What is a revenue model?

A revenue model is a plan for earning revenue from a business or project. It explains
different mechanisms of revenue generation and its sources. Since selling software products
is an online business, a plan for making money from it is also called an eCommerce revenue
model.

The simplest example of a revenue model is a high-traffic blog that places ads to make
money. Web resources that present content, e.g., news (value), to the public will make use of
its traffic (audience) to place ads. The ads in turn will generate revenue that a website will use
to cover its maintenance costs and staff salaries, leaving the profit.

Revenue model types:

1. Transaction-based revenue model:
A transaction-based model is a classic way a business can earn money. The revenue is
generated by directly selling an item or a service to a customer. The customer can be another
company (B2B) or a consumer (B2C). The price of the product or service constitutes the
production costs and margin.
By increasing the margin, the business can generate more income from sales. This model
charges a fee every time a transaction is made through their platform. For example, eBay
charges sellers a fee whenever an item is sold; PayPal charges users a fee for transferring
money; eTrade gains a transaction fee whenever a stock is sold; and so on. The amount to be
paid to the operator is either decided upon based on a percentage or a fixed amount with the
vendor. Amazon is another example of a transaction fee revenue business model.

Selling products or services entails using different pricing tactics. While some of them may
be considered separate revenue models, these tactics are often used in pairs. Because pricing
tactics can be seen as pricing plans in a software business, we can clearly define the
following:

Licensing/one-time purchase: This entails selling a software product by license that can be
used by a single user or a group of users. The general idea is to offer a product that requires
making only one payment for it, e.g., Microsoft Windows, Apache Server, and some video
games.
This model charges a fee every time a transaction is made through their platform. For
example, eBay charges sellers a fee whenever an item is sold; PayPal charges users a fee for
transferring money; eTrade gains a transaction fee whenever a stock is sold; and so on.

Recurring payment: Unlike licensing, a user receives access to the software by paying a
subscription fee on a monthly/annual basis, e.g., Netflix, Spotify, and Adobe products.

Pay-per-use: This pricing tactic is mostly used by different cloud-based products and
services that charge you for the computing powers/memory/resources/time used. Examples
are Amazon Web Services and Google Cloud Platform.
Freemium/upselling: Freemium is a type of app monetization in which a user may access
the main product for free, but will be charged for additional functions, services, bonuses,
plugins, or extensions, e.g., Skype, Evernote, LinkedIn, and many video games.

Hybrid pricing: Sometimes pricing plans are a mixture of more than one. So that freemium
plan might morph into some form of pay-per-use tiered plan. After passing some limit in
computation or resources, a user can be forced to use or offered another type of pricing.
Examples are Mailchimp, Amazon Web Services, and SalesForce.

Various combinations of pricing tactics can be used simultaneously, which is more often seen
in cloud-based products that offer multiple payment options at once. The revenue model in
this case remains based on the transaction and purchases made by the customers. The
difference in pricing tactics will modify how the revenue is generated and basically depends
on the type of product/service you sell.

The pros: You have full control over the pricing strategy.

The cons: The cons will depend on the industry/product type and pricing tactics, as the
model itself imposes a constant generation of sales with the help of advertising and marketing
strategies. The only con we might mention here is the financial burden connected with sales
you will carry on your own.

Transaction-based revenue model examples: Nearly any company that produces and sells
its products uses this type of revenue model. Examples are Samsung, Rolls Royce, Nike,
Microsoft, Apple, Boeing, and McDonald’s, to name a few.

2. Advertisement-based revenue model

The advertisement-based revenue model is a plan with which businesses make money by
selling ad spaces. It is one of the most standard methods of producing top-line growth, and
it’s valid both for online and offline businesses. It’s often used by
websites/applications/marketplaces or any other web resource that attracts huge amounts of
traffic.

The pros. Having a high-traffic resource allows you to monetize the ad space nearly
instantly. Often, there is a strong demand for advertising space, especially with organic traffic
and platforms with the target audience.

