What Is a Revenue Model?
Published: October 06, 2021
Deciding how you’ll generate revenue is one of the most challenging decisions for a business to make, aside from coming up with what you’ll actually sell.
You want to ensure that you’re accounting for production costs, salaries for workers, what your consumers are willing to pay, and that you generate enough to continue business operations. You also want to make sure that your strategy fits with what you’re trying to sell.
Various revenue models will help you set your business on the right path. In this post, we’ll outline what they are and how to choose the right one for your company.
What is a revenue model?
A revenue model dictates how a business will charge customers for a product or service to generate revenue. Revenue models prioritize the most effective ways to make money based on what is offered and who pays for it.
Revenue models are not to be confused with pricing models , which is when a business considers the products’ value and target audience to establish the best possible price for what they are selling to maximize profits. Once the pricing strategy is set, the revenue model will dictate 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 you’ll get it makes it easier to predict how often it will come in.
There are various revenue models that businesses use, and we’ll cover some below.
Types of Revenue Models
Recurring revenue model.
Recurring revenue model , sometimes called the subscription revenue model, generates revenue by charging customers at specific intervals (monthly, quarterly, annually, etc.) for access to a product or service. Businesses using this model are guaranteed to receive payment at each interval so long as customers don’t cancel their plans.
Recurring Revenue Model Example
Businesses 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). Businesses you may be familiar with that use this strategy are Spotify, Amazon, and Hello Fresh.
Affiliate Revenue Model
Businesses using affiliate revenue models generate revenue through commission, as they sell items from other retailers on their site or vice versa.
Sellers work with different businesses to advertise and sell their products, tracking transactions with an affiliate link . When someone makes a purchase, the unique link notes the responsible affiliate, and commission is paid.
Affiliate Revenue Model Example
Businesses you may be familiar with that use the affiliate revenue model include Amazon affiliate links and ticket promoting services. Influencers also use this model to advertise products from businesses and entice users to purchase them through custom links.
Advertising Revenue Model
The advertising revenue model involves selling advertising space to other businesses. This space is sought after because the advertiser (who is selling the space) has high traffic and large audiences that the buyer (who is purchasing the space) wants to benefit from to give their business, product, or service visibility.
Advertising Revenue Model Example
Various types of online businesses use this model, like YouTube and Google, and so do traditional outlets like newspapers and magazines.
Sales Revenue Model
The sales revenue model states that you make money by selling goods and services to consumers, online and in person. Therefore, any business that directly sells products and services uses this model.
Sales Revenue Model Example
Clothing stores that only sell their products in a storefront or business-specific retail website use the sales revenue model as 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 as users are charged on an interval basis to use software. Businesses using this model focus on customer retention, as revenue is only guaranteed if you keep your customers. The image below is the HubSpot Marketing Hub pricing page that uses the SaaS recurring subscription model pricing.
SaaS Revenue Model Example
Businesses using this revenue model include video conferencing tool Zoom, communication platform Slack, and Adobe Suite.
How to Choose a Revenue Model
Choosing a revenue model is entirely dependent on your specific business needs and your pricing strategy.
There is no one-size-fits-all solution, and some businesses have multiple revenue streams within their revenue model. For example, if you use a recurring revenue model, you still may sell advertising space on your website to other businesses because you have a high-traffic page.
There are some key factors to keep in mind, though:
1. Understand your audience.
When picking a revenue model, the most important thing to remember is the target market and audience your pricing strategy has identified. You want to understand their pain points and what model makes the most sense for charging them.
For example, if you’re a service that sells meal kits, your target audience is likely busy and wants the convenience of food that is set up and easy to make after a long day. Using the recurring revenue model makes sense, as you’ll automatically charge them on an interval basis, and they won’t have to remember to submit payment — speaking directly to their desire for convenience .
2. Understand your product or service.
It’s also essential to have an in-depth understanding of your product or service and how your audience will use it. For example, if you sell shoes, your audience likely won’t need a new pair every month, so it may make sense to go with the Sales Revenue Model. Instead, your customers can come to you directly every time they need a new pair.
Choose the Model That Best Fits Your Needs
Ultimately, choosing a revenue model is centered around understanding what makes the most sense for what you’re selling and what makes the most sense (and will be most convenient) for the audiences you’re targeting.
Take time to develop your pricing strategy, choose a revenue model aligned with it, and begin generating revenue.
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Revenue Model: Understanding its Structure and Role in Business Success
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Revenue Model Definition
A revenue model is a strategic framework that outlines the methods a business uses to generate income from its products, services, or content. It is an integral part of a company’s business model, providing insight into the monetization strategy and the process by which the company turns its products or services into profits.
Types of Revenue Models
Starting with the Sales Revenue Model , it primarily revolves around selling either tangible goods or intangible services directly to customers. The revenue is generated through the pricing of these goods or services, and often includes a mark-up on the cost of production. A typical example is retail businesses, where the customer pays to acquire a product.
The License/Fee Revenue Model is mainly used by companies that create software or other types of proprietary technology. Here, users must pay a license or fee in order to legally utilize the product or service. This fee might be a one-time charge, or it could be a recurring cost, such as a yearly license renewal.
Next, is the Subscription Revenue Model , which involves charging customers a recurring fee to access a product or service. This model is typically used by media outlets, software as a service (SaaS) companies, and fitness clubs among others. The defining feature of this model is the continuous payment plan, providing a predictable and steady income stream to the companies.
Then, there’s the Transaction Fee Model that involves earning revenue from every transaction facilitated by a company’s platform. This model is often utilized by payment processors, online marketplaces, or auction sites where the company levies a charge on the transferring parties as a fee for their service.
Finally, the Advertising Revenue Model generates earnings through selling advertising space. Companies that have high levels of website traffic or strong media presence can benefit from this model, charging other businesses or entities for visibility on their platforms, such as search engines and social media sites.
Additionally, there are other revenue models including Freemium , where basic services are offered for free, while more advanced features need to be paid for, and Affiliate Marketing , wherein a company receives a commission for referring new customers to another business.
These are broad categories that form the majority of revenue models. Each model has its unique characteristics that make it suitable for specific types of businesses. It’s also important to note that the chosen revenue model must align with the overall business model and strategy in order to be truly effective.
Choosing the Right Revenue Model
As any effective business strategy puts the customer at its core, understanding your customer’s preferences is a critical factor when deciding on your revenue model. Consider what forms of payment your customers are most comfortable with or what payment structures align with their purchasing behavior. For instance, if you’re selling high-cost items, customers may prefer installment payments to a one-off large payment, suggesting a subscription model may work best.
The nature of your product or service also plays an integral role in shaping your revenue model. For example, if your product is a one-time purchase, a direct sales model may be the best fit. However, if your product entails regular updates or maintenance, a subscription model could be more appropriate. The goal is to choose a revenue model that aligns with the way customers use your product.
While innovation is a key driver of business success, it’s also essential to recognize the importance of industry norms. Analyze the revenue models of successful competitors in your industry. Doing so can provide useful insights and help you avoid pitfalls. It’s also vital to understand what your customers will expect based on general industry standards.
The chosen revenue model must align with your company’s strategic objectives. If your goal is rapid growth, for instance, you may want to consider a freemium model to attract a large user base quickly. Conversely, if your focus is on long-term customer relationships, a subscription model might be preferable due to its ability to provide ongoing value and foster stronger customer relationships. Remember, what works for one company may not work for yours. It’s vital to consider your unique situation and goals.
Revenue Model and Business Strategy
Understanding the importance of an agreement between a firm’s revenue model and its overall business strategy is an integral part of any successful business management. The revenue model, providing a blueprint of income generation, should ideally fall in line with the strategy designed to navigate the company towards its long-term objectives.
Interplay Between Revenue Model and Business Strategy
The impact of this alignment is far-reaching and touches virtually every aspect of the company’s operations. Being in sync means the company’s financial resources are directed towards the said strategy in a manner that optimizes revenue generation and profit margins. The revenue model acts as the driving force that propels the strategic decisions of top management.
Impact on Financial Performance
A well-aligned business strategy and revenue model can significantly improve a company’s financial performance. For instance, if a firm’s strategy revolves around market penetration and the revenue model is focused on low price, high turnover – there’s harmony. This congruence prompts cost efficiencies, maximizes revenues, and enhances financial performance.
Influence on Competitiveness
Competition in any industry is intense. Firms that fail to align the revenue model with the business strategy could lose competitive edge. If the strategy is to offer unique, high-quality products but the revenue model is based on volume sales, the discord creates inefficiencies; potentially leading to quality compromise or reduced profitability. Ensuring alignment bolsters the firm’s ability to fulfill its value proposition and uphold its competitive position.
Sustainability and Long-Term Success
In the long run, a company’s sustainability hinges heavily on the synergistic working of the revenue model and business strategy. An organization must consistently innovate and update both to keep pace with market evolution. A well-crafted strategy ensures a company stays relevant and valuable to its customers, and a supporting revenue model, tuned to the strategy, enables the company to reap financial benefits of this relevance – a foundation of business sustainability.
Thus, the intertwined fate of the revenue model and business strategy cannot be overlooked – it forms a critical cornerstone of the entire economic structure of a competitive firm.
Revenue Model in a Digital Economy
Focusing on the digital economy, businesses face a unique set of challenges and opportunities when deciding upon a revenue model. The dynamics of business operations have significantly changed due to digitization, thus impacting how companies garner their earnings.
