Revenue model

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A revenue model is a framework for generating financial income. It identifies which revenue source to pursue, what value to offer, how to price the value, and who pays for the value. [1] It is a key component of a company's business model. [2] It primarily identifies what product or service will be created in order to generate revenues and the ways in which the product or service will be sold.

Contents

Without a clear and well-defined revenue model, with a clear plan of how to generate revenues, new businesses will more likely struggle due to costs which they will not be able to sustain. By having a clear revenue model, a business can focus on a target audience, fund development plans for a product or service, establish marketing plans, begin a line of credit and raise capital. [3]

Types

The type of revenue model that is available to a firm depends, in large part, on the activities the firm performs, and how it charges for those. Various models by which to generate revenue include the following.

Production model

In the production model, the business that creates the product or service sells it to customers who value and thus pay for it. An example would be a company that produces paper, who then sells it to either the direct public or to other businesses, who pay for the paper, thus generating revenue for the paper company.

Manufacturing model

Manufacturing is the production of merchandise using labour, materials, and equipment, resulting in finished goods. Revenue is generated by selling the finished goods. They may be sold to other manufacturers for the production of more complex products (such as aircraft, household appliances or automobiles), or sold to wholesalers, who in turn sell them to retailers, who then sell them to end users and consumers. Manufacturers may market directly to consumers, but generally do not, for the benefits of specialization.

Construction model

Construction is the process of constructing a building or infrastructure. Construction differs from manufacturing in that manufacturing typically involves mass production of similar items without a designated purchaser, while construction typically takes place on location for a known client, but may be done speculatively for sale on the real estate market.

Rental or leasing model

Renting is an agreement where a payment is made for the temporary use of a good, service or property owned by another. A gross lease is when the tenant pays a flat rental amount and the landlord pays for all property charges regularly incurred by the ownership. Things that can be rented or leased include land, buildings, vehicles, tools, equipment, furniture, etc.

Advertising model

The advertising model is often used by Media businesses which use their platforms where content is provided to the customer as an advertising space. Possible examples are newspapers and magazines which generate revenue through the various adverts encountered in their issues. Internet businesses which often provide services will also have advertising spaces on their platforms. Examples include Google and Taobao. [4] Mobile applications also use this specific revenue model to generate revenues. By incorporating some ad space, many popular apps such as Twitter and Instagram have strengthened their mobile revenue potential after previously having no real revenue stream. [5]

The sponsored ranking model is a variant of the Advertising model. The sponsored ranking model is mainly used by search engine platforms like Google and specialized products- and IT-services- platforms where users are offered free search functionality in return for sponsored results in front of other search results. The sponsor is often paying per click, per view or as a Subscription model

Commission model

The commission model is similar to the markup model as it is used when a business charges a fee for a transaction that it mediates between two parties. Brokerage companies or auction companies often use it as they provide a service as intermediaries and generate revenue through commissions on the sales of either stock or products. [1]

E-commerce model

This revenue model is the implementation of any of the other revenue models online

Fee-for-service model

In the fee-for-service model, unlike in the subscription model, the business only charges customers for the amount of service or product they use. Many phone companies provide pay-as-you-go services whereby the customer only pays for the number of minutes he actually uses.

Licensing model

With the licensing model, the business that owns a particular content retains copyright while selling licenses to third parties. Software publishers sell licenses to use their programs rather than straight-out sell copies of the program. Media companies also obtain their revenues in this manner, as do patent holders of particular technologies. [6]

Software licensing model

Rather than selling units of software, software publishers generally sell the right to use their software through a limited license which defines what the purchaser can and cannot do with it.

Shareware model

In the shareware model, users are encouraged to make and share copies of a software product, which helps distribute it. Payment may be left entirely up to the goodwill of the customer (donationware), or be optional with an occasional reminder (nagware), or the software may be designed to stop working after a trial period unless the user pays a license fee (trialware or demoware), or be crippled so that key features don't work. Or it may be a free feature-limited "lite" version (freemium), with a more advanced version available for a fee.

