Revenue models for start-ups can be tricky to choose. However, picking the right one is critical in starting a business. Revenue models for start-ups determine how a company manages its money, so select yours carefully using these tips.
Revenue models for start-ups are one of the most important things to consider when pursuing a new business idea. Your technique for managing profits and losses can impact how your company operates. It can also affect how the public perceives your goods and services.
Understanding start-up revenue models can be challenging, and choosing the best one is even trickier. How do they work, and what factors should you consider? Here is what you need to know.
Table of Contents
What Are Revenue Models for Start-ups?
Examples of Revenue Models for Start-ups
#3. Transactional Revenue Model
#4. Subscription Revenue Model
Choosing the Right Revenue Models for Your Start-up
What Are Revenue Models for Start-ups?
For a start-up to be successful, it must make money. Revenue models for start-ups determine and explain the structure of income generation and loss management. This can include details on the products or services you’re selling, how you’ll sell them, and what the prices will be.
Revenue models for start-ups are central to the overall business plan.
Deciding the most appropriate option is crucial. You can pursue other vital income-focused aspects of your business like:
- Determining your specific target audience
- Creating a unique marketing strategy
- Raising capital
It’s also important to note that the term “revenue model” is often used interchangeably when talking about business models and revenue streams. While all three terms are slightly similar and often work together, there are key differences to know.
- A revenue stream is a company’s source of revenue. Companies can have a variety of revenue streams depending on their size and what they’re selling. For example, Apple’s revenue streams would include iPhones, Apple Music, and MacBooks, among other things.
- A business model is the overall structure of a company that includes all aspects, like the revenue model and revenue streams. It’s like the company’s design plan, explaining how all the different parts work together to create a profitable business.
It’s essential to research your options and ensure you’re selecting a suitable strategy.
Implementing the wrong revenue models for your start-up could damage your brand and cause your business idea to fail.
How Do Revenue Models Work?
Each revenue model will depend on the model itself, as each is a bit different. That’s why it’s crucial to understand your business goals and then conduct ample research to determine what model will be the best fit.
Revenue models for start-ups prioritize the most effective ways to profit based on what is being offered and who is paying for it.
While researching revenue models, it’s important to remember that while they sound similar, revenue and pricing models are two different things.
Pricing models are strategies or methods used to determine the best price for a product or service by considering the product’s value, target audience, and market demand. Different pricing models help you choose the best prices to maximize your profits and shareholder values while keeping your consumer and the market in mind.
Examples of Revenue Models for Start-ups
Choosing revenue models for start-ups is an important decision as it can significantly impact your business’s success, growth, and long-term sustainability. There are several options to choose from, but the decision ultimately comes down to what makes the most sense for your goals.
With such a wide variety to choose from, here are some new, popular, and effective revenue models for start-ups to consider:
- Ad-based revenue model
- Affiliate revenue model
- Transactional revenue model
- Subscription revenue model
- Freemium model
- Licensing revenue model
#1. Ad-Based Revenue Model
In the ad-based revenue model for start-ups, you make money by selling ad space to anyone interested. Paid advertising is a trendy revenue model. It is especially appropriate for broadcast and print/digital media companies, including full-page ads in magazines, commercials, and website ads.
In this model, your business makes money by providing other brands and companies a platform to display their ads. Some of the advantages of an ad-based revenue model include:
- It’s quick and easy to implement
- Online platforms like Google AdSense and Facebook Ads make monetization and tracking analytics very easy
- If done right and targeted effectively, ads can be very profitable
Some potential disadvantages of ad-based revenue models to keep in mind include:
- To generate significant revenue, you’ll likely need a large audience or high-volume traffic to see the ad
- Some people don’t like to see ads, especially when visiting websites, and may be turned off
Ad-based revenue models can make companies much money without selling a product or service. In most cases, you can pursue an ad-based revenue model for your start-up in four simple steps:
- Build your audience
- Learn about who your audience is, including demographics like their interests, age, and purchase habits
- Find advertisers looking to reach your audience.
- Offer them ad space and exposure to your audience for a set price
Social media platforms are big on ad-based revenue models. Streaming services and free apps also often use ads to generate revenue as they have massive audiences to tap into.
#2. Affiliate Revenue Model
Using the affiliate revenue models for start-ups is perfect for online marketing. Affiliate models promote your business with links on personal platforms. Influencer mentions usually lead to direct sales and increased traffic. Your company pays the affiliate commission when someone purchases through that specific link. The commission rate is typically either a flat rate per sale or a percentage.
Advantages of the affiliate revenue model include:
- It can also work in conjunction with advertising and can be more profitable than ads alone
- It’s commission-based, so there’s no upfront cost to you as the start-up owner
- If it’s successful, it can become a passive revenue stream over time
Possible disadvantages to note include:
- The amount of money you make is limited to the size of your start-up, the products and services you sell, and the size of your affiliate’s audience
- It can take a while and sometimes be a little tricky to see a sizable revenue and traction from the affiliate revenue model
#3. Transactional Revenue Model
In terms of revenue models for start-ups, the transactional model is one of the most direct ways to generate revenue. It simply involves a business providing a product or service, and people pay them for it. This can be in person in a retail space or online.
Retail-based sales will obviously require your business to have a physical presence. A brick-and-mortar location may not be feasible for all start-ups since storefront rent can be a considerable added expense. However, digital sales may be an even more viable option as online shopping is widely accessible to just about anyone, anywhere.
The transactional revenue model isn’t necessarily new as it’s the most simple and straightforward way to make money as a business.
The only difference is that nowadays, it’s more advantageous to focus on online transactions rather than physical, in-store ones.