Challenges in a Digital Economy
The digital economy is characterized by its fluid nature and fast-paced changes, which can make it challenging for firms to select an appropriate revenue model. Identifying the right pricing strategy can become complex with several options at disposal, such as freemium, pay-per-use, subscription, and others. Furthermore, managing digital goods with almost-zero replication and distribution costs can also confuse traditional pricing notions.
Digital businesses face high customer acquisition costs owing to increasing competition. The challenge here is not just to acquire but to retain these customers, derived from providing consistent value. It becomes paramount to understand customer behavior, preferences, and willingness to pay, which demands substantial time and resources. Also, the global nature of the digital economy requires businesses to consider diverse regulations, tax implications, and currency exchanges in their revenue model.
Opportunities in a Digital Economy
While it comes with its challenges, the digital economy offers vast opportunities for businesses to morph their revenue models creatively. Companies can monetize their offerings in multiple ways – digital ads, commission structure, direct sales, or a blend of these. The global reach of online platforms offers an expanded customer base, increasing potential revenue streams.
The increasing tendency of customers towards subscription services presents another opportunity. As per a report, the subscription e-commerce market has grown by over 100% a year in the last five years. Companies can take advantage of this trend by establishing a recurring revenue model, ensuring dependable income flow.
Similarly, digital content consumption is at an all-time high. Businesses can tap into this trend by adopting an ad-based or a freemium model, wherein users can access content for free, but additional features or ad-free access would come with a fee.
In conclusion, defining a revenue model in the rapidly evolving digital economy presents a fascinating mix of challenges and opportunities. With careful consideration, businesses can select a revenue model that aligns best with their strategic goals, the nature of their offering, and their customer preferences. Staying abreast of trends such as growing preference for subscription and high digital content consumption can guide companies in this process
Revenue Model and Price Determination
The critical role of a revenue model resides in its capacity to establish a connection between product or service price and the value that the customer perceives. Essentially, the model helps to identify and define the approach for charging for a product or service, which significantly influences the customer’s impression of the product’s worth.
Customer Perception of Value
The choice of revenue model plays a significant role in consumer perception. For instance, a subscription model may create an impression of long-term value; the customer is investing in the benefits derived over a period, be it monthly, quarterly, or annually. In contrast, a pay-per-use model emphasizes an immediate return on investment, with each usage perceived as a unique value point. Thus, the revenue model can directly shape how attractive the product appears to the customer, impacting their willingness to pay and influencing their perceived value.
Implicate on Demand
Once the revenue model shapes the customer’s perceived value, demand for the product or service inevitably follows. A revenue model that successfully convinces customers of tangible benefits, whether short-term or long-term, will spur them towards consumption, thus driving up demand. Conversely, a model that fails to do so will struggle to generate interest, let alone demand.
Influence on Firm Profitability
Ultimately, the profitability of the firm rests heavily upon the revenue model chosen. An effective revenue model results in a strong relationship between the price of a product or service and consumer’s perceived value. This relationship directly impacts demand, revenue inflows, and subsequently, profitability.
Price determination is a complex process involving operational costs, market conditions, competition, and margins. The revenue model is critical as it gives strategic direction in setting the price. For instance, a freemium model may permit lower initial prices (or even free services) to attract customers, with revenues generated from subsequent upgrades or premium services. By influencing the price, the model also has indirect control over profitability, thus underscoring its importance.
In sum, the revenue model serves as a vital link between price, customer value perception, demand, and profitability. The choice and execution of the model play a defining role in a firm’s success.
Revenue Model Adaptation and Evolution
The ability for a firm to skillfully adapt its revenue model to changing circumstances is an often underappreciated key to success. The market dynamics do not remain static; they are in a constant state of flux. Changes in consumer behavior, emerging market trends, and fluctuations in the economic landscape necessitate continuous updates to retain relevance and maintain profitability.
Alterations following Market Dynamics
Consequently, the need to adapt the revenue model becomes quintessential in response to shifting market dynamics. A firm may find itself in a situation where its current offerings no longer resonate with its customer base. Alternatively, an entirely new market segment may emerge due to societal changes or shifts in demand. Adapting the revenue model in these instances could involve diversifying the product portfolio, price adjustment, tapping into new distribution channels, among others. A failure to do so could mean a significant drop in revenues, or worse, risks obsolescence.
The rapid pace of technological advancements also challenge firms to constantly revamp their revenue models. For instance, companies that relied heavily on brick-and-mortar stores have had to rethink their strategies due to the surge in e-commerce and digital based transactions. These companies have had to adjust by integrating elements of subscriptions, advertising and transaction fees, leveraging digital platforms’ versatility.
Navigating Competitive Pressures
Robust competition also frequently necessitates the modification of revenue models. Competitors may introduce a disruptive innovation or a highly effective go-to-market strategy that necessitates a reaction. In extreme cases, a competitor’s action may challenge the viability of a firm’s core business model, necessitating a broader strategic shift.
Although this process can seem daunting, it is critical to remember that the successful adaptation of a revenue model can often lead to periods of increased growth and profitability. By staying abreast of market dynamics, harnessing the power of technological advancements, and carefully navigating competitive pressures, firms not only survive but thrive amidst changes.
Impact of Revenue Model on Stakeholders
The revenue model of a company holds significant implications for various stakeholders. These stakeholders include investors, employees, customers, and society at large.
Impact on Investors
Investors, both potential and existing ones, base their decision to invest on a company’s revenue model. A robust and sustainable revenue model suggests that the company can generate consistent income, creating a level of security for investors. Conversely, a weak or unpredictable revenue model can be a red flag, dissuading potential investors and worrying those who have already invested.
Impact on Employees
The revenue model also impacts an organization’s employees. The resolution of an organization to ensure stability and profitability directly impacts the job security of its employees. Moreover, organizations that generate substantial revenue are in a position to offer benefits, competitive salaries, and growth opportunities, thereby fostering a stable and conducive work environment.
Impact on Customers
Customers are also significant stakeholders. An organization’s revenue model can influence the price of products or services, the quality delivered, and even the level of customer service received. A company operating on a freemium model, for instance, may offer basic services at no cost to the consumer, while offering more advanced or specialized features at a premium. This availability and price variation can affect a customer’s purchasing decisions.
Impact on Society
On a broader scale, companies and their revenue models can have significant societal impacts. For instance, a firm with high revenue and profitability may contribute to economic growth through taxes, job creation, and local investments. On the downside, businesses with a single-minded pursuit of revenue may make decisions that are detrimental to the environment or society at large, such as unsafe labor practices, pollution, or causing local gentrification.
Role of CSR in Revenue Model Formulation
The increasing significance of Corporate Social Responsibility (CSR) also plays a key role in shaping the revenue model of a firm. Companies are not just expected to make a profit, but to do so in a manner that is ethically sound and socially responsible. Firms are acknowledging that aligning their revenue models with their social responsibility goals can boost their reputation and customer base and ultimately contribute to long-term revenue growth. For instance, many companies are shifting towards a shared value model, where they create revenue-making business models that also have positive societal impacts.
In conclusion, the revenue model can influence multiple facets of a business and its interactions with its stakeholders. As businesses grow and evolve, understanding these impacts is of paramount importance.
Revenue Model Risks and Mitigation
Businesses often face the risk of changes in regulatory requirements, which can significantly impact the existing revenue model. For instance, new laws may prohibit certain practices, or impose additional costs that may undermine the revenue model’s viability. Therefore, businesses need to be proactively aware of any impending regulatory changes, and devise strategies to adapt their revenue models accordingly. This could involve lobbying against proposed laws, researching alternative practices, or re-strategising their revenue model for compliance with the new regulations.
Revenue models are also susceptible to threats from market volatility. Changes in customer requirements, economic downturns, or competitive displacement can destabilize the revenue model. Therefore, to mitigate the impact of market dynamics, businesses should diversify their revenue streams. Diversification results in reduced vulnerability to changes in any one market domain. In addition, businesses should frequently reassess market conditions and adjust their strategies accordingly.
In today’s rapidly evolving technological landscape, technological invention or innovation can disrupt established revenue models. A novel technology might render a company’s offering obsolete or introduce more cost-effective substitutes. To mitigate this risk, companies should continuously invest in research and development, periodically update their products or services, and adapt their revenue models to harness new technologies.
Customers are at the core of any revenue model. Therefore, a decrease in customer retention can have a detrimental impact on the revenue model. This could result from several factors, ranging from poor product quality to weak customer relationships. Businesses must focus on customer satisfaction and maintain avenues for customer feedback to mitigate this risk. Striving to create a strong customer experience can help increase customer retention and ensure the stability of the revenue model.
In any industry, there are always threats posed by existing and new competitors. If competitors offer better products, lower prices, or improved customer experience, they can shrink a firm’s customer base. Businesses need to continuously innovate and improve their value proposition to withstand this pressure. Regular market research, competitor analysis, and agile adaptation can enable businesses to stay ahead of the competition.
Risk management forms a crucial part of maintaining a robust revenue model. By identifying and strategically mitigating these potential risks, businesses can ensure the stability and resilience of their revenue model.
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Revenue models: 11 types and how to pick the right one
Finding the right revenue model for your company and products is an incredibly important part of starting and expanding your business. It's a key part of building a brand. Explore popular revenue models and how to choose the right one.