Donationware

Donationware is a licensing model that supplies fully operational unrestricted software to the user and requests an optional donation be paid to the programmer or a third-party beneficiary (usually a non-profit). [7] The amount of the donation may also be stipulated by the author, or it may be left to the discretion of the user, based on individual perceptions of the software's value. Since donationware comes fully operational (i.e. not crippleware) with payment optional, it is a type of freeware.

Nagware

Nagware is a type of shareware that persistently reminds (nags) the user to register it by paying a fee. It usually does this by popping up a message when the user starts the program, or intermittently while the user is using the application. These messages can appear as windows obscuring part of the screen, or as message boxes that can quickly be closed. Some nagware keeps the message up for a certain time period, forcing the user to wait to continue to use the program.

Crippleware model

In software, crippleware means that "vital features of the program such as printing or the ability to save files are disabled until the user purchases a registration key". This allows users to take a close look at the features of a program without being able to use it to generate output.

Freemium models

Freemium works by offering a product or service free of charge (typically digital offerings such as software, content, games, web services or other) while charging a premium for advanced features, functionality, or related products and services. For example, a fully functional feature-limited ("lite") version may be given away for free, with advanced features disabled until a license fee is paid. The word "freemium" is a portmanteau combining the two aspects of the business model: "free" and "premium". It has become a highly popular model, with notable success.

Markup model

In the markup model, unlike with previous models, the business buys a product or service and increases its price before reselling it to customers. This model characterises wholesalers and retailers, who buy products from manufacturers, mark up their prices, and resell them to end customers.

Wholesale

Wholesaling, jobbing, or distributing is the sale of goods or merchandise to retailers; to industrial, commercial, institutional, or other professional business users; or to other wholesalers and related subordinated services. In general, it is the sale of goods to anyone other than the end-consumer. Wholesaling can be implemented online via electronic transactions.

Retail

Retail is the process of selling consumer goods or services to customers through multiple channels of distribution to earn a profit. Demand is identified and then satisfied through a supply chain. Attempts are made to increase demand through advertising.

Brick and mortar retail

Conventional retail or brick and mortar retail is selling products from a physical sales outlet or store.

Mail order

The mail order revenue model and distribution method entails sending goods by mail delivery. The buyer places an order for the desired products with the merchant through some remote method such as by telephone call or web site. Then, the products are delivered to the customer, typically to a home address, but occasionally the orders are delivered to a nearby retail location for the customer to pick up. Some merchants also allow the goods to be shipped directly to a third party consumer, which is an effective way for someone to buy a gift for an out-of-town recipient.

E-tail

E-tail is on-line retail. Retail is the process of selling consumer goods and/or services directly to end-consumers to earn a profit. Demand is created through promotion, and by satisfying consumers' wants and needs effectively (which generates word-of-mouth-advertising).

In the 21st century, an increasing amount of retailing is e-tailing, done online using electronic payment and delivery via a courier or postal mail. Via e-tail, the customer can shop and order through the internet and the merchandise is dropped at the customer's doorstep. This format is ideal for customers who do not want to travel to retail stores and are interested in home shopping.

The online retailer may handle the merchandize directly, or use the drop shipping technique in which they accept the payment for the product but the customer receives the product directly from the manufacturer or a wholesaler.

Subscription model

In the subscription model, the business provides a product or service to a customer who in return pays a pre-determined fee at contracted periods of time to the business. The customer will be required to pay the fee until the contract with the business is terminated or expires, even if he is not using the product or service but is still adhering to the contract. Possible examples are flat-rate cellular services, magazines and newspapers.

Revenue streams

A revenue stream is an amount of money that a business gets from a particular source. [8] A revenue model describes how a business generates revenue streams from its products and services. [9] They are resultantly a key aspect of the revenue model. They are generated through the use of the revenue model components listed in the section above. Businesses continually seek for new ways of generating revenues, thus new revenue streams. [10] Finding a new revenue stream has gradually taken on a distinct and specialized meaning in certain contexts to mean a new, novel, undiscovered, potentially lucrative, innovative, and creative means of generating income or exploiting a potential. This approach in particular can especially be applied to new technology and internet businesses which find extremely innovative ways of generating revenues, often ways which seemed not to be possible. [11] As a result, technology-based businesses are constantly updating their revenue models in order to remain competitive. Advertising can be seen as a component of the revenue model, however, when the business is advertising its own products, this would result as a cost for the business which is the exact opposite of revenue. On the other hand, advertising can lead to an increase in sales thus revenue over a period of time. For the majority of businesses which will add value to a product or service that will be purchased by a customer, advertising is often a component of their business plan. Expenditure for this particular component is forecasted as it can generate greater revenues over periods of time. [12]

