Business terms like revenue model, revenue stream and business model may seem like basic concepts, but many people get confused with these terms.
In business, you often hear these terms being used with various levels of accuracy. And in this article I’ll try to provide clear explanations and definitions for what these terms are.
Most businesses prepare a blueprint for how the company will conduct its operations. Such blueprints are typically referred to as a model. These templates serve many purposes and come in a variety of forms, including business and a revenue models.
Despite the similarities between a business and revenue model, the two outlines serve different functions and outline distinct aspects of the business.
Go Back To The Basics
A business model is sometimes used interchangeably with the idea of how your business will make money. But that is incorrect. The more correct way to look at a business model is as a high level view of your overall business.
The business model takes all aspects of your business into account, including your revenue model and all your revenue streams, and examines how well the different parts of the business play well together.
The revenue model describes the structure of how a company generates revenue or income. Each customer segment can contain one or more revenue streams.
A business model is HOW you deliver value in market.
That means how the company creates and delivers value to its customers, which key components will be utilized and which key processes the company will incorporate.
Key components include staff and human resources, machinery and technology as well as branding efforts. Business operations such as manufacturing and training make up the business’s key processes. Each business model differs depending on the organization’s size, industry and expectations.
A revenue model is how you GET paid.
A revenue model is a subset component of a business model. The revenue model focuses on answering the question of how the business will generate revenue and, ultimately, how the company will be profitable.
The revenue model depends on the industry. For example, a website might employ a contextual advertising model, which means the business generates money by users clicking on third-party ads within the page content.
The difference can be illustrated by the individual components of a business model. In essence, four factors describe a business model:
Finally, the choice of model depends on circumstance.
Companies draft a business model and present it to financial institutions in order to get a loan. Venture capitalists typically view a business model in order to make decisions to invest in the company.
On the other hand, corporations review their revenue model to make financial forecasts. Companies also inspect their revenue model to see if it’s relevant in lieu of any changes in operations. For instance, the revenue model could need modification if the cost of production rises or wages change.
When Planets Are Aligned
Most entrepreneurs and creative visionaries know they need to take action to be successful, but the planning ahead of time might not come as naturally to them.
Creative visionaries who jump straight into doing the work of starting a company without going through the Strategy Pyramid may find themselves either wasting time doing things that are not actually necessary for them to be successful or–even worse–completely missing tasks that are critical to success because they didn’t even know the task needed to be done.
Strategic planning can make the difference between immediate success and struggle…or complete failure.
The Strategy Pyramid makes strategic planning simple. The Strategy Pyramid is a simple method for planning for a creative or entrepreneurial vision.
An organization’s “why” includes:
Vision – what do you want to change about the world? How would you like your company to be different in 10 years?
Mission – why does your organization exist? How will you meet the need that you’ve identified in your vision?
Values – what does your organization believe in? Why is it important for you to achieve your vision and mission? How do you plan to work? What do you want to do–and what will you never do?
An organization’s “how” includes:
Goals – what are you going to achieve to make your vision a reality? What short-term, mid-term, and long-term goals can you set for yourself to propel yourself towards your vision?
Strategy – how are you going to pursue your goals? What areas can you focus on to make your goals more achievable? What do you plan to do and not do to move forward?
Your action plan should be based on your goals, strategy, and strategic focus areas. It should define specific tasks you and your team plan to complete to achieve your goals.
Action Plan – what are the specific tasks you need to complete as part of your strategy?
Give Me My Money
A revenue stream represents a single source of revenue for your business.
A business can have zero or many revenue streams. New businesses or start-ups often have no revenue streams. Once a business matures, 99% of businesses must develop some kind of a a revenue stream because without a revenue stream, the business just keeps losing money until money runs out.
A revenue model is precisely the strategy of how many revenue streams your business will have, and how you position your business in regard to the overall revenue strategy. The revenue model is the high level look at the revenue structure of your business.
Top 8 Revenue Models
One off sale
One-off selling is a win-lose approach to revenue.
This type of sales is often described as ‘retail selling’. One off revenue models are less attractive than recurring revenue models, because the company has to invest something new into every sale.
The most common example are newspapers subscriptions.
The software sector which was once dominated by the licensing model is slowly moving towards subscription based revenue model, with companies like Trello, Basecamp and others relying on it.
Sponsorship is essentially a fixed promotion.
Sponsorships are often sold on the audience size. Advertising is becoming more targeted towards individual users (ads on social media), but sponsorship still focuses on mass broadcasting.
Pay Per User
This model is one of the modern trends to enter the market with the introduction of Software as a Service.
The concept of it implies the offer of a range of services by a third-party provider using the internet. This can result in the offering of pay per use SaaS, which entails paying a subscription fee on per usage basis.
A white label product is a product that other companies rebrand to make it appear as if they had made it.
Some websites use white labels to enable a successful brand to offer a service without having to invest in creating the technology and infrastructure itself.
The brokerage fee model works based on the fact that a broker is compensated for executing a transaction.
It is usually, but not always, a percentage of the transaction value. In finance, stockbrokers most often come to mind, but real estate agents and business brokers frequently charge brokerage fees.
This model is a business approach that emphasizes the sale of advertising as a major source of revenue.
This structure is most prominent in traditional broadcast and print media, as well as online media. Media businesses generally earn revenue from advertising, customer subscriptions or a combination of the two.
Freemium is a pricing strategy by which a service is provided free of charge, but a price is charged for additional features.
LinkedIn encourages its users to try their premium version for a trial period 30 days. To continue with the premium version for a longer duration, the registered user has to pay an extra amount.
Everyone Can Be a Driver
Uber’s business model is based on arranging carpooling opportunities without running a fleet of vehicles. People who travel by car and those who are looking for a ride are brought together via an app.
Billing is also carried out via the app: The passenger stores a payment method before the journey, from which the fare is automatically debited. The driver has to register with Uber and receives the payment weekly on his bank account. A rating system ensures safety.
How does the company earn money with this business model, i. e. how is the Revenue Model conceived in the context of this business model?
Uber’s revenue model is therefore based on the collection of usage fees on the basis of the fare, the amount of which depends on the respective customer segment. In addition, the company is generating additional income through demand-based surge pricing.
Most businesses need at least one great revenue stream. Typically, a revenue stream gets nurtured and optimized, and the marketing channels that lead customers into that revenue stream also get optimized. It takes a substantial amount of your company’s resources to hone in on, and optimize a single revenue stream. That is why even if your business has more than one revenue stream, there should typically be a great revenue stream among them that trumps all the others.
The clear distinction between the business model and revenue model sharpens the view of the entire company and allows the revenue model to be withdrawn as a subordinate key component of the business model.
A successful combination of a great Business Model and Revenue Model results in a Google of today or a Facebook of tomorrow.
But if you place your Revenue Model on the throne and crown it as king, with your Business Model as its slave, then you will land up with a Myspace of yesterday.