What is a revenue model?
- 11 different types of revenue models
Costs associated with revenue models
- How to choose your revenue model
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In one of the most famous lines from the 1941 classic Citizen Kane , Mr. Bernstein proclaims: “ It's no trick to make an awful lot of money... if what you want is to do is make a lot of money .” If only that statement were as true as it seemed. It's probably more accurate to say, “There are a lot of ways to make a lot of money.”
That’s particularly true for software businesses, with the rise of the mobile internet stimulating an explosion in the number of viable revenue models. Choosing which revenue model works best for your SaaS business, though, is not easy (even if that's all you want to do is choose a revenue model for your SaaS business). Your choice will help determine your sales strategy , and from there the growth rates, the amount of money you’ll need to invest initially, and the kind of relationship you’re likely to build with your customers. More than that — the choice determines the future of your business. Let’s take a look at some of the most popular revenue models used today — why they’re popular, why they work, and why they will (or won’t) work for you.
A revenue model is the income generating framework that is part of a company’s business model. Common revenue models include subscription, licensing and markup. The revenue model helps businesses determine their revenue generation strategies such as: which revenue source to prioritize, understanding target customers, and how to price their products.
Revenue models often get conflated with revenue streams, probably because each is a single revenue generation source. They are also confused with business models, of which revenue models are a part. Revenue models help business owners determine how to manage their revenue streams and are required to complete a business model.
Without a considered revenue model, your business will incur costs it cannot sustain. With a revenue model, you can set, track, and forecast business growth based on specific customer segments.
11 different types of revenue models
There is no such thing as a perfect revenue model, but the popularity of some of the methods below suggests that many of them are well-tailored for the current state of the market. Here we’ll walk through each type of revenue model and when they may be most beneficial and applicable.
The subscription model is the “vanilla” SaaS revenue model, not that there’s anything boring about a well-worked subscription plan. Businesses charge a customer every month or year for use of a product or service. All revenue is deferred and then fulfilled in installments. The subscription model is perhaps the most popular among SaaS companies because of its versatility, promise of recurring revenue , and high value:customer lifetime balance. Done right it's a one-way-ticket to sustainable growth .
Companies working with recurring revenue models, such as subscription or licensing , see more value from a customer across a given customer lifetime. Being able to offer a variety of value options means your company can respond to more than one set of customer needs, expanding your appeal. Hubstaff’s subscription plan, seen below, is a classic of the genre:
Hubstaff’s various plans are distinct from one another in price and feature. This flexibility in the subscription model means that tentative or lower-budgeted customers can still get what they need, all the while maintaining visibility of what extra they could get for a few dollars more a month.
The freemium model is often described as a subscription revenue model, but in fact it’s an acquisition model, not a revenue model. Freemium involves giving users free access to an app and then selling subscriptions for a premium tier that includes more features.
Markup is a very common revenue model for buyer companies (i.e., companies that buy the products they sell). It’s as simple as can be: Take the cost of goods you just bought, mark it up X%, and make a profit margin on the original purchase. There are various subgenres of the markup model, including the following:
- Wholesale: Sale of goods or merchandise to retailers, business users, or other wholesalers
- Retail: Identification of demand, and satisfaction of it through a supply chain via a number of possible outlets, including physical and ecommercial ones
Markup is particularly used by mediators like ecommerce marketplaces — Amazon, for example. On average, Amazon charges a seller who uses their site 15% of the sale, plus FBA fees (including storage, pick & pack, shipping).
One of the most enduring legacies of SaaS in the world of business is the introduction of pay-per-user (PPU). It involves giving a customer potentially unlimited to access to a range of features while charging them only for the services they use. At the dawn of SaaS, as the software required no physical delivery and deployed so quickly and cheaply, PPU appeared to be the most sensible revenue model. However, as natural as it seemed back in the day, pay-per-user is not popular anymore. Ascribing value to your product is one of the key considerations of your revenue model, and that includes demonstrating why it’s worth your target customers’ valuable dollars, not just making everything so cheap and easy that they can’t refuse. The issue with PPU, then, is that it’s rarely where value is ascribed to your product. Moreover, PPU kills your Monthly Active User metric. The per-user metric is not the most useful to customers in terms of deriving value — its take-it-or-leave-it approach actively works against your Daily Active Users number, and thus contributes to your churn rate.
As evidenced by the rise and rise of Kickstarter - and Patreon -based ventures, altruism is, if unpredictable, a pretty effective revenue model by itself. Relying on the donations of regular users is a common revenue model for nonprofits, online media (i.e., YouTubers) and independent news outlets.
What is affiliate marketing ? This new, popular model works by promoting referral links to relevant products and collecting commission on any subsequent sales of those products. Leverage your product’s synergy with another product in an adjacent space and you both stand to gain. The affiliate model can be as simple as including in an article an outlink to a book or other product mentioned or offering your customers specialized recommendations relative to purchase history (again, Amazon is a master of this art). Some companies, such as Etsy, even have a specific program for their affiliates, where other companies can earn a commission on qualifying sales that result from featuring links to Etsy products and services. The affiliate revenue model is increasingly popular, owing to the way it dovetails effectively with other revenue models, particularly ad-based models.
Applicable mainly to sellers or marketplace-oriented companies, the arbitrage revenue model uses the price difference in two different markets of the same good/service to make a profit. You buy in one market (a security/currency/commodity) and simultaneously sell in another market, at a higher price, what you just bought, pocketing the temporary price difference. Arbitrage is popular with affiliate marketers , as well as with many cryptocurrency firms, SFOX being a prime example.
This transactional revenue model involves a middleman charging commission for each transaction it handles between two parties or for any lead it provides to the other party. It’s particularly popular with online marketplaces and aggregators, as well as businesses like independent music distributors. It’s particularly easy to get up and running with a commission-based business model because you’re working off of existing products. However, unless your field is well-conditioned for a monopoly, and unless your company is (or can become) that monopoly, you’ll find the commission model very tough to scale .
10. Data Sales
Ever heard the phrase, “If you can’t see how the money’s made, you’re the product”? That’s data-selling in action. Many companies selling digital goods and services could not exist without core underlying data assets. In the data sale revenue model, this data is sold directly to a consumer or business customer. While certain companies will use data sale as their primary revenue model, the use of data sales to augment another revenue model is virtually ubiquitous. While some are using it as an entrepreneurial venture , it is also the subject of considerable justified public concern and should be handled with care in the event you decide to go with it as your revenue model.
11. Web/Direct Sales
The old-fashioned revenue model made new, web sales and direct sales involve payment for goods or services through a digital medium. Web sales involve a customer finding your product via outbound marketing (or a web search) and can used for software, hardware, and subscription-based offerings. Direct sales revolve around inbound marketing and is good for handling multiple buyers and influencers in big-ticket markets.
A good revenue model is not just about squeezing as much revenue possible out of a sales cycle; it’s also about balancing your ambitions in the market with your resourcing requirements. A startup revenue model may be significantly different than one for an established business because their resources are vastly different. When choosing your model, factoring in costs is paramount to ensure profitability.
Cost of revenue
The first cost you’ll be likely to factor in is your cost of goods — how much it costs to produce the goods or service that you then sell. For hardware, this can comprise testing and manufacture; for software, it’ll include the whole development cycle. Regardless of what you produce, administrative overheads will also apply. You will find cost of goods a considerably less comprehensive metric than cost of revenue, which is the total cost of manufacturing and delivering a product or service to consumers. That includes everything we’ve just covered, plus distribution and marketing costs. Cost of revenue is more often used in SaaS and other service-oriented industries because it makes the many costs incurred outside of production in SaaS easier to track.
Prototyping is a fundamental aspect of any production cycle and, unfortunately, is one of the most expensive. While testing prototypes or beta versions of your new product, even the smallest revisions can necessitate costly changes to your production/development process. This usually comprises a base-level cost, plus iteration costs on top of that. When forecasting prototyping costs, it’s wise to plan for several iterations; it’s highly unlikely you’ll get everything right the first time around, especially if your product is innovative or is composed of a number of features.
One of the beautiful things about being a SaaS company is that there are no production lines to run. Nevertheless, equipment costs still factor into the bottom line. Firmware, app development tools , server rental, plus any other administrative services bought on subscription (e.g. Slack or Hubstaff) will play a part in your equipment costs, but, generally, equipment costs should be the easiest of all to forecast.
An underpaid workforce is an unhappy workforce (if it’s a workforce at all); wage costs come out of your bottom line. Based on the interaction of salary and commission in your compensation plan , as well as the type of commission you offer (entirely open-ended or capped? Will there be accelerators/decelerators involved?), you will have to plan for your expenditure on labor costs differently.
Advertising & marketing costs
Your advertising and marketing costs will be determined by the following:
- The size of your respective advertising and marketing teams
- The scale of exposure you’re shooting for
- Your method of approach to advertising and marketing: undefinedundefinedundefined
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Your revenue model is unique
So many revenue sources, so many revenue models, so little time. There are some fundamental differences between revenue models. For instance, if you’re a SaaS company producing your own software product, you’re unlikely to get all that far with an arbitrage model. Likewise, if your product is a medium or if you’re a seller, a subscription-based revenue model won’t do the trick. A product with a high ceiling for potential revenue is not best served by a donation model. Nevertheless, the choice of a main revenue model out of the batch that do work for your product, and how you then combine them with appropriate aspects of other models, is yours, and yours only. Your product and the market should be in mind at all times while you’re settling on, adding to, and refining your model. After that, bringing in the revenue itself should be as easy as Citizen Kane said.