Component of a business model

A revenue model is part of a business model. A business model shows the framework for an entire business and allows investors and bankers, as well as the entrepreneur, to have a quick way of evaluating that business. Business models can be viewed in many different ways, but they are generally composed of the following six elements: [13]

  1. Offer significant value to customers
  2. Fund the business
  3. Acquire high value customers
  4. Deliver products or services with high margins
  5. Provide for customer satisfaction
  6. Maintain market position

The revenue model is a key component of the business model [9] as it is an essential factor for delivering products or services with high margins and funding the business. Less than 50% of the investment required to set up a business will be used in revenue-producing areas. [13] It can not resultantly be viewed as being identical to the business model as it does not influence all the six elements but more should be viewed as an inner component of it.

Having a well-structured business model is necessary for the success of any business adding value to a product or service for customers. This will consequently include having a clear and tailored revenue model which will ensure its financial health. It provides the owners of the business with a necessary understanding of cash flows as well as how it will generate revenue and maximize profitability. [14] In addition to the business model, financial targets have to be forecasted when creating an initial business plan whereby expected revenues and profits will have to be presented [15] and thus calculated through the use of revenue models applied by the business.

Related Research Articles

Shareware is a type of proprietary software which is initially shared by the owner for trial use at little or no cost with usually limited functionality or incomplete documentation but which can be upgraded upon payment. Shareware is often offered as a download from a website or on a compact disc included with a magazine. Shareware differs from freeware, which is fully-featured software distributed at no cost to the user but without source code being made available; and free and open-source software, in which the source code is freely available for anyone to inspect and alter.

Marketing refers to activities a company undertakes to promote the buying or selling of a product, service, or good.

Price discrimination

Price discrimination is a microeconomic pricing strategy where identical or largely similar goods or services are sold at different prices by the same provider in different markets. Price discrimination is distinguished from product differentiation by the more substantial difference in production cost for the differently priced products involved in the latter strategy. Price differentiation essentially relies on the variation in the customers' willingness to pay and in the elasticity of their demand. For price discrimination to succeed, a firm must have market power, such as a dominant market share, product uniqueness, sole pricing power, etc. All prices under price discrimination are higher than the equilibrium price in a perfectly-competitive market. However, some prices under price discrimination may be lower than the price charged by a single-price monopolist.

In marketing, product bundling is offering several products or services for sale as one combined product or service package. It is a common feature in many imperfectly competitive product and service markets. Industries engaged in the practice include telecommunications services, financial services, health care, information, and consumer electronics. A software bundle might include a word processor, spreadsheet, and presentation program into a single office suite. The cable television industry often bundles many TV and movie channels into a single tier or package. The fast food industry combines separate food items into a "meal deal" or "value meal".

Distribution (marketing)

Distribution is one of the four elements of the marketing mix. Distribution is the process of making a product or service available for the consumer or business user who needs it. This can be done directly by the producer or service provider or using indirect channels with distributors or intermediaries. The other three elements of the marketing mix are product, pricing, and promotion.

Pricing Process of determining what a company will receive in exchange for its products

Pricing is the process whereby a business sets the price at which it will sell its products and services, and may be part of the business's marketing plan. In setting prices, the business will take into account the price at which it could acquire the goods, the manufacturing cost, the marketplace, competition, market condition, brand, and quality of product.

The subscription business model is a business model in which a customer must pay a recurring price at regular intervals for access to a product. The model was pioneered by publishers of books and periodicals in the 17th century, and is now used by many businesses and websites.

Online Business or e-business is any kind of business or commercial transaction that includes sharing information across the internet. Commerce constitutes the exchange of products and services between businesses, groups, and individuals and can be seen as one of the essential activities of any business. Electronic commerce focuses on the use of information and communication technology to enable the external activities and relationships of the business with individuals, groups, and other businesses, while e-business refers to business with help of the internet. Electronic business differs from electronic commerce as it does not only deal with online transactions of selling and buying of a product and/or service but also enables to conduct of business processes within the value chain through internal or external networks. The term "e-business" was coined by IBM's marketing and Internet team in 1996.

