4.5 Revenue Models
The revenue model is how a company actually makes money under its business model. Common revenue models include:
Sales (Transaction-based): The company sells a product or service for a price each time. Most retail and manufacturing companies use this. The revenue per period = units sold × price. For example, a cafe sells coffee cups one by one. This model requires continuously attracting customers. (Companies like Nike, Apple, or even McDonald’s use this model for their products.)
Subscription: Charging a recurring fee. We already mentioned Netflix/Spotify. Each subscriber brings in steady monthly income. Subscriptions work well for software (SaaS), media, clubs, and any service that customers use regularly.
Advertising: Earning money by selling advertising space. If your business has an audience (viewers, app users, website visitors), you can show ads. YouTube, Facebook, and news websites do this. They typically let advertisers pay per view or click. The advantage is that core content can be free to users. For instance, social media and search engines offer free services and sell ads to businesses.
Licensing: Charging others to use your intellectual property (IP). This could be software, patents, brand names, or content. For example, a software company might license its product to clients, or a musician might license songs for movies. The licensing revenue model allows companies to earn fees from others using their IP. Often licensees pay upfront fees and possibly royalties (a percentage of their own sales of the licensed product). This model can generate large upfront cash from each license agreement.
Many companies mix models. For example, a smartphone app might sell the app (transaction model), offer a monthly subscription for advanced features, and also show ads to free users. It’s crucial to identify which streams will support your strategy. In summary, the revenue model defines how customers pay you – whether per sale, per month, per click, or via license fees.