Every business needs to bring in enough revenue to sustain itself. While the term business model can refer to a number of things with subtle differentiation, here we mean it simply as: how your company brings in money.
The reason this simple definition works here is that in this app, the focus is mainly on helping create the sturdiest fundamentals for your venture. That means having a balanced and strong strategy for your product, targeting marketing efforts to the right type of users or customers, and a way to make money from those users or customers. The way of making money from them is what we will be referring as the business model. For a great deal of companies, the business model, or the revenue model, is one of the most important fundamentals around which to build your company.
There are many ways to bring in revenue. One of the most popular revenue models is displaying ads. It is a type of a revenue model. It isn't a revenue model. But it has become so popular and widely used that we will discuss it as a type of a business model in itself. Another very popular type of revenue model is selling physical goods or providing services for which you get paid directly. Another popular revenue model is a subscription model where the customer pays you at consistent time intervals. They can all work for different businesses, and each has their own pros and cons. There are a few more, but the purpose of this article is to give you a solid understanding of how to think through your business model for yourself so we will just focus on these and build upon that. Whatever the revenue model might be, the important thing is to realize which one is 1) The best fit for the type of company you are running and 2) Can sustain your company and help you achieve your ultimate goals for the company.
Since the ad revenue model has become so popular so popular during the last 50 years, and increasingly so with the proliferation of the Web, we will examine that first. Right from the beginning it must be mentioned that while it is easy to slap ads on things, overall displaying ads is a very Unattractive revenue model. There are many reasons for that. One reason for that is that it often dilutes the enjoyment that your users get from your product. Another huge problem is that this revenue model brings in very little revenue per user. That means it can only be effective if you have a tremendous amount of users. Additionally, it augments your company strategy because once you choose this revenue model you have no choice but to go big. But for many companies, there is a long time before they can really grow in a sustainable way. Scaling a company too fast can be very damaging and the ad revenue model creates a lot of pressure to grow big rapidly since it is the only way to make any real money from that revenue model.
For example, ads are priced at something called CPM (Cost Per Thousand). Yes, somehow the M stands for thousand. A very reasonable CPM online is about $10. Some sites earn more and many sites earn less so we will use this for our example. So if for every 1000 page views, the site owner (the ad publisher on whose site the ads appear) earns $10, that means the site owner only earns one penny per page view. That is terribly disappointing if you consider how difficult and often expensive it is to build a great site. Not to mention how many page views you need to pay yourself and your staff a salary.
In general, the ad revenue model is one of the easiest to implement but one of the least attractive revenue models due to its poor earning potential. If you can, do try to stay away from it, and explore more effective revenue streams. Sometimes it might even require realigning the strategy of your company a little, if you get it right, in the end you will be much happier with a more effective revenue stream. For some businesses, the ad revenue can work well, and for many publishing businesses, it is even almost inescapable. But if you can, try to explore more effective revenue streams. One such more effective revenue model is something we refer to as a transactional business model.
Think now for example, about any kind of a transactional (where there is a transaction of money for a product or service) revenue model. The dollar amount of the transaction can range greatly from pennies to thousands of dollars. Most common consumer products other than cars, computers, televisions, and a few other big-box goods typically range from $5 or $100. Compare that to the ad revenue model. In the ad revenue model that we considered, for 1000 page views you make $10. But, if you sell a product or provide a service for $100, you need to market it to fewer people within your target market, and only after a few transactions you already make more money than the ad revenue model which required you to get to 1000 page views just to earn that $10.
The subscription revenue model works similarly to the transactional revenue model. The main difference is that instead of getting a larger chunk of money at once, the goal is to take a small amount at repeating time intervals. That requires you to make a product so useful that the customer wants to keep coming back and paying for it. The customer needs to enjoy your service or product so much that they stay as customers as long as possible.
There is an underlying thread here that needs to be noted. The more effective your business model, the easier it will be for you to keep your company. If you have a weak business model, you will need a lot of site traffic or customers just to make a little bit of money. That can damage the rest of the strategy of the company since it will force you to rely on the few marketing channels that can bring in high volumes of new visitors and you will forever be at the mercy of those large marketing channels. Over-marketing can make you look cheap, commoditized, desperate, and waste a lot of your company's resources. A great solution is to have a stronger revenue model. If possible, try to have a strong revenue model as a part of your strategy so you can test it out earlier rather than later and have it improved by the time you get to scale.
One very important thing NOT to underestimate (especially for a small company) is the timing of the revenue. We will consider one example. Say that you want to open a restaurant, a gym, a physical store, or have something to do with real estate. These have one thing in common: you need to pay lots of money upfront before you get a single customer. You need to rent out the physical space, re-decorate it, get a number of licences required by your city and state to run that kind of a company, buy liability and other types of insurance, write up contracts with lawyers, etc. And all that has to happen before you get to see a single customer. You need to invest a lot of money upfront and all the risk is on you.
To determine whether a business model will work or not, you must not only understand the revenue aspect of it, but also the costs to generate that revenue. Typically a large part of the costs are office space rent, employee salaries, and marketing costs. Marketing costs can be tricky to determine. Things that seem free can be very expensive in how things play out. So try to think through costs like marketing costs very carefully because they can be very tricky to determine correctly.
Now imagine a completely reversed kind of a schedule for when you get paid. As an example, think about the business of creating conferences. If you are the organizer, you have to pay upfront for the space, and many other costs list insurance, etc. But all of the people who will attend your conference will pay prior to the event starting, meaning you can pay to stage the event from the very revenues that come from ticket sales for that event. This isn't to say that the conference business is smooth and easy. It has its own difficulties. But one plus about it is that you get paid upfront and can use that money to create that conference. That is a big contrast to the types of businesses previously mentioned where the burden of risk much heavier on the entrepreneur.
Now think about the subscription model. Since you collect the money in small increments, but collect it regularly. That means you have a degree of predictability for your revenue. The negative side of this kind of a model is that you need a large number of subscribers to bring in good revenue each month.
And as a bonus, since many people want to start a company that sells something, or provides a service to other companies, it is important to keep in mind that companies have much slower decision-making processes and the revenue might come in MUCH later than hoped for. Although there are exceptions to every rule, typical corporate sales cycles are usually estimated at 3-12 months so expect the money to come much later rather than sooner.
Many people often think that having multiple revenue streams is good. It sounds great actually. But the truth is that a revenue stream does not live in a vacuum. It takes time to perfect it, and your product should align with it very naturally. And most importantly, the revenue model must be effective and efficient. If you have one very strong revenue stream, it is often better than many moderately strong revenue streams that are just OK. Plus, it is much easier to perfect it and grow your business around it. Of course, it is never too great to put all your eggs in one basket, so you have to be very watchful of what might happen in the future, but for a young company, to try to go after multiple revenue streams at once might be dangerous because it can confuse and dis-focus efforts and direction of the company.
That is not to say that you should not have multiple revenue streams. It is ok to make a little money from your non-primary revenue stream if that money comes relatively easy. But do make sure you identify and perfect your single main revenue stream.
Not every company makes a profit, or any revenue. Despite the fact that many people like to question, make fun, or badmouth those kinds of companies, in many cases it might actually be the correct strategy. If, for example, a company has been funded by investors, then the company has an option to not focus on revenue but rather focus on making the product be the best out of all the competitors, or growing users. In fact, many people subscribe to the theory that focusing on revenue too early may be damaging to creating a great product or growth. Again, all these theories can be valid for certain types of companies and strategies. The trick is to get a sense of which is the right one for a given situation.
For more information on business models, take a look at this Wikipedia entry on business models.
Article by Alex Genadinik