There are revenue models and there are revenue models, but discovering which one is the best revenue model for your business is one of the most important activities that you as an entrepreneur should take up at the earliest. Here we talk about the revenue models that were relevant in the past and those that are prevalent now.
How to choose the right business model
There are three main factors that should be taken into consideration when choosing the best business model for a business.
1. The Target Market for the business
2. The Scale of the business
3. The Business Offering
There may be more than one business model that is suitable for the each of the factors mentioned above, but your business needs to choose one that lies at the intersection of all the three factors specific to your business.
Consider Oracle, the worlds largest business software company. Based on their business offering, which is primarily software products, they could sell their software directly to customers (which are usually big businesses). Based on Oracle’s target market, they could have also sold their technology as pure services, since no big scale ERP software comes ready for use out of the box. Also since businesses around the world are potential customers for Oracle, it could have setup big sales and implementation teams in all customer regions and tried to reach the customers directly.
Although when looked at individually all the three revenue models could make sense for Oracle, one revenue mode is to offer solutions through IT service providers who implement Oracle Applications. thus establishing a large community of service providers as an extended sales arm.
Revenue Models From the Offline Era
If you were to time travel to the 70’s and 80’s of the last century, irrespective of the industry to which your product belonged to, some of the revenue models that were in common use before the internet stepped into change the world, are listed below.
1. Unit sales or license sales
2. Franchisee/royalty model
Unit Sales or License Sales
This is a model where you are selling a product in units and you charge per unit. If you are selling software you will probably sell per user license or per site license.
Franchisee or Royalty Model
This revenue model is used if you the owner of intellectual property or a brand. This model then lets others use your IP or brand for a fee.
Upgrades / Updates / Accessories
This model worked where you subsidized the cost of your main product, but the design of the product is in such a way, that it requires repeated purchase of upgrades or accessories. In case of software products you could charge for software updates.
The business environment of those times, made these excellent choices for revenue models back then.
Internet - The Game Changer
When the Internet first arrived, nothing much changed, that needed business to adapt it to. Then started the online only businesses like the Amazons, EBays, Yahoos, Googles of the world.
Slowly, the consumers, whose primary source for information up until that point was newspapers, discovered that they could get a lot more information from websites.
There was a big bang explosion of websites that allowed almost everyone to publish and share their knowledge. There are now websites that talk about how men can cut their own hair , there are websites that talk about how to build you own spaceship  and some others that can even tell you how to get pregnant .
This widespread availability of information has changed the way businesses start, scale and operate. And this has also changed how businesses sell and make money.
The availability of all this information means, people are more informed about their choices. There is now the facility to research the price of almost any product before a customer buys it. People can look at product reviews; can learn about the experiences of other customers who have already bought the product. They can interact with those buyers and then make the decision to buy.
The Revenue Models of the Digital Age
The presence of Internet has given buyers a lot of power, and the same Internet has provided completely new, and sometimes more powerful platforms for the businesses to reach customers and sell to them in newer ways. There are now more ways to sell products and services than those that have existed in the past .
Some of the newer and prevalent revenue modes are:
1. Subscription Based
2. Transaction Based
3. Crowd sourced Customers
4. Freemium Model
Subscription Based Revenue
The invention of the browser, and giant strides that Internet browsers have made since the birth of the Internet, means that powerful software, can be delivered to users without them even installing anything on their machines.
Selling Software-As-A-Service means that business can rent out software and collect a recurring usage fee for their software. This has a lot of benefits (to both sellers and consumers) compared to the unit sales or licensing sales model of the yesteryear. The seller can save a ton of money in software distribution costs. That money can instead be invested in marketing. The consumer does not get locked into expensive software that may turn out to be too costly to upgrade.
Revenue from Transactions
The Internet has given birth to the now ubiquitous e-commerce. People want to buy something as soon as they learn about a product and this is great for businesses too. All the effort that business put into marketing their products or services can be turned to sales at the click of a button by the consumers.
With all these transactions happening on the Internet, it was only a matter of time before companies like Amazon inserted themselves in between these transactions to make a small cut from it. Uber has done this for the cash transactions that happen between a taxi passenger and the taxi driver.
In the past many entrepreneurs would have struggled to get funding for building the prototypes for their great ideas. But not anymore, there are now crowdfunding platforms abound, that allow potential buyers to pre-pay for a product that is not even produced yet. You can potentially accumulate a 100,000 paying customers even before you produce a single unit of your product.
The Freemium Model
The world loves free samples. People loved free samples in the industrial era and people totally dig free samples in the digital era. The Freemium revenue model has taken this a step further, where business are signing up non-paying customers by providing them with a limited functionality versions of their product and converting a percentage of these free users to a paid version of the product that offers additional functionality.
There are millions of software products that have adopted this revenue model in today’s market.
Digital Market Places
When it comes to serving a particular niche of a market, for example - all the needs of a household where a wedding is about to take place - it is not possible for one business to cater to all the needs of the wedding. But the market places revenue model does not need one business to meet all the needs that arise out of conducting a wedding.
Businesses can create a market place, where a lot of other businesses that provide the services needed to conduct a wedding, can come together and participate in creating a Wedding Mall so to speak. This digital wedding mall, could provide a way for buyers to put together all the pieces of the wedding, by hiring or buying from the businesses that sell at this mall.
The market place itself could generate revenue is various ways in addition to the revenue that business in the market place generate by selling products and services to customers.
Are You There Yet?
Thus, it is imperative for a Startup to do a deep dive in to the three focus factors that we spoke about earlier, and discover what revenue model can take their business into healthy profitability.