The cons. Running advertising campaigns to gain web visibility on various platforms like
social networks is a standard marketing activity with targeting instruments more precise than
ever. However, advertisements are everywhere, so you might think twice about whether you
want to distract a user by placing an ad in your app – even if it is a secondary revenue stream.

Ad-based revenue model examples. YouTube, Instagram, Facebook, and Google are just a
few prominent examples. All these platforms generate revenue by displaying advertisements
to users and charging businesses for exposure. In addition to promotion, these platforms may
also generate revenue through other sources, such as premium subscriptions or licensing
agreements.
 3. Commission-based revenue models

A commission-based revenue model is one of the most common ways businesses make
money today. A commission is a sum of money a retailer adds to the total cost of a product or
service.

The pros: Revenue is easily predictable because of the sheer fee.

The cons: There are many problems bound to the concept of a commission, but the major
one goes to the scalability of a business that’s attached to a transaction size or volume. In
general, dependency on the product supplier’s sales makes generating revenue require upfront
investments and competitive superiority.

Commission-based revenue model examples: Airbnb is a platform that allows individuals

to list and rent their homes or apartments as short-term rentals. It generates revenue by
charging a commission on each booking made through its platform. The commission is
typically a percentage of the total booking cost and is paid by the host (property owner).
Other examples are Booking.com, Uber, Lyft, Ticketmaster, Priceline, and Upwork.

4. Markup revenue model

Markup is the type of revenue model with which you buy a product at a certain cost and then
sell it for a higher price: The difference between the two is your profit margin. This model is
often used by wholesale, retail, and service-based businesses.

For example, a wholesaler may be a bed bank — a B2B company that purchases rooms from
accommodation providers in bulk at a discounted, static price for specific dates, and sells
them to OTAs, travel agents, destination management companies, airlines, or tour operators.

Pros. Markup revenue models are straightforward, allowing businesses to easily calculate
their profit margins on each sale. With this approach, businesses can be flexible with their
pricing by adjusting the markup to reflect changes in the cost of goods or changes in market
conditions.

Cons. While markups provide a great deal of flexibility, some organizations may not have
enough resources to manage revenue and apply changes to their markup strategy based on the
market state. So they set a uniform markup for all of their products or services.
This may lead to prices being too low or too high and businesses may not be able to fully
capitalize on the value of certain products.

Markup revenue model examples. In addition to bed banks, airline consolidators leverage a
markup model to earn revenue: They are brokers that book flight seats in bulk at discount
rates and then resell them to travel agencies. Examples are Mondee, Picasso Travel, and
Centrav.
5. Affiliate revenue model

The affiliate model is similar to the commission-based model. The main difference is that,
with the affiliate model, you do not sell the product or service on your own platform, but
rather redirect the customer to the original provider's platform to make the purchase and earn
a commission on any resulting sales. An affiliate model is a contract between a supplier of a
product/service and a promoter. A promoter can be another business/media resource/blogger
that recommends a supplier’s product. The earnings will come as a percentage of sales or fees
for the number of registrations done via referral links.

Businesses utilizing the affiliate model include metasearch engines as a unique example.
Metasearch tools can be found almost everywhere. Their main difference with retailers is that
they don’t sell products directly but offer comparison and search as a value. Advertising and
affiliate programs are the main revenue models used to get earnings in this case.

The pros. Just like the advertisement-based revenue model, once you have a huge traffic
resource, you might apply for an affiliate program to earn money. This will bring you income
without any investments because you will basically generate traffic and leads for the affiliate
program provider.

The cons. Unfortunately, the percentage of affiliate programs promised to the promoter is
quite low. Sometimes it fluctuates between 1-2 percent and requires a high volume of sales
generated through your links.

Affiliate revenue model examples. Blogging and event-promoting platforms like

Broadway.com or TheaterMania generate revenue using this model. Among other examples
are Amazon affiliate websites, e.g., Cloud Living and ThisIsWhyImBroke.

6. Interest revenue model

An interest or investment revenue model relates to any type of business that generates
revenue in the form of interest on their loans or deposit payments. These are most often
banking or electronic wallet companies that work with financial operations.

