The term “revenue model” gets thrown around a lot these days, but few really understand what it means. It sounds cool to say you have different revenue models, but most of those are not well defined.
This article will take a close look at startup revenue models so that you can be more familiar with them. You will also learn some important points about each model!
Startup revenue models typically fall into one of three categories:
Freemium (free plus paid features) Paid-only model Advertisements or Sponsors Product sales
There is no wrong way to run a business, nor is there a best way to run your company depending on which model fits you and your business the best. Each has their benefits and drawbacks, just like any other type of business model.
However, knowing which model yours falls under can help you determine the right mix for your business and how to improve it. This article will focus on the advantages and disadvantages of each model.
A second stage launch is when you have your business with you, but you don’t have anyone to help you market it or use it yet. This is the most common type of startup revenue model because you need to spend time establishing yourself as an entrepreneur before people will trust you with their money or resources.
What this means for you is that you have to validate the concept by throwing out there and seeing what happens. You can’t rely on others to do that for you! As difficult as it may be at times, you have to go into this process alone until you find someone who wants to join you on your mission.
That person might not be easy to find, however. It could take months, even years, so be prepared for that! But once you do find them they’ll make sure to bring in enough money for you to keep working without needing to start your own company.
The ladder model is one of the most common startup revenue models. This is when your company offers a service or product that costs you to use, but produces significant income as it goes up in price.
The cost of using the tool drops off as usage increases, making the tool more affordable for lower level users and then eventually free for high uses (where it makes sense to distribute and market the tool).
Uber is a great example of this. You can pick up any city anywhere and get a ride almost anytime through their UberX service. It’s not exactly cheap to use, but low usage is subsidized by people who do want the convenience of the app.
Once you reach the premium tier though, things get expensive. I won’t go into how much Uber charges per trip now, but they also offer an uberXL tier which is even more expensive than standard uberX.
That’s the way the ladder works! As you climb the ladder, the prices keep going up, but there are ever-lower levels to start with. If someone wants the higher end features, they have to pay for them, but if they don’t care about those, well, they’re paying nothing for them!
This business model was popularized back in the day when companies would sell phone services and landline phones.
Another popular startup revenue model is to offer services or products in exchange for an advertising or sponsored link from your followers’ pages. This is called a collaboration agreement, and it can be done directly with the person who follows you or through an agency that facilitates such collaborations.
By offering sponsorship opportunities to your audience, you open up new doors to income. You will need to find appropriate partners and negotiate terms but there are plenty of sites where you can share links and resources free of cost, so this is not budget-breaking per se.
Another way to use partnerships as an opportunity to make money is to create and sell your own products or services related to those shared by the partner. For example, if someone shares a business website and newsletter, you could start selling their product on your site or via email.
The key here is to pick your battles – don’t try to get paid twice for the same thing! Find ways to merge what each party offers with your own expertise and gain some profit along the way.
A startup with no revenue typically has one of three product launch models. They are:
Launch and sell products at cost;
Raise money through private or public investors; or
Explore free business model options, such as offering your services for pay or giving away your service in return for compensation
The first option is often not feasible for startups looking to stay afloat. It’s more common than you might think — but it’s also pretty rare.
A small amount of cash can sometimes carry a company just long enough to get its foot in the door, which is what many entrepreneurs will go into debt over before they realize that it isn’t sustainable.
They’ll have to choose between paying down their debts and keeping the lights on.
It’s important to consider how much capital you need to keep your company alive while you're developing and launching your product.
As mentioned earlier, angel investing is an excellent way to start your business career! If you are very passionate about a field or area of work, then offering your services as an investor can be a great way to make some extra money.
By helping businesses with their funding, you get to choose where your investment dollars go. It’s not like giving a job to someone else, because you get to pick which companies you invest in, and you earn a return on your investment.
The returns typically include shares in the company or even additional income depending on what they are able to achieve through your investments.
There are many ways to approach angel investing so it doesn’t have to feel too vague. There are lots of online resources available that talk about how to begin. Some good sources include VentureBroth, Business Insider, and The Balance.
Business owners are always looking for help financing their projects, so this is a valuable skill to possess. Even if you don’t end up investing in any companies, being familiar with the process will give you a better understanding of how the finance world works.
One of the most common revenue models for startups is to ask their investors to contribute money in return for equity in the company or additional paychecks while the business is still going. This is what many large corporations do, where Fortune 500 companies outsource their operations to other businesses that they own a piece of (or have ownership of completely).
A second option is to offer paid services to your customers as part of your business model. This is how some companies make money through online courses you need to purchase to learn certain skills, health and wellness programs you must subscribe to to stay healthy, and so on.
The key thing about these two types of startup revenues is that they use an asset that comes with limited supply – capitalization via investment from private individuals or institutions. As long as you are confident in your product and its market, you can look to raise money from this source very easily.
Another important element of this type of income is consistency. It takes time to find funding, and even more time to see it come together. You will have to be willing to wait months if not years before seeing the returns on your investments.
One of the most common startup revenue models is to take advantage of small business loans or lines of credit that your firm can access. This is typically done through banks, credit unions, and other lending sources.
By establishing themselves as reliable vendors for your product or service, you can use their connections to get low-interest financing. It’s not free, but it is much more affordable than getting a traditional loan from a bank.
There are many ways to approach this type of funding. Some offer higher rates of interest or have stricter requirements for collateral, so be familiar with these before you apply.
Another popular startup revenue model is corporate sponsorship. This is when an organization or company agrees to pay you for your product or service by putting their logo next to yours (or even paying you to use theirs). Their advertisement becomes part of your marketing material, so it must be included in their budget!
By adding this layer of exposure, you’re giving them recognition for who they are while promoting yourself and your business. It also helps bring in new customers as people see the brand advertising your product.
Some companies will not advertise about something they do not believe in, which can hurt your relationships. Make sure you are clear with what products and services your company uses before agreeing to have them sponsor you.
Corporate sponsorships are very common and helpful ways to earn money from your online store. Just make sure you dont take too much advantage of these opportunities otherwise your colleagues and superiors may get upset.
