What Is a Revenue Model?

Deciding how to generate income is one of the toughest decisions a business can make, other than what you will actually sell.

You want to make sure that you factor in production costs, workers ‘salaries, and your consumers’ willingness to pay, and that you generate enough to keep your business going. You also want to make sure your strategy fits what you are trying to sell.

Various revenue models will help you get your company on the right track. In this post, we’ll explain what they are and how to choose the right one for your business.

Revenue models are not to be confused with pricing models, where a company considers the value of the products and the target audience in order to get the best possible price for what they sell in order to maximize profit. Once the pricing strategy is established, the sales model determines how customers pay that price when they purchase.

RevOps teams also use pricing models to predict and forecast revenue for future business planning. Knowing where your money is coming from and how to get it is a better way of predicting how often it will come in.

There are different revenue models businesses use and we’ll cover a few below.

Types of revenue models

Recurring revenue model

A recurring revenue model, sometimes called a subscription revenue model, generates revenue by billing customers at specific intervals (monthly, quarterly, yearly, etc.) for access to a product or service. Companies using this model are guaranteed to receive payments at any interval as long as customers do not cancel their plans.

Example of a recurring revenue model

Companies that benefit from recurring revenue models are service-based (like providing software), product-based (like subscription boxes), or content-based (like newspapers or streaming services). Companies you may know that use this strategy are Spotify, Amazon, and Hello Fresh.

Affiliate Revenue Model

Companies that use affiliate sales models generate revenue from commissions when they sell items from other retailers on their website, or vice versa.

Sellers work with various companies to promote and sell their products and track transactions with an affiliate link. When someone makes a purchase, the unique link notes the responsible partner and the commission is paid.

Example of an affiliate revenue model

Some of the companies you may be familiar with using the affiliate revenue model include Amazon affiliate links and ticket promotion services. Influencers also use this model to promote company products and entice users to purchase through custom links.

Advertising revenue model

The advertising revenue model involves selling advertising space to other companies. This space is sought because the advertiser (who sells the space) has high traffic and a large audience that the buyer (who buys the space) wants to benefit from in order to give visibility to their business, product or service.

Example of an advertising revenue model

Different types of online businesses such as YouTube and Google use this model, as do traditional media such as newspapers and magazines.

Sales model

The revenue model is that you make money by selling goods and services to consumers online and in person. Therefore, any company that sells products and services directly uses this model.

Example of a sales revenue model

Clothing stores that only sell their products through a storefront or company-specific retail website use the revenue model because they sell directly to consumers with no third-party involvement.

SaaS revenue model

The Software as a Service (SaaS) revenue model is similar to the recurring revenue model in that users are billed for use of the software on an interval basis. Companies that use this model focus on customer loyalty because revenue is only guaranteed if you keep your customers. The image below is the HubSpot Marketing Hub pricing page, using the SaaS recurring subscription model pricing.

Example of a SaaS revenue model

Companies using this revenue model include the video conferencing tool Zoom, the communications platform Slack, and the Adobe Suite.

How to choose a revenue model

Choosing a revenue model depends entirely on your specific business needs and pricing strategy.

There is no one-size-fits-all solution, and some companies have multiple revenue streams within their revenue model. For example, if you use a recurring revenue model, you can still sell ad space on your website to other companies because you have a high traffic page.

However, there are a few important factors that you should be aware of:

1. Understand your audience.

When choosing a sales model, the most important thing to remember is the target market and audience that your pricing strategy identified. They want to understand their weak points and know which model makes the most sense to charge them.

For example, if you are a service that sells meal sets, your target audience is likely busy and want food that is conveniently prepared and easy to prepare after a long day. Using the recurring revenue model makes sense because you automatically bill these at intervals and you don’t have to remember to submit the payment – address their desire for comfort directly.

2. Understand your product or service.

It is also important to have a deep understanding of your product or service and how your audience will use it. For example, if you’re selling shoes, your audience probably won’t need a new pair every month, so it can make sense to go with the sales model. Instead, your customers can come straight to you every time they need a new pair.

Choose the model that best suits your needs

Ultimately, choosing a sales model is about understanding what makes the most sense for what you are selling and what makes the most sense (and convenience) for the audiences you are targeting.

Take the time to develop your pricing strategy, choose a revenue model to match, and start generating revenue.