitivity graph is a great tool for looking at each separate value and graphing its potential impact on revenue as that value changes. Charting this enables you to see at what point revenue improves or worsens as the data is manipulated.
7. Mitigate for variables.
The goal is to get your variables to a point where you can mitigate them. You want to be confident in your numbers -- this means seeing them realistically. There’s no sense in hiding from risk; you should identify it, understand it, and directly address it. Mitigating for variables leads to transparency which is good for your own understanding as well as for investors (who are always going to find something even if you try to hide it!).
There is a lot of choice when it comes to developing your revenue model - but not creating a revenue model is not a choice. From helping you to stay focused to helping you to develop your service, your revenue model is the necessary foundation for your company’s success.
Published: October 06, 2021
Deciding how you’ll generate revenue is one of the most challenging decisions for a business to make, aside from coming up with what you’ll actually sell.
You want to ensure that you’re accounting for production costs, salaries for workers, what your consumers are willing to pay, and that you generate enough to continue business operations. You also want to make sure that your strategy fits with what you’re trying to sell.
Various revenue models will help you set your business on the right path. In this post, we’ll outline what they are and how to choose the right one for your company.
What is a revenue model?
A revenue model dictates how a business will charge customers for a product or service to generate revenue. Revenue models prioritize the most effective ways to make money based on what is offered and who pays for it.
Revenue models are not to be confused with pricing models , which is when a business considers the products’ value and target audience to establish the best possible price for what they are selling to maximize profits. Once the pricing strategy is set, the revenue model will dictate how customers pay that price when they purchase.
RevOps teams also use pricing models to predict and forecast revenue for future business planning. Knowing where your money is coming from and how you’ll get it makes it easier to predict how often it will come in.
There are various revenue models that businesses use, and we’ll cover some below.
Types of Revenue Models
Recurring revenue model.
Recurring revenue model , sometimes called the subscription revenue model, generates revenue by charging customers at specific intervals (monthly, quarterly, annually, etc.) for access to a product or service. Businesses using this model are guaranteed to receive payment at each interval so long as customers don’t cancel their plans.
Recurring Revenue Model Example
Businesses that benefit from recurring revenue models are service-based (like providing software), product-based (like subscription boxes), or content-based (like newspapers or streaming services). Businesses you may be familiar with that use this strategy are Spotify, Amazon, and Hello Fresh.
Affiliate Revenue Model
Businesses using affiliate revenue models generate revenue through commission, as they sell items from other retailers on their site or vice versa.
Sellers work with different businesses to advertise and sell their products, tracking transactions with an affiliate link . When someone makes a purchase, the unique link notes the responsible affiliate, and commission is paid.
Affiliate Revenue Model Example
Businesses you may be familiar with that use the affiliate revenue model include Amazon affiliate links and ticket promoting services. Influencers also use this model to advertise products from businesses and entice users to purchase them through custom links.
Advertising Revenue Model
The advertising revenue model involves selling advertising space to other businesses. This space is sought after because the advertiser (who is selling the space) has high traffic and large audiences that the buyer (who is purchasing the space) wants to benefit from to give their business, product, or service visibility.
Advertising Revenue Model Example
Various types of online businesses use this model, like YouTube and Google, and so do traditional outlets like newspapers and magazines.
Sales Revenue Model
The sales revenue model states that you make money by selling goods and services to consumers, online and in person. Therefore, any business that directly sells products and services uses this model.
Sales Revenue Model Example
Clothing stores that only sell their products in a storefront or business-specific retail website use the sales revenue model as they sell directly to consumers with no third-party involvement.
SaaS Revenue Model
The Software as a Service (SaaS) revenue model is similar to the recurring revenue model as users are charged on an interval basis to use software. Businesses using this model focus on customer retention, as revenue is only guaranteed if you keep your customers. The image below is the HubSpot Marketing Hub pricing page that uses the SaaS recurring subscription model pricing.
SaaS Revenue Model Example
Businesses using this revenue model include video conferencing tool Zoom, communication platform Slack, and Adobe Suite.
How to Choose a Revenue Model
Choosing a revenue model is entirely dependent on your specific business needs and your pricing strategy.
There is no one-size-fits-all solution, and some businesses have multiple revenue streams within their revenue model. For example, if you use a recurring revenue model, you still may sell advertising space on your website to other businesses because you have a high-traffic page.
There are some key factors to keep in mind, though:
1. Understand your audience.
When picking a revenue model, the most important thing to remember is the target market and audience your pricing strategy has identified. You want to understand their pain points and what model makes the most sense for charging them.
For example, if you’re a service that sells meal kits, your target audience is likely busy and wants the convenience of food that is set up and easy to make after a long day. Using the recurring revenue model makes sense, as you’ll automatically charge them on an interval basis, and they won’t have to remember to submit payment — speaking directly to their desire for convenience .
2. Understand your product or service.
It’s also essential to have an in-depth understanding of your product or service and how your audience will use it. For example, if you sell shoes, your audience likely won’t need a new pair every month, so it may make sense to go with the Sales Revenue Model. Instead, your customers can come to you directly every time they need a new pair.
Choose the Model That Best Fits Your Needs
Ultimately, choosing a revenue model is centered around understanding what makes the most sense for what you’re selling and what makes the most sense (and will be most convenient) for the audiences you’re targeting.
Take time to develop your pricing strategy, choose a revenue model aligned with it, and begin generating revenue.
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The key to creating your revenue model is through forecasting - that is, projecting revenue estimates, even if you’re currently pre-revenue. Forecasting is an ongoing process that will help you to manage your cash and continue to grow. There are two general approaches to financial forecasting: top-down and bottom-up forecasting.
Affiliate Revenue Model Businesses using affiliate revenue models generate revenue through commission, as they sell items from other retailers on their site or vice versa. Sellers work with different businesses to advertise and sell their products, tracking transactions with an affiliate link.
3 Factors to Consider When Choosing a Revenue Model Here are tips to help you pick the best revenue model for your business: 1. Product value. The revenue model you choose should connect to your value proposition, which is a statement that clearly expresses your product or service's distinct selling points to potential customers.