The revenue is generated by making a loan to a customer or by a customer depositing or

investing money (or other resources) into the business. At the end of a return period, a
percentage of the loan sum will return as revenue. Debit/credit money provided with the bank
accounts also relates to this model. That’s just one of the ways financial companies can make
money, combining it with transaction fees for using their e-wallet/bank account.

The pros. The interest rate provides a clear view of what revenue a business will generate, as
the percentage stays unchanged until the return period is over.

The cons. The regulations of an interest rate impact both the customer and the business.
Sometimes it depends on the economic environment. Think of currency rate changes that
influence potential and existing borrowers.
Interest revenue model examples. Many banks, credit card companies, and other financial
institutions use the interest revenue model. For example, peer-to-peer lending platforms, such
as LendingClub and Prosper, generate revenue by charging interest on loans funded by
investors.

7. Donation-based or pay-what-you-want revenue models

This is a revenue model based on investments made by businesses or customers on a

voluntary basis. The product or service itself is free to use by default, so that’s the primary
value a company brings to the customer. The revenue is generated in the form of donations,
or sometimes in the form of “pay-what-you-want.”

It’s important to mention that there is a difference between a donation-based business and a
charity organization. A donation-based company is still required to pay taxes.

The pros. Because of the free access to the product, some companies manage to get
increasingly popular, resulting in donations becoming a major part of their revenue.

The cons. The model is never used on its own and the revenue generated by it remains a
secondary source because of its random/unstable nature.

Donation-based revenue model examples. AdBlock generates revenue through donations

from users who support the development and maintenance of the software. At the same time,
AdBlock offers a premium version of the software for a fee, which includes additional
features and support. Among other examples is Wikipedia which relies on donations as a
significant source of revenue. Additionally, the platform makes money through grants and
partnerships.

There are many other revenue models, and a business or project may use more than one
revenue model. It is important for businesses and projects to carefully consider their revenue
model as it can have a significant impact on the overall success of the venture.

How to choose a revenue model for your business?

Before choosing a revenue model, you need a fully developed business strategy that will
include a prepared business model with all its key instances. That means you must take a few
steps prior to selecting the revenue model.

Define your value proposition. Map out your product strategy by describing what the
product is and what value it brings to the customer. Not all products can be sold: Can you
recall the last time you upgraded your WinRAR to a full license? Also, you can analyze the
future traffic for your app to understand if you can use ads in it.

Explore the market state and customer groups. This step is to define your user persona
and understand how these users usually buy things. Some markets are inclined to purchase
just one product, some are inclined to ignore upgrades or in-app purchases. A good example
in this field is the death of music-selling platforms that were totally replaced by subscription-
based streaming services like YouTube Music, Apple Music, Spotify, and others.
Analyze competitors and their products. You’ll need to learn what mechanisms and
revenue streams your competitors use and how they manage their costs. This information will
probably show you the market’s pitfalls and dead ends.

Looking at this simple matrix below, we can analyze the capabilities and needs of your
company to help you decide the type of revenue model to use.

How to choose a revenue model framework

Depending on your business model, the product or service you’re presenting to the user is a
subject of exchange. This is your value proposition on the market, so you are in charge of
choosing what you want to get back based on the market factors, target audience, etc.

Paid value proposition. In most cases, your value proposition costs money to use. Whether
it’s a service or a software product, a customer will need to pay in some form to gain access
to your value. Your revenue model in this case will be based on transactions. So develop
pricing tactics that will depend on the nature of the product, the type of audience you’re
trying to reach, the type of deployment, specifics of product usage, etc.

Free-to-use value proposition: If the value proposition doesn’t require money to use or you
choose it to be free, then you need a third party to generate revenue for you. This could be
anything based on the previously mentioned types, whether it’s ad space or reselling.

The combination of the two will basically present you with the revenue streams that will
focus on each of the customer segments. In the case of the paid value proposition, each
pricing plan will be a separate revenue stream.