While every entrepreneur dreams of becoming the next Bill Gates or Mr. Wonderful, many lack the foresight to reach this pinnacle of startup success. They get distracted by the big picture and become too starry-eyed to focus on the nitty gritty that inherently comes when building a new company. A critical aspect of entrepreneurship that an exorbitant amount of founders overlook is determining the proper revenue model for their young businesses. Figuring this out is paramount, and something that should be carefully considered before you decide what yacht you’ll purchase when you earn your first million. Don’t be another statistic of a failed founder, rub the sparkles from your eyes, and meticulously calculate the best revenue model for your startup. For before Evan Spiegel was getting engaged to Victoria’s Secret models and Richard Branson was buying private islands, they were crunching numbers and focusing on the bottom line.
The revenue model can be broken down into three distinct parts: the market segmentation, the market response, and the financial model. While many companies tend to focus solely on the financial model, it seems that those revenues can only be maximized after consideration of not just the model itself, but also how a company’s product will be the most efficient and desirable to its market.
Their impact on revenue and your company’s overall success is massive. Typically a company’s product falls within two ranges: high fidelity and high convenience. High fidelity products are those that cater to a specific, personalized, exclusive experience whereas high convenience products are those that are widely available, less expensive, and more convenient to the user. The market reaction of either of these segments of users directly influences the strength of revenue and growth.
Now, determining a revenue model combines pricing with the basis on which a company makes its revenue. Your revenue is created either one-time or is recurring. Some common forms of revenue models include freemium, transactional, usage, retail, database, ad-based, and subscriptions. Each of these poses a different revenue stream. Some provide no user fee – a free download of an app, and then the revenue is made through other companies who advertise on the app (ad-based), payment for data mining (database), or by receiving a percentage of the transaction between a user and another company (transaction). Some other “free” apps function with the freemium revenue model – allowing users to download the app for free, and then offer in-app purchases for versions without ads or for the premium version. These models are popular because they offer a high convenience to users while allowing the company to make revenue off of third party companies. When choosing one of these models, it’s important to realistically estimate the associated costs and risks, as well as the user market.
The other types of revenue models include retail, usage, and subscription. The retail model is the standard one-time revenue model, relying upon individual transactions. The other two models involve recurring payments; a model that can be very helpful for a startup looking to quickly increase revenue. Even with a high attrition rate, a sales cycle can create revenue for many months to come, and oftentimes revenue is easier to predict. A usage model charges based off of the use of a product, and often attracts users who prefer a more personalized and concise payment. A subscription model is a very popular model both for companies due to the steady revenue stream, and users for the constant and updated access to the product. Subscriptions are often products that are a premium, and can be high fidelity. Often recurring payment models serve both B2B and B2C clients.
What is the most interesting part about establishing a revenue plan for your startup is that oftentimes, new companies do not consider market segmentation, reaction, and community as part of it. It’s worthwhile to note that many people romanticize the startup, and ignore many of the costs and risks associated with starting something that hasn’t been researched, planned, and predicted. There are so many pitfalls for a startup, and with only 30% of them succeeding, creating a viable company requires serious preparation. It’s important to start your company with a strong revenue model to give yourself the best chance of having your company flourish into the success you dream of it being.