A royalty is a payment made by one party to another that owns a particular asset, for the right to ongoing use of that asset. Royalties are typically agreed upon as a percentage of gross or net revenues derived from the use of an asset or a fixed price per unit sold of an item of such, but there are also other modes and metrics of compensation. A royalty interest is the right to collect a stream of future royalty payments.

Commercial software, or seldom payware, is a computer software that is produced for sale or that serves commercial purposes. Commercial software can be proprietary software or free and open-source software.

Yield management is a variable pricing strategy, based on understanding, anticipating and influencing consumer behavior in order to maximize revenue or profits from a fixed, time-limited resource. As a specific, inventory-focused branch of revenue management, yield management involves strategic control of inventory to sell the right product to the right customer at the right time for the right price. This process can result in price discrimination, in which customers consuming identical goods or services are charged different prices. Yield management is a large revenue generator for several major industries; Robert Crandall, former Chairman and CEO of American Airlines, gave yield management its name and has called it "the single most important technical development in transportation management since we entered deregulation."

Online shopping

Online shopping is a form of electronic commerce which allows consumers to directly buy goods or services from a seller over the Internet using a web browser or a mobile app. Consumers find a product of interest by visiting the website of the retailer directly or by searching among alternative vendors using a shopping search engine, which displays the same product's availability and pricing at different e-retailers. As of 2020, customers can shop online using a range of different computers and devices, including desktop computers, laptops, tablet computers and smartphones.

Freemium Business model and software licensing scheme in which the basic form of a product is free of charge but additional features requires payment

Freemium, a portmanteau of the words "free" and "premium", is a pricing strategy by which a basic product or service is provided free of charge, but money is charged for additional features, services, or virtual (online) or physical (offline) goods that expand the functionality of the free version of the software. This business model has been used in the software industry since the 1980s. A subset of this model used by the video game industry is called free-to-play.

Dynamic pricing, also referred to as surge pricing, demand pricing, or time-based pricing is a pricing strategy in which businesses set flexible prices for products or services based on current market demands. Businesses are able to change prices based on algorithms that take into account competitor pricing, supply and demand, and other external factors in the market. Dynamic pricing is a common practice in several industries such as hospitality, tourism, entertainment, retail, electricity, and public transport. Each industry takes a slightly different approach to dynamic pricing based on its individual needs and the demand for the product.

A marketing channel consists of the people, organizations, and activities necessary to transfer the ownership of goods from the point of production to the point of consumption. It is the way products get to the end-user, the consumer; and is also known as a distribution channel. A marketing channel is a useful tool for management, and is crucial to creating an effective and well-planned marketing strategy.

A revenue stream is a source of revenue of a company or organization.

Razor and blades model Business model

The razor and blades business model is a business model in which one item is sold at a low price in order to increase sales of a complementary good, such as consumable supplies. For example, inkjet printers require ink cartridges, and game consoles require accessories and software. It is different from loss leader marketing and free sample marketing, which do not depend on complementary products or services.

Consumer to consumer (C2C) markets provide an innovative way to allow customers to interact with each other. Traditional markets require business to customer relationships, in which a customer goes to the business in order to purchase a product or service. In customer to customer markets, the business facilitates an environment where customers can sell goods or services to each other. Other types of markets include business to business (B2B) and business to customer (B2C).

There are several types of e-commerce models, based on market segmentation, that can be used to conducted business online. The 6 types of business models that can be used in e-commerce include: Business-to-Consumer (B2C), Consumer-to-Business (C2B), Business-to-Business (B2B), Consumer-to-Consumer (C2C), Business-to-Administration (B2A), and Consumer-to-Administration (C2A).

Business Model Canvas

The Business Model Canvas is a strategic management template used for developing new business models and documenting existing ones. It offers a visual chart with elements describing a firm's or product's value proposition, infrastructure, customers, and finances, assisting businesses to align their activities by illustrating potential trade-offs.

References

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