Revenue Models: Where the money comes from?

Have you ever wondered what are the sources of income for a business?

When developing a startup, many entrepreneurs have the goal of capturing users and grow rapidly; however, first, they need to define a revenue model. Any company in order to have economical value must generate income at some point in time; otherwise, it is worth nothing. Regardless of the business of your startup, consider the industry in which you operate and begin with a basic revenue model, always seeking to differentiate yourself from the competition.

How many times have you thought about solving a problem with a product or service without considering how you are going to make money?

According to CB insights, 18% of startups fail because they do not have a well-defined revenue model, including prices and costs. Do you remember how iTunes began to charge at the beginning of its operations? It generated income by charging users per song, at the same time Spotify developed its business model by charging with a freemium and subscription model. Due to the competition, iTunes ended up modifying its revenue model, charging for a subscription.

As you develop your business model, identify what your competitive advantage is and the industry in which you operate, also consider the following elements:

1) The value of your product or service for the user.

2) The relationship and frequency you have with your clients.

3) Average life of your product/service

4) Complexity of the product/service

Leverage all the above to define your revenue model and maximize customer value. There are many revenue models that you can search on the internet (https://www.boardofinnovation.com/guides/revenue-model-cards-b2c/); however, the most important are:

1) Revenue per service: Software as a Service, Distribution as a Service, Fintech as a Service, etc.

2) Revenue per transaction: Purchase and sale of a product or service.

3) Subscription Revenue: Periodic payment for a service like Spotify, Netflix, Amazon Prime.

4) Commission Revenue: Based on the sales, you generate a commission (percentage of sales).

5) Revenue from license or royalties: Disney licenses, Artists, any other person who develops some type of intellectual property.

Usually, companies have more than one revenue model, so try to develop a hybrid model. This implies identifying the customer, determining the value that you can provide, and multiplying the sources of income.

Some examples are:

Hardware sales vs. service sales: Some load positioning sensor or shelf analytics companies receive income from the sale of the sensor. Other companies provide the sensors for free and charge for the data analytics and reports provided to customers.

Sale of product vs sale of services: Traditionally, convenience stores have simply been dedicated to selling products. Today technology allows them to generate other income sources through the sale of services such as banking transactions, loans, delivery, or packages distribution.

Sale by lease or sale by commission: In the world of vending machines, companies generate income by leasing vending machines. Now, these companies can sell products themselves (ej. micro markets) or sell the technology and earn a commission for the sale of the product through their machines.

Sale by Software as a Service or sale by transaction: Usually software development companies generate income through the sale of their technology. In the foodservice retail sector, there are technology companies that charge a fee per transaction and sometimes a fee for logistics, fully modifying the traditional income model of the sector.

Rental income vs. commission income: Some prop kitchen companies (https://medium.com/@ACV_VC/the-kitchen-multiverse-d360414e3bdd) generate income by renting the physical space of the kitchens. Companies such as Kitchen United have developed critical mass with restaurants and their customer distribution channel with which they charge a commission per sale if the order is placed..

As you conceptualize your hybrid revenue model, keep an open mind and think about whether you can increase your revenue channels through the sale of data, advertising, or complementary services to your main line of business.

The product or service and the technology you develop are a fundamental part of your business model. Always include in your planning the review of your revenue model, it is essential in the growth of your company and hybrid models will allow you to increase the revenue channels maximizing the value of customers.

“Startups don’t fail because they lack a product; they fail because they lack customers and a profitable business model” — Steve Blank (Silicon Valley entrepreneur)

Hector Shibata. Director of Investments & Portfolio at ACV a global Corporate Venture Capital (CVC) fund and Adjunct Professor for Entrepreneurial Finance.

Igal Kovalsky — Intern analyst at AC Ventures

ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.

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