What Is A Revenue Model? – Components & Types
Entrepreneurs spend months designing and planning how their business model will work and create value in the market.
This business model is made up of components – the value created; the operating model , which specifies how the business works and operates; and the revenue model, which specifies how the business makes money and how much does it spends in doing so.
While the operational blueprint is important for the business, a blueprint of the revenue model is equally important as it decides the feasibility and long-term projections of the business by stating its money-making process.
But what is revenue model and why is it important?
Let’s find out.
What is a Revenue Model?
A revenue model is a conceptual structure that states and explains the revenue earning strategy of the business. It includes the offerings of value, the revenue generation techniques, the revenue sources, and the target consumer of the product offered.
Revenue can be generated from a myriad of sources, can be in the form of commission, markup, arbitrage, rent, bids, etc. and can include recurring payments or just a one-time payment. A revenue model is that part of the business model that includes every aspect of the revenue generation strategy of the business.
A revenue model is how a business makes money.
A revenue model is important for the company’s long-term business projections as it gives an overview of the company’s current and future potential to earn profits.
Importance Of A Defined Revenue Model
The revenue model is just like a fuel system to a car. While the engine or the operating model is a necessity, a car cannot move for long if its fuel system is damaged.
Hence, a well-defined revenue model is important for any business to –
- Operate and expand
- Remain in the market for long
- Make profits
Components of a revenue model
Revenue model forms an integral part of the business model covering the financial aspect of the business. It has two major components –
- Revenue streams: This includes all the direct and indirect streams that brings in revenue to the business.
- Cost structure: It includes all the fixed and variable expenses that the business incurs to do its operations and generate revenue.
In simple terms, a revenue model elaborates on how the business makes money and how much does it spends to make so, indicating the profits it makes or intends to make.
Types of Revenue Models
With the advent of the internet, the revenue models of many companies now include countless income sources from the digital world. Nevertheless, all of the income sources, whether online or offline, can be confined to 10 types of revenue models on the basis of revenue source
Markup is the most common and oldest revenue model seen among the businesses. It involves setting up the selling price of the good by adding profits and overhead charges to its cost price. This revenue model is common among retailers , wholesalers , etc. who act as middlemen and buy the products from manufacturers/other parties before selling it to others.
However, manufacturers also use markup model to earn money by selling the good at a price which includes profits over and above the cost involved in manufacturing it.
Arbitrage revenue model makes use of the price difference in two different markets of the same good. It involves buying security, currency, and/or commodity in one market and simultaneously selling the same in another market at a higher price and making profits from the temporary price difference .
Licencing revenue model is common among inventors, creators, and intellectual property owners which grant a license to use their name, products or services at a predetermined or recurring cost. The revenue model is common among many software companies and legally protected intellectual property (patents, trademarks, copyrights) owners which grant a license limited by time, territory, distribution, volume, etc. to anyone who fulfils their requirements and pays for it.
A commission revenue earning model is a type of transactional revenue model where a party charges commission for every transaction/action it mediates between two parties or any lead it provides to the other party. It is one of the most common revenue earning strategy among the online marketplaces and aggregators where they provide a platform for selling items digitally and charge a commission as a percentage or fixed price on every item sold.
Affiliates , brokers, and auctioneers are also seen working on a commission-based revenue model.
Rent/Lease revenue model is common where a physical asset is involved. This revenue earning strategy involves recurring (rent) or one time (lease) payment for temporary use of the asset.
A subscription model is a great example of recurring revenue strategy. This is a common strategy among SAAS, entertainment services, and online hosting companies like Netflix , Youtube etc. where they provide the specified service for a pre-determined periodic cost.
An advertising revenue model is usually adopted by media houses and information providers which usually earn money by including advertisements in the content provided. This revenue model is widespread in both offline and online businesses and the company makes money by charging the advertiser: per size of the space offered, thousand impressions or per click on the advertisement.
Unlike other service-based models, a fee-for-service model charges the customers for the type of and times the service is provided. This is pay-as-you-go or pay-per-usage revenue model where the customer pays only for the services he actually used. This revenue model is common in telecom and cloud-based services industries.
An interest-based revenue strategy or an investment based revenue strategy is common among banks. Banks usually generate revenue in the form of interest on their offerings (loans).
Many companies provide their products and services free of cost and rely totally on donations paid to them by their customers. These companies hardly make any profits as donations usually cover only their operating costs. Wikipedia is one such company which relies on donations.
Symmetric Vs Asymmetric Revenue Models
Symmetric revenue model.
In symmetric revenue models, the user of the business’s offering is also the customer who pays for it. Generally, this model involves a single sided flow of offering and money – offering from the business to the customer and money from the customer to the business.
For example, a retailer charges a markup on every good sold to the customer, or an agent charges brokerage for every deal made on behalf of the client. The flow of this revenue model is simple and direct where only two parties are involved – business and the customer.
Asymmetric Revenue Model
In asymmetric revenue models, the user of the business’s offering is not the customer who pays for it. This company uses a two-fold revenue model where it monetises the data provided by its offering’s users and sells the same to another customer segment.
For example, Facebook users don’t pay for the service they use. But the company earns its revenue from advertisements where the data of the users is provided to the advertisers to target ad in a better way.
Go On, Tell Us What You Think!
Did we miss something? Come on! Tell us what you think about our article on revenue model in the comments section.
A startup consultant, digital marketer, traveller, and philomath. Aashish has worked with over 20 startups and successfully helped them ideate, raise money, and succeed. When not working, he can be found hiking, camping, and stargazing.
Revenue Model Types in Software Business: Examples and Model Choice
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- Last updated: 28 Dec, 2022
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Here's our video breakdown of revenue models
What is a revenue model?
Revenue model vs business model.
- What value will we create?
- How will we deliver it?
- How will we bring in revenue?
- How will we earn profit?
A business model canvas template by AltexSoft
Revenue model vs revenue stream
Revenue model types, transaction-based revenue model, advertisement-based revenue model, commission-based revenue models.
- flat rate, a fixed sum of money for any type of transaction, e.g., a $450/300/1500 transaction is charged with a $20 commission;
- percent of transaction size, e.g., a $100 transaction is charged with a 10 percent commission – $10; or
- tiered commission, a percent or flat rate that grows based on the transaction volume, e.g., 50,000 transactions are charged a 4 percent commission, 150,000 transactions a 7 percent commission.
Markup revenue model
Affiliate revenue model, interest revenue model, donation-based or pay-what-you-want revenue models, how to choose a revenue model for your business.
How to choose a revenue model framewor k
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Business Model versus Revenue Model - what is the difference?
Be it in pitches or meetings - the terms "business model" and "revenue model" are often used synonymously, there is no clear delimitation. The terms apple and apple seed behave like this. You can find out why this is the case in this article.
A definition: business model vs. business model
A business model describes, in a model-like and holistic manner, the logical connections and the way in which a company generates value for its customers. A company can operate several business models at the same time.
A revenue model describes the structure of how a company generates revenue or income. Each customer segment can contain one or more revenue streams.
Difference between business model and revenue model
The business model describes how a company generates value.
The Revenue Model describes how a company generates revenue from the value it has generated for customers.
The Revenue Model is therefore an important component of the business model.
The difference can be illustrated by the individual components of a business model. In essence, four factors describe a business model:
- WHO are the target customers (segments, relationships)?
- WHAT is the benefit that a company provides to its customers and most important partners in the value chain (value promise or value proposition)?
- HOW does the company deliver this benefit (partners, activities, resources)
- HOW does the company earn money (revenue model or revenue structure)?
A comprehensive concept for describing business models is the Business Model Canvas. It allows a high degree of complexity in terms of describing the functioning of a company using nine basic building blocks. These cover the company's four most important areas. The HOW € section illustrates the revenue model and cost structure as part of the business model.
Business Model versus Revenue Model using the example of Uber
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?
- Basic fare plus surcharges: The price of the journeys consists of a basic fare (€1-€4) plus an amount per kilometre (€0.65 - €1.50) plus an amount per minute (€0.25 - €0.40).
- Different price models: The price differences in base price and surcharge result from different price models. For example, the three variants UberBlack, UberX and UberVan are offered for taxi service. In addition, there are further services such as UberEATS, UberCargo, UberRideshare, Uber for Business, Uber Freight, etc.
- Surge pricing: If there is a high demand for journeys, the price dynamics will gradually increase the fares.
- Fee for use: 20 percent of the fare goes to Uber
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. Here is an overview of the Business Model, including Revenue Model, based on the Business Model Canvas:
Business model innovation versus revenue model innovation
As described above, a business model consists of four key components that are closely related to each other. Therefore, the change in one component often leads to changes in other components. A change or innovation of the revenue model can thus influence and change the entire business model of a company.
#1 Change Business Model
A very good example of how changes in the earnings model can affect the entire company is Hilti's business model innovation. Instead of selling expensive machines, it was based on charging the customer for the equipment, including maintenance, based on usage. The high one-off payment was replaced by regular but smaller turnovers. This change ultimately led to a change in Hilti's business model.
