When you are starting a new business, one of the biggest challenges you will face is choosing your startup’s revenue model. Your revenue model essentially shows how your startup will make money. It is what your target market is ready to pay for. Will you be selling a product? A service? An online service? Are you selling packages? Are you charging a commission fee? Are you a franchise and earning royalty fees? Find out how to choose the right model with these tips from Berytech.
Why choosing a revenue model is important
A startup’s revenue model essentially connects [through its different revenue streams] the business value proposition to the target market segments.
People generally think that what determines the success of a startup is the extent to which the idea behind it is innovative. This is only true if it is coupled with the choice of the right revenue model. There are two main reasons for that:
- The right revenue model greatly contributes to the business solving a problem and alleviating a pain point
- The right revenue model allows the business to quickly gain traction on the market and efficiently scale up, precisely because it is built around a market need that people are ready to pay for
GrowthWheel – a visual toolbox and cloud-based platform used by business advisors to help startups and small businesses, classifies revenue models in five main categories: Manufacturing, Trading, Services, Online activities, and Financial Revenue Models. Within those categories are 26 revenue models like freemium, franchising, leasing, sale of services, affiliate marketing, etc. (cf. below for all options)
Tips to select your revenue model
The above classification is by no means mutually exclusive and the best businesses have proven to be a combination of various revenue models. For startups and even established companies, it is always helpful and beneficial to think of alternative/additional revenue models. Oftentimes, this exercise proves to generate new revenue streams for the business.
At this point, you might be wondering how to select your revenue model and on what basis to select/modify it. Here are 3 tips to keep in mind while selecting or evaluating your revenue model.
- Build “Painkillers” not “Vitamins” – Focus on solving a pain point and make sure that your product/service offering is something people would pay for. Is your startup building a “vitamin” or a “painkiller” for your clients? To get their attention and build a sizable and scalable business, “painkillers” are a must. While “vitamins” are nice-to-have products, and just like in a drug store, optional; “painkillers” on the other hand are need-to-have products that clients really need today to solve big pain points.
- Experiment, Learn, Adjust: One of the main things to keep in mind when building a startup is that it is the perfect ground for experimentation. While market studies, targeted interviews, and data collection often help determine the most suitable revenue model, it is only through experimentation, testing, and tweaking that we find the optimal revenue model. A lot of variables come into play including the product or service itself, how innovative it is, its frequency of use, how needed it is deemed to be, the target market purchasing power, habits, preferences, lifestyle, etc.
- Perceived Value vs. Incurred Cost: Always keep in mind that from the customer’s point of view, the perceived value of the purchase always has to be higher than the price he/she is paying.
What to keep in mind
In summary, when it comes to choosing the right revenue model for your startup, keep in mind that:
- Choosing the right revenue model for your startup is crucial and will to a large extent determine its success or failure. In addition to impacting a business’ bottom line, selecting the right revenue model for one’s business will determine the extent to which the business is scalable as well as its growth potential
- The best revenue models will always be the ones that match your business idea, while solving a pain point at the level of the target market
- The benefit of combining several revenue models is not only that you will be able to enjoy multiple income sources, but you will often be able to offer your customers a better, more innovative product or service
- Experimentation and testing are key to determine the optimal revenue model
- Pricing should always be done while keeping in mind that from the customer’s point of view, perceived value from the purchase has to be larger than the price of the product or service
Joelle Atallah is currently Business and Finance Advisor at Berytech. She has 10+ years of experience between management and financial consulting helping organizations in finding solutions to their most challenging problems. Passionate about entrepreneurship and growth, she currently works with startup founders to help them build a strong foundation for their businesses, optimize their growth, and drive their companies’ bottom line. Joelle holds a Masters in Economic Analysis from the Barcelona Graduate School of Economics as well as a double-degree in Economics and Finance from the American University of Beirut.