Advantages of the transactional revenue model include:
- It’s straightforward and easily accessible
- It can be applied to just about any industry
- Most customers are very familiar with this model, making them more likely to participate
Potential disadvantages to the transactional model include:
- It can lead to a lot of fierce competition
- Competition can lead to price wars, putting you at risk of losing revenue or customers
- It takes time and money to build a good, searchable website if you go the online route, and rent can be expensive if you go the retail route
#4. Subscription Revenue Model
The subscription revenue model for start-ups offers customers a product or service that they pay a subscription fee for, usually either monthly or yearly. This model can result in a steady flow of revenue over time. Companies like Netflix, Amazon Prime, and Hello Fresh have successfully leveraged the subscription model.
Advantages of the subscription revenue model include:
- Allows for predictable, consistent revenue
- Potential for additional income from customers who forget to cancel their subscriptions
- Provides a more stable revenue stream than single-point transactions
Possible disadvantages to making money via subscriptions include:
- Subscription fees are usually small, so you need a large customer base to make money
- Because subscriptions are so popular, there is a lot of competition
#5. Freemium Model
With the freemium revenue model, you offer essential services for free. Then they let users pay to access upgraded versions. This revenue model for start-ups has gained popularity within the past 10 years, thanks to businesses like Spotify and LinkedIn.
Offering a free service attracts a large customer base, allowing you to convert some of them over to paid premium customers by providing additional features and incentives.
Advantages of the freemium model include:
- Providing free services is an attractive entry point for customers
- Recruiting existing free customers is more manageable than recruiting new customers to start paying right off the bat
Possible disadvantages of going the freemium route include:
- It could take a lot of time and money to build up your audience
- Converting free customers also requires effort on your part as the start-up owner
#6. Licensing Revenue Model
The licensing revenue model allows individuals or other companies to use your business’s copyrighted products or services.
For example, suppose you’re a programmer and develop a new program that another company wants to use. In that case, you could issue a licensing fee to make your revenue.
SaaS companies, or Software as a Service, utilize the licensing revenue model by allowing their customers to access cloud storage services for a set fee.
Some of the advantages of choosing this model include:
- It can generate ongoing revenue from multiple customers at once
- If your product or service is marketable and very sought after, you could have a high-earning revenue stream on your hands
On the other hand, possible disadvantages to note include:
- It can be challenging for start-ups to gain enough traction to generate a demand to license their products or services
- You need to ensure what you’re offering is desirable enough to pay a licensing fee for it and that it doesn’t already exist elsewhere
Choosing the Right Revenue Models for Your Start-up
Picking the best revenue models for your start-up is something you will likely have to determine internally. It typically follows researching the available options and discovering how they connect with your goals.
However, there are three steps in choosing revenue models for start-ups:
- Consider product value
- Understand your customers
- Study the competition
#1. Consider Product Value
Ensure that the revenue models for your start-up align with your value proposition statement, which expresses your unique selling points to potential customers. Then ask yourself whether people will buy or license your product or service. What’s the payment like?
#2. Understand Your Customers
A solid understanding of your customers or target audience is also helpful when determining the best revenue models for your start-up. If you’re targeting single customers, they may prefer having a subscription or getting to explore your offerings with a freemium model. But if you’re working with larger companies, it may be easier for them to pay a licensing fee.
#3. Study the Competition
You have to know who you’re up against to be successful. Take a look at how your competition generates revenue to determine whether your revenue model is as successful as theirs. Studying your competitor’s strategies will also allow you to see if your model isn’t quite up to par and give your ideas on how to improve.
TIP: Consider what value your product or service will provide your consumer, and then bake that into the revenue model.
Combining Revenue Models
It’s also possible to find success by combining revenue models. When done efficiently, this can allow your start-up to diversify and see several different revenue streams.
For example, Spotify operates both an advertising and subscription revenue model. They also offer a freemium as the complimentary version of their platform is monetized with ads. You pay a monthly subscription fee, and you can listen ad-free.
Most companies and start-ups start with one primary revenue model and branch out later.
Diversifying your revenue models can allow you to increase your revenue but also reach a wider audience and see faster growth.
You can also revolutionize your revenue streams and start-up ideas by mixing non-traditional revenue models with existing industries. For example, doctors have continuously operated under a service revenue model. You go to the doctor; they provide a service, and you or your insurance pays for it.
However, new models have emerged in recent years, largely thanks to technological advancements. Now companies like Talkspace, Jetdoc, and BetterHelp offer healthcare access via a subscription model. Users pay a monthly fee for a set number of visits rather than spending money each time they go to the office.
Conclusion
Revenue models for start-ups are one of the most important things to consider when pursuing a new start-up idea. Your revenue model can impact how your start-up operates and even set the tone for how your business can grow in the future.
Revenue models are central to your overall business plan, making it crucial to take time to determine the most fitting revenue model for your start-up. With a compelling revenue model in place, your start-up will be successful, grow and have long-term sustainability.
About the Author
Jonathan Hung is one of the most active angel investors in Southern California; his mission is to drive value creation within each portfolio company. In support of this mission, he serves as Co-Managing Partner at – Unicorn Venture Partners.
He and his team target investments in US companies with global market potential, focusing on long-term growth expansion to East Asian markets.
As a Managing Member for his family office fund, J Heart Ventures, Jonathan developed his investing prowess, making investments in start-up companies such as Gyft, ChowNow, Miso Robotics, Clover Health, and Bitmain, to name a few start-ups he funded.
Jonathan has various degrees from the University of Southern California, London School of Economics, Massachusetts Institute of Technology, and The Wharton School at the University of Pennsylvania.