#2 Change Revenue Model
The telecommunications industry provides an example of revenue model innovation with no significant impact on other components of the business model: The original revenue model was based on a fixed amount that had to be paid approximately two months in advance. The remaining amount for a certain period of time was collected by direct debit. As this procedure was risky, a comprehensive credit and receivables management system was developed to check the creditworthiness of customers.
However, this automatically excluded large customer groups such as young people. In order to tap into these customer groups, the earnings model was innovated: customers no longer pay a basic fee and there are no more invoices. The customer pays an amount in advance, which he can then telephone - the prepaid card was born.
Conclusion: Business Model versus Revenue Model
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.”
Alok Keyrival, Digital entrepreneur
More articles, 3 mistakes that make every innovation strategy fail, house of innovation: this is how ceos make their company innovative, open innovation vs. closed innovation, innovation management: this is how to fill the idea funnel for numerous innovations, how corporate venture building makes established companies more innovative, what is innovation culture, 4 reasons why innovations fail, innovation culture - enabler or killer for innovation, 3 successful recipes for a failing culture of innovation, 7 success factors for the introduction of innovation management.
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What Is Revenue?
- Formula and Calculation
Revenue vs. Income/Profit
- Revenue FAQs
- Corporate Finance
- Financial Statements
Revenue Definition, Formula, Calculation, and Examples
Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.
Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.
Revenue is the money generated from normal business operations, calculated as the average sales price times the number of units sold. It is the top line (or gross income) figure from which costs are subtracted to determine net income. Revenue is also known as sales on the income statement .
- Revenue, often referred to as sales or the top line, is the money received from normal business operations.
- Operating income is revenue (from the sale of goods or services) less operating expenses.
- Non-operating income is infrequent or nonrecurring income derived from secondary sources (e.g., lawsuit proceeds).
- Non-business entities such as governments, nonprofits, or individuals also report revenue, though calculations and sources for each differ.
- Revenue is only sale proceeds, while income or profit incorporate the expenses to generate revenue and report the net (not gross) earnings.
Investopedia / Matthew Collins
Revenue is money brought into a company by its business activities. There are different ways to calculate revenue, depending on the accounting method employed. Accrual accounting will include sales made on credit as revenue for goods or services delivered to the customer. Under certain rules, revenue is recognized even if payment has not yet been received.
It is necessary to check the cash flow statement to assess how efficiently a company collects money owed. Cash accounting , on the other hand, will only count sales as revenue when payment is received. Cash paid to a company is known as a "receipt." It is possible to have receipts without revenue. For example, if the customer paid in advance for a service not yet rendered or undelivered goods, this activity leads to a receipt but not revenue.
Revenue is known as the top line because it appears first on a company's income statement. Net income, also known as the bottom line, is revenues minus expenses. There is a profit when revenues exceed expenses.
To increase profit, and hence earnings per share (EPS) for its shareholders, a company increases revenues and/or reduces expenses. Investors often consider a company's revenue and net income separately to determine the health of a business. Net income can grow while revenues remain stagnant because of cost-cutting.
Such a situation does not bode well for a company's long-term growth. When public companies report their quarterly earnings , two figures that receive a lot of attention are revenues and EPS. A company beating or missing analysts' revenue and earnings per share expectations can often move a stock's price.
Revenue may also be referred to as sales and is used in the price-to-sales (P/S) ratio —an alternative to the price-to-earnings (P/E) ratio that uses revenue in the denominator.
Types of Revenue
A company's revenue may be subdivided according to the divisions that generate it. For example, Toyota Motor Corporation may classify revenue across each type of vehicle. Alternatively, it can choose to group revenue by car type (i.e. compact vs. truck).
A company may also distinguish revenue between tangible and intangible product lines. For example, Apple products include iPad, Apple Watch, and Apple TV. Alternatively, Apple may be interested in separately analyzing its Apple Music, Apple TV+, or iCloud services.
Revenue can be divided into operating revenue —sales from a company's core business—and non-operating revenue which is derived from secondary sources. As these non-operating revenue sources are often unpredictable or nonrecurring, they can be referred to as one-time events or gains. For example, proceeds from the sale of an asset, a windfall from investments, or money awarded through litigation are non-operating revenue.
Formula and Calculation of Revenue
The formula and calculation of revenue will vary across companies, industries, and sectors. A service company will have a different formula than a retailer, while a company that does not accept returns may have different calculations than companies with return periods. Broadly speaking, the formula to calculate net revenue is:
Net Revenue = (Quantity Sold * Unit Price) - Discounts - Allowances - Returns
The main component of revenue is the quantity sold multiplied by the price. For a service company, this is the number of service hours multiplied by the billable service rate. For a retailer, this is the number of goods sold multiplied by the sales price.
The obvious constraint with this formula is a company that has a diversified product line. For example, Apple can sell a MacBook, iPhone, and iPad, each for a different price. Therefore, the net revenue formula should be calculated for each product or service, then added together to get a company's total revenue.
There are several components that reduce revenue reported on a company's financial statements in accordance to accounting guidelines. Discounts on the price offered, allowances awarded to customers, or product returns are subtracted from the total amount collected. Note that some components (i.e. discounts) should only be subtracted if the unit price used in the earlier part of the formula is at market (not discount) price.
One entity's revenue is often another entity's expense. For example, your personal household expense of $1,000 to buy the latest smartphone is $1,000 revenue for the phone company.
Example of Revenue
Microsoft boasts a diversified product line that contributes many types of revenue. The company defines its business in several different channels including:
- Productivity and Business Processes: Office products (commercial and consumer), LinkedIn, Dynamics products
- Intelligent Cloud: Server products and cloud services
- More Personal Computing: WIndows OEM, Windows Commercial, Xbox, Surface.
As shown below, Microsoft reported $49.36 billion during Q3 2022. High-level reporting requirements have Microsoft's income statement being shown between product revenue and service/other revenue.
In supplementary reports, Microsoft further clarifies revenue sources. For example, the breakdown of the $49.36 billion of revenue earned during Q3 2022 was split fairly evenly between the three product lines:
Many entities may report both revenue and income/profit. These two terms are used to report different accumulations of numbers.
Revenue is often the gross proceeds collected by an entity. It is the measurement of only income component of an entity's operations. For a business, revenue is all of the money it has earned.
Income/profit usually incorporates other facets of a business. For example, net income or incorporate expenses such as cost of goods sold, operating expenses, taxes, and interest expenses. While revenue is a gross amount focused just on the collection of proceeds, income or profit incorporate other aspects of a business that reports the net proceeds.
Recognizing Revenue: ASC 606
In 2016, the Financial Accounting Standards Board released Revenue from Contracts with Customers (Topic 606). The accounting standards update outlined new guidance on how companies must report revenue. The guidance requires an entity to recognize revenue in accordance with five steps:
- Identify the contract with the customer.
- Identify the performance obligation in the contract.
- Determine the contract price.
- Allocate the transaction price to the performance obligation(s) in the contract.
- Recognize revenue when the entity satisfies a performance obligation.
In the case of government, revenue is the money received from taxation, fees, fines, inter-governmental grants or transfers, securities sales, mineral or resource rights, as well as any sales made. Governments collect revenue from citizens within its district and collections from other government entities.
For nonprofits, revenues are its gross receipts. Its components include donations from individuals, foundations, and companies, grants from government entities, investments, and/or membership fees. Nonprofit revenue may be earned via fundraising events or unsolicited donations.
Real Estate Revenue
In terms of real estate investments, revenue refers to the income generated by a property, such as rent or parking fees or rent. When the operating expenses incurred in running the property are subtracted from property income, the resulting value is net operating income (NOI). Vacant real estate technically does not earn any operating revenue, though the owner of the property may be required to report fair market value adjustments that result in gains when externally reporting their finances.
What Does Revenue in Business Mean?
Revenue is the money earned by a company obtained primarily from the sale of its products or services to customers. There are specific accounting rules that dictate when, how, and why a company recognizes revenue. For instance, a company may receive cash from a client. However, a company may not be able to recognize revenue until they've performed their part of the contractual obligation.
Are Revenue and Cash Flow the Same Thing?
No. Revenue is the money a company earns from the sale of its products and services. Cash flow is the net amount of cash being transferred into and out of a company. Revenue provides a measure of the effectiveness of a company's sales and marketing, whereas cash flow is more of a liquidity indicator. Both revenue and cash flow should be analyzed together for a comprehensive review of a company's financial health.
What Is the Difference Between Revenue and Income?
Revenue and income are sometimes used interchangeably. However, these two terms do usually mean different things. Revenue is often used to measure the total amount of sales a company from its goods and services. Income is often used to incorporate expenses and report the net proceeds a company has earned.
How Does One Generate and Calculate Revenue?
For many companies, revenues are generated from the sales of products or services. For this reason, revenue is sometimes known as gross sales . Revenue can also be earned via other sources. Inventors or entertainers may receive revenue from licensing, patents, or royalties. Real estate investors might earn revenue from rental income.
Revenue for federal and local governments would likely be in the form of tax receipts from property or income taxes. Governments might also earn revenue from the sale of an asset or interest income from a bond. Charities and non-profit organizations usually receive income from donations and grants. Universities could earn revenue from charging tuition but also from investment gains on their endowment fund.
What Is Accrued and Deferred Revenue?
Accrued revenue is the revenue earned by a company for the delivery of goods or services that have yet to be paid by the customer. In accrual accounting, revenue is reported at the time a sales transaction takes place and may not necessarily represent cash in hand.
Deferred, or unearned revenue can be thought of as the opposite of accrued revenue, in that unearned revenue accounts for money prepaid by a customer for goods or services that have yet to be delivered. If a company has received prepayment for its goods, it would recognize the revenue as unearned, but would not recognize the revenue on its income statement until the period for which the goods or services were delivered.
Microsoft. " Earnings Release FY22 Q3 ."
Financial Accounting Standards Board. " Revenue from Contracts with Customers ."
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Business model and revenue model
What are the main differences.
Social entrepreneurs put a lot of effort in designing sustainable business models (BM) for their social enterprises . Throughout the design process, they indeed have to focus on several components of a BM. Value proposition , key activities, channels.. just to name a few. But is there any relationship between a business model and a revenue model ? And precisely, what does “revenue model” even mean? In this article, we dig into the main differences between these two concepts.
Business model and revenue model: main differences
Let’s start with a definition of the topics at hand. First, what is a business model (BM)? According to literature, there are several ways to describe it. For instance, Alex Osterwalder defines a business model as “ the rationale of how an organization creates, delivers, and captures value “. In general, BM is a description of (1) how the company creates value for its customers, (2) the key processes and resources needed to deliver this value and (3) the ways in which the company wants to make a profit.
Now it’s time to tackle “ revenue model “, which is a subset component of a BM. As a matter of fact, the revenue model describes how the company earns money in order to capture value for itself. A revenue model basically answers to the following questions: “ Through which mechanisms does the company bill its customers and generate revenues? How does it generate income? “. Depending on the industry and the customer segments, revenue models can radically change from time to time.
Implications for social enterprises
Although they might sound similar, business models and revenue models do not mean the same thing. On one hand, a business model describes indeed how an organization creates value (for both audience and itself). On the other hand, a revenue model describes instead how the money flows from the customer to the firm. This distinction applies to social enterprises too.
Coming up with solid revenue models is often a struggle, especially for social businesses. As a matter of fact, such entities primarily exist to serve unprivileged communities or vulnerable individuals. Because of that, often times they cannot rely on revenue streams coming directly from beneficiaries. Instead, they must get creative in order to find viable alternatives.
Take Aravind Eye Care Hospital , for instance. This company performs eye surgeries to cure preventable eye diseases and eradicate needless blindness in India. That’s the value proposition provided. But what about its revenue model? Well, the firm decided to charge paying customers the price of each surgery performed, whereas beneficiaries receive treatments for free.
Another interesting case study is StartSomeGood , an Australian social enterprise connecting donors and social entrepreneurs. Thanks to its crowdfunding platform, the company helps changemakers get their projects/initiatives funded from the crowd. To remain financially sustainable, StartSomeGood keeps a 5% fee each time a crowdfunding campaign reaches its goal.
Direct payments and intermediary fees as such are just couple examples of revenue models social enterprises may choose from. But the list goes on and on. The point we want to make here is that the revenue model is no standalone entity. Quite the opposite: it ‘ s just a part of the business model , thus it must be coherent with the value proposition provided and the overall structure of a BM.
As discussed in this article, there is a clear distinction between business model and revenue model . In a nutshell, the first concept relates to “value” generation (what value is created for beneficiaries, customers as well as for the firm), while the second one focuses on “income” generation (how the money flows from customers to the firm). The two terms shouldn’t be confused nor used as synonyms, as the first includes the latter.
In conclusion, we believe every aspiring social entrepreneur should determine first the value proposition that he/she intends to provide to the audience (beneficiaries and customers) and only then evaluate/choose the most suitable revenue model option for his/her social enterprise.
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SaaS Revenue Model
Table of Contents
What is the saas revenue model.
The SaaS revenue model is a form of software distribution where users pay recurring fees to access cloud-based applications through the Internet, typically in a pay-per-use or subscription-based model. The vendor maintains the application and stores its data on the cloud.
The ability to store, maintain, and update software programs on the cloud has revolutionized the software industry, providing increased flexibility and convenience to both vendors and customers.
- Vendors don’t need to deliver the physical product and release updates.
- Customers don’t have to maintain the software at their end, and they can access it from anywhere in the world.
Since Salesforce released the world’s first SaaS platform in 1999 (its CRM), software companies had to create a revenue model that was both sustainable and scalable. And with that came the modern-day subscription economy .
Since they get most of their revenue from recurring subscription fees, SaaS companies have a steady stream of income, predictable cash flow, and a lower barrier to entry for smaller companies.
- SaaS revenue strategy
- SaaS monetization model
SaaS Revenue Model vs. SaaS Business Model
You’ll sometimes hear “revenue model” and “business model” used interchangeably. In reality, the former is a single component of the latter that focuses on generating income from the core product/service.
Of course, revenue is the be-all-end-all for businesses. But it doesn’t tell the whole story. A business model is a comprehensive overview of how a SaaS company’s…
- cost structure
- internal team structure
- value proposition
- buyer personas and ideal customer profile
- product differentiation
- operational processes
- customer experience
- retention strategies
- and, yes, revenue model
…come together to form a successful business.
It’s worth mentioning SaaS companies rely heavily on recurring subscription payments from customers. So, unlike other types of companies, they dependso on customer retention. Although the SaaS revenue model considers this, it only does so in the context of revenue.
While revenue models focus on income-generating activities and initiatives, business models consider the entire picture and find ways to maximize profits in all areas.
SaaS Revenue Models Explained
SaaS companies get most of their income from recurring revenue . But there’s a lot more to the story. Today’s SaaS businesses diversify their income streams and employ multiple revenue strategies .
Subscription revenue is where a software company makes most of its money. Typically, it’ll at least be 75% of the company’s income. And according to insights from Statista, 11% of companies earn more than 90% of their income from subscription subscription sales .
A subscription to a software product uses three types of pricing:
- Tiered pricing — Customers choose between a basic, mid-tier, high-end, or enterprise-class package. Tiers progressively include more advanced features at a higher cost. Enterprise pricing is usually quote-based.
- Flat-rate pricing — Each product tier has a fixed baseline price.
- Seat/user-based pricing — After a certain number of team members (usually between 2 and 10), customers pay a fixed recurring amount per additional user. They can onboard new users at any time.
SaaS companies sell subscriptions on a monthly and yearly basis. A monthly subscription costs the full amount. To incentivize long-term retention, they’ll take 10% to 20% or 1-2 months off the monthly price to calculate the annual subscription cost.
Customers subscribe to SaaS applications hoping for cost savings. Usage-based pricing allows them to pay only for the extra resources they consume. That way, they can’t run out of resources in the middle of a project and won’t end up overpaying and underusing certain features.
The pricing structure for usage-based revenue depends on the company and its product. For example:
- Data storage fees
- API call fees
- User action (e.g., clicks, logins) fees
- CRM/marketing automation contacts
- Lead generation fees
Although revenue from new users on a team account is a form of usage-based revenue, pure usage-based revenue is transactional and happens within the product. It’s typically somewhere between a fraction of a cent and tens of cents for each action.
Within a SaaS org, an inside sales team sells directly to prospective customers. For a brand-new startup, this is almost always the first approach because they don’t have good enough branding or product validation to dive into marketing (nor do they have the network to leverage other strategies).
The inside sales team is responsible for:
- Finding and connecting with leads
- Educating the prospect on their product’s value proposition and differentiation
- Coordinating virtual product demos
- Handling contract negotiations (e.g., getting sign-off on pricing)
As SaaS companies grow, they continue to expand their sales force because it’s easy to calculate how much they need to invest in sales to predict specific revenue. This is one of the main selling points (pun intended) of SaaS companies for investors. However, they branch off into different strategies as well.
Even as a new market entrant, getting others to sell your product for a piece of each sale is incredibly easy. So, most software vendors set up an affiliate program as soon as they launch their new product or service.
The most significant advantage of affiliate partnerships is that they’re success-based — you only pay for conversions. If you get paid, they get paid next. It’s an easy, low-risk, and low-cost way to piggyback off of others’ audiences.
Sales reps and partners outside of your company can also sell SaaS products. This could include:
- Partnerships with other software companies
- Referral partners
- Value-added resellers
- Consultants who use their product
- White-label licenses
- Co-branding with a trusted business
- Marketplace sales (e.g., AppExchange)
Channel sales give others the chance to build a business off of your product. The tradeoff is that you have less control over the end customer experience. But, with a fraction of the investment and less effort than going after new customers yourself, SaaS companies can massively scale when using this strategy.
The vast majority of B2B buyers are already spending $50,000+ on single online transactions. 35% of buyers say they’re willing to make purchases over $500,000 through a web interface. Although traditional sales infrastructure has its place, most of today’s buyers want to talk to company reps as little as possible.
In B2B SaaS (e.g., a streaming platform) and low-tier B2B platforms, web sales are straightforward:
- You create a self-serve sign-up process
- Users to enter their credit card details.
- They’re now a subscriber.
For larger B2B sales, it’s a little more complex because of the high-ticket, long-term nature of their commitments. But within a SaaS application with assistive features (like live chat), it’s still possible to land clients directly through the website.
Freemium pricing reduces customer acquisition costs, speeds up growth, and increases the chances of reaching product-market fit. The most basic freemium pricing model looks like this:
- Free — Users can test out your software’s core functionality without a time limit.
- Premium — Once they’ve grown familiar with your product, they’ll either continue using the free one, realize its limitations and upgrade, or realize it isn’t for them. If they
Not everybody will convert from free to paid immediately; some customers may never move past the free plan. But a good freemium strategy can create a large user base that you can upsell later. Usually, SaaS companies aim for a freemium-to-paid conversion rate of 2% to 5%.
Ads become a part of the SaaS revenue model once there’s an established market for the tool you’re selling. For example, a project management software vendor knows exactly what to call their platform (“project management software”). So, they’ll advertise for those keywords to get leads that way.
Startups usually don’t know how to talk about their product, and therefore, won’t see the benefits of ad-based revenue for a while. But once they do understand how their buyers search for them on Google and social media, ads become an advantage.
SaaS companies with proprietary software often license some or all of it to other companies that want to build their own products with it. They’ll pay a percentage of their revenue to the software owner for the privilege. The licensing fee is typically much less than purchasing the same software as SaaS and includes one or more of:
- Code libraries
- UI design elements
This strategy can also be an effective way to leverage your product’s branding by getting it into many different applications. Over time, it familiarizes more of the market with your interface (plus, you’re making money off their success).
In-App Purchases (IAP)
In-app purchases are a popular revenue model for mobile apps but are also relevant to the SaaS world. They’re meant to add additional functionality or convenience to the app experience.
For example, website builders and design tools like Webflow and Canva offer some pre-built templates for free. If their users want to use others, they can pay on a per-template basis.
These applications also have marketplaces, where users can list their own templates and the parent company takes a small cut of each sale.
When another platform wants to integrate with your SaaS software, you can charge API fees for access to your system. As long as the other application continues using yours, they’ll pay recurring fees for each integration.
Ad Hoc Fees
Implementation, consulting, and setup are all examples of non-recurring engineering services to get a customer started with your product. These fees are in addition to their subscription cost and can vary over time.
Since word-of-mouth is the most profound form of marketing (at the lowest customer acquisition cost), SaaS businesses heavily prioritize it. To create a customer advocacy program, you’ll need to:
- Identify who your most loyal customers are and reach out to them using a customer advocacy tool.
- Once they’re in, get to leave positive reviews on the biggest review sites for your niche (like Gartner or Capterra). And enable them to create testimonials, share data you can turn into case studies, and refer new customers.
- Give something back based on each activity (e.g., a quick payment).
Customer advocacy helps drive new leads, increases conversions, and keeps churn rates low. It’s also a cost-effective way to get more referrals and recommendations from satisfied customers.
Phases of SaaS Revenue Models
Phase 1: initial sale.
In the first phase of a SaaS revenue model, the goal is to acquire new customers and get them started with your product.
This phase includes:
- Demand generation campaigns to create brand awareness
- Lead generation marketing and outbound sales to bring in potential customers
- Sales demos and negotiation close deals and onboard new clients
- Channel sales
- Freemium conversions
- Implementation and setup fees
- The initial subscription sale
- API fees and software licenses (for third-party apps building your platform into theirs)
At this point, you’re only concerned with closing the deal for your core product. And, for long-term retention purposes, you’re looking for highly qualified prospects who will actually benefit from your product long-term.
In earlier growth stages, you won’t have as many revenue streams . Relationships with channel partners, system integrators, and others using your software usually develop after you’ve reached product-market fit.
Phase 2: Retention Revenue
Once you’ve onboarded your customer, your focus shifts from revenue generation to creating a product experience your customers want to keep paying into. As far as retention goes, you’re mostly concerned with preserving and increasing customer lifetime value.
You can accomplish this in the following ways:
- Use email marketing to share valuable content with customers and keep them engaged with your product
- Implement a customer advocacy program to encourage positive reviews and referrals
- Focus on customer success, addressing concerns quickly and effectively, and ensuring your customers are getting the most out of their subscription
- Streamline your customer support workflow
- Create helpful content that helps users get more out of the product
- Automate the renewal process
This phase is all about minimizing friction while helping your customers maximize their ROI from using your solution.
Phase 3: Expansion Revenue
At this point, you can shift your focus back to the money. Sometimes, you’ll focus on expansion and retention in tandem, but you want to avoid being overbearing on new customers (who are still familiarizing themselves with your product).
That said, with retention, it’s natural for customers to expand their product usage and increase their subscription levels as they grow their own businesses. As the vendor, you can encourage that in the following ways:
- Upselling your customers
- Cross-selling other solutions within your product suite
- Developing add-ons or complementary products as in-app purchases
- Expanding usage of your software across different teams or departments within the same company
- Bundling software products together to encourage users to build more of your tools into their tech stack
- Using differential pricing to more accurately match pricing with a user’s value
Expansion revenue is generally seen as the most valuable for software companies. Net negative churn — where expansion revenue exceeds customer churn — is a strong indicator of product-market fit and long-term business success. It’s one of the main factors investors look at when valuing your company.
SaaS Revenue Metrics
As far as revenue is concerned, these are the most important SaaS metrics :
Monthly Recurring Revenue (MRR)
Monthly recurring revenue (MRR) is the total amount of predictable revenue that a SaaS business earns in a month. It’s the running total of revenue from subscription sales and other recurring customer payments. It does not factor one-time payments into the total.
Annual Recurring Revenue (ARR)
Annual recurring revenue (ARR) is the total amount of predictable revenue that a SaaS business earns in a year. It’s calculated by multiplying MRR by 12.
You’d look at ARR over MRR when you want to understand how your company has performed YoY. It’s a fantastic metric to understand revenue performance on a macro level, but it won’t tell you much about the success about any one campaign or initiative.
Customer Acquisition Cost (CAC)
Customer acquisition cost (CAC) measures how much you’re spending to acquire a new customer, on average. It considers your entire sales and marketing spend, including headcount and program costs.
You can measure your SaaS churn rate in two ways:
- Customer churn — The percentage rate at which existing customers cancel their subscriptions over a given period of time.
- Revenue churn — The financial impact of that customer churn.
A lot of businesses fall into the trap of looking at one or the other. You have to look at both.
It’s entirely possible you’re losing very few customers, but they’re your most valuable ones. It’s also possible your product isn’t satisfying a low-value segment you’ve decided not to focus on, and that’s the reason for your high customer churn rate.
Customer Lifetime Value (CLV)
Customer lifetime value (CLV) measures the amount of revenue your average customer will bring in over their time subscribing to your product. It’s an important metric to consider when determining your pricing strategy and understanding the value of each customer. It helps you plan out how long you need to retain each customer for them to be profitable.
How to Choose a Revenue Model
The exact revenue models and monetization strategies you choose will depend on your target market, industry, and specific product. Different models work well for companies in different growth stages, with different funding levels, and targeting different customer segments.
There are five key questions to ask yourself when evaluating different revenue models.
- What do your buyer personas look like? Defining your ICP is the logical first step because. The primary goal of product development is to create something that’s most useful for them.
- What is your product differentiation strategy? You have to examine how your product’s nuances could justify one revenue model over another. For instance, a company selling route optimization software might build an advanced algorithm, then license it to other vendors in the space.
- How mature is your company? You don’t want to add too many products or features before you have a core one that serves a specific customer base. That’s the key to sustainable revenue growth.
- How can you capture value through your product? The ultimate goal is to add additional value without adding any friction to your product experience. Look at others in your industry and see what most customers expect. For example, the project management tool Notion sells templates for different workflows and customer segments.
- Which additional areas can you capture revenue? There’s probably some low-hanging fruit. You might not have an affiliate program yet. Or, your product might have potential to improve tons of other SaaS platforms with an API connector.
People Also Ask
How does a saas company generate revenue.
SaaS companies generate the vast majority of their revenue from subscriptions. Other sources of revenue include one-time purchases, add-ons or complementary products, and in-app purchases.
What counts as SaaS revenue?
Anything a SaaS company does to generate revenue counts as SaaS revenue. This can include subscription sales, implementation fees, professional services, and any other sources of income related to the product.
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Revenue vs. Profit: What's the Difference?
Here's how companies report profit and revenue, and how investors use that information to make decisions.
Revenue vs. Profit
Comparing revenue and profit from the current year to those metrics from the year prior reveals if a company is growing or losing market share. Getty Images/iStockphoto
Business owners and investors have to be familiar with a company's finances to make well-informed decisions. There are several key numbers watched by investors that indicate the current health of a company.
Comparing revenue and profit from the current year to those metrics from the year prior reveals if a company is growing or losing market share. Looking at "year over year" profit and revenue numbers is one way to gauge how healthy a company is and whether it would be a good investment.
This guide breaks down revenue and profit as tools for making investment decisions. Throughout are examples of how real companies report their earnings and sales, and how investors can use that information to make judgment calls:
- What is revenue?
- What is profit?
- How to analyze revenue.
- How to analyze profit.
- Types of revenue.
- Types of profit.
What Is Revenue?
Revenue is the total money a company generates from sales of products and services. This is the "top line" item of an income statement. Businesses do not consider expenses when calculating top-line revenue.
Hank Smith, head of investment strategy at Haverford Trust Co., offers a brief definition of revenue and encourages business owners and investors to consider which products and services drive revenue: "Revenue is the money companies receive selling products or services. For example, Pepsi sells products, carbonated beverages and snack foods . On the other hand, a consulting firm such as Accenture sells a service, or in this case, advice."
Business owners and investors can look deeper into revenue numbers, or sales, to discover which business segments generated the most revenue. For instance, Amazon.com Inc. (ticker: AMZN ) reported that net sales increased 13% in the third quarter year over year, from $127.1 billion in Q3 2022 to $143.1 billion in Q3 2023.
In its quarterly earnings report , Amazon then put net sales into two categories: net product sales and net service sales. Net product sales reached $63.2 billion in the quarter, while net service sales came in at $79.9 billion. The company's earnings report goes deeper into each of those two categories to reveal how much revenue came from each business segment.
What Is Profit?
Profit offers more context surrounding a company's financials. While revenue is the top-line item on an income statement, profit is the "bottom line." Revenue represents the income a business generates, while profit is a company's net income.
Accountant Lisa Wood, director of tax for Buckingham Advisors, explains some of the expenses that help business owners and investors determine their profit: "Profit is the income earned less all expenses, including the costs of operating the business, taxes and depreciation. Profit also includes income from non-business activities such as investment and rental income."
How to Analyze Revenue
Business owners and investors analyze revenue and profits to understand growth rates and assess the health of companies.
Year-over-year comparisons are important because while $100 billion in revenue may sound like a good quarter for a company, this figure would be concerning if the company generated $150 billion at the same time last year. Dropping from $150 billion in revenue to $100 billion represents a 33% year-over-year decline.
Investors should look for companies that are growing their revenue year over year. Revenue growth indicates that the company's efforts to gain market share are bearing fruit.
Investors would be happy to see a company go from $100 million in revenue to $150 million in revenue, representing a 50% year-over-year jump. However, high revenue growth accompanied by substantial net losses can deter investors. Some growth companies report exceptional year-over-year revenue growth while losing millions of dollars in the same quarter.
Snowflake Inc. ( SNOW ) is a good example of this. While the relatively young company posted 36% year-over-year revenue growth in the second quarter of fiscal 2024, it also posted a net loss of $227 million in that quarter.
Companies like Snowflake hope that they can focus on high top-line growth during their early stages and then focus on bottom-line growth as the business matures. "Companies can stay in business by securing additional funding through debt or adding additional investors," Wood explains.
Enough investors have to be on board with the business model for an unprofitable company to stay afloat. Any revenue deceleration can scare away investors.
How to Analyze Profit
While the Snowflake example demonstrates how substantial losses can minimize the impact of high revenue growth, there are more ways to analyze profit. Looking at a company's profit margin can reveal how efficient the company is at preserving capital.
For instance, a company with a 25% profit margin holds onto 25 cents out of every dollar earned. If a company grows its revenue by 15% year over year and maintains a 25% profit margin, then the company also grows its profits by 15% year over year.
If the profit margin stays constant or within a small range, revenue and profit growth will be similar. A rising profit margin means net income growth is outpacing revenue growth, while a declining profit margin indicates revenue growth is outpacing net income growth.
Some companies achieve higher year-over-year profit growth than revenue growth because of effective cost-cutting measures that don't interrupt core revenue opportunities. A company with high revenue growth with flat earnings is suddenly spending more money to acquire each dollar.
While investors give new corporations more leniency, mature companies don't get the same leeway if profits decline or stay flat.
"For more mature, established companies, profit growth is as or more important than revenue growth," Smith says. "It must be pointed out that in the long term, a company's stock price often correlates directly with growth in profits."
Investors and business owners can look at a company's individual segments to see which ones are driving the biggest shifts in revenue and profit. Some segments generate significant revenue growth but struggle to break even. Other segments have moderate revenue growth but maintain the same profit margins, which means profits go up, too.
Types of Revenue
While businesses have many revenue segments, each revenue segment belongs to one of two categories: operating or non-operating revenue.
Operating revenue comes from business activities. Each time someone buys a product on Amazon, the company generates operating revenue. The corporation generates this revenue because of the business model.
Non-operating revenue entails all revenue sources that are not a direct result of the business. If a company exchanges its British pounds for U.S. dollars, for instance, the company can generate non-operating revenue if the pound gains or loses value against the U.S. dollar.
A currency exchange can increase or decrease revenue, depending on the exchange rate. So, currencies are a type of non-operating revenue source. Returns from investments also count as non-operating revenue.
For instance, Amazon receives payments in various currencies. Without the favorable impact of exchange rates throughout the third quarter, which represented $1.4 billion, Amazon's net sales increased only 11% compared with Q3 2022, rather than 13%.
Types of Profit
This article has focused on net profit, or the bottom-line item for income statements. However, investors and business owners can look at two additional types of profit to gauge a company's performance.
Gross profit is the difference between a company's revenue and the cost of goods sold. Each good has several costs, such as for purchasing necessary materials and shipping them to their locations . These costs reduce revenue and help investors arrive at a company's gross profit.
Operating profit takes it a step further. This profitability metric includes operating costs and indirect expenses. It ignores interest and taxes. Operating profits reveal how effectively a company can convert sales into profit.
Business owners can improve operating profits by reviewing their overhead. Cutting too much overhead can impede a company's ability to operate smoothly, so business owners and analysts must seek the perfect balance.
Net income indicates how much money a company has earned after all expenses. If interest and tax payments consistently result in a net loss, the company may have a hard time staying afloat.
Business owners analyze all these metrics and look for opportunities to make them more attractive. For example, lowering the cost of goods sold or increasing the prices of products makes gross profit margins more enticing. Higher gross profits will trickle down to operating profits and net profits.
Investors should compare year-over-year results and monitor changes in net income, revenue and other metrics on company earnings reports. Staying on top of these key results helps investors and shareholders make better decisions about their investments.
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Put Meaning at the Center of Your Business Model
Panera’s founder on looking beyond the numbers.
Most business models cover the bases nicely: how the company will serve customers better than rivals. But they don’t really explain why the company matters. Why should anyone care that your company exists? Why should they walk past your rivals in order to reach you? What’s your real differentiation in the eyes of target customers? Without good answers, you aren’t likely to stand out in the marketplace for long. Once the shine wears off, or rivals match your pricing, you’ll lose both customers and employees. That’s bad both for your long-term competitive position and for society. Adding a larger meaning beyond the dollars makes sense for every constituent — investors, employees and the community. A successful business model connects with customers, employees, and investors, and builds a compelling vision for the long term. And the only way to do that is with empathy and imagination to gain a deep understanding of the needs of your target customer. In this article, author Ron Shaich, founder and former chairman & CEO of Panera Bread, shares how his team transformed a low-margin French bakery into a profitable French bakery café by listening to customers and pinpointing the meaning behind the business model.
We’ve been looking at business models all wrong. Yes, they’re about making your company stand out from the competition and deliver value to customers — getting their jobs done. And leaders need the foundation of a solid business model to make crucial decisions when setting up and structuring their operations.
- RS Ron Shaich is the founder and former chairman & CEO of Panera Bread and of Au Bon Pain. He is now CEO and managing partner of Act III Holdings, and chairman and a lead investor in Cava, Tatte, Life Alive and Level99. He is also author of the best-selling Know What Matters: Lessons from a Lifetime of Transformations (Harvard Business Review Press, 2023).
What Is Ecommerce and How Is It Changing (Waves Hand) Everything?
Get the deets on ecommerce: what it is, why it’s important, and how it can grow your business.
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Ecommerce has come a long way since its humble beginnings nearly three decades ago. Although disputes remain over the first actual internet transaction — was it a Sting CD or a pizza? — we can all agree that now, you can buy just about anything online, maybe even a pizza with Sting’s likeness on it. What is ecommerce? It’s the online activities that bring such goods to your door. It’s one of the world’s largest industries, and it’s completely changed the way shoppers interact with businesses. Buying and selling online is the norm these days, and AI is making it more efficient and personalized. And ecommerce is big business: This year, the global ecommerce market exceeded $16 trillion .
How did the market get this massive and what changes are in store as technology and customer expectations evolve? Here’s everything you need to know about digital commerce and how it works.
What you’ll learn:
What is ecommerce, the rise of digital shopping, how is ecommerce changing new trends and priorities, what are ecommerce channels, how does ecommerce work and what are the critical elements, what are examples of successful ecommerce, what are the benefits of ecommerce, what are the different types of ecommerce business models, social commerce sales will reach $2.9 trillion by 2026.
Here’s how to get your products in front of billions of shoppers.
Ecommerce is all the online activity involved in the buying and selling of products and services. In other words, it’s the process for conducting transactions online. When you go to your favorite online retailer to buy a new pair of shoes, you’re engaging in ecommerce. If you pay online for a ticket to attend a music concert or travel by plane, that’s ecommerce, too.
Ecommerce doesn’t only occur on desktop, though. In fact, most ecommerce traffic happens on mobile devices. Spurred by the influence of smartphones and the convenience of online shopping, mobile commerce sales make up almost 75% of ecommerce market share . That means nearly three out of every four dollars spent on online purchases today is done through a mobile device.
How important has online shopping become for businesses and consumers? Check out these stats:
- Ecommerce sales are projected to reach 57% of retail sales by 2024.
- There are 2.6 billion digital shoppers in the world. If you’re not selling online, you’re missing out on the chance to convert a vast pool of potential buyers.
- More than half (57%) of all customers prefer to engage through digital channels.
To win your share of the market, it’s important to stay on top of the latest ecommerce trends and know what motivates customers to make purchases.
You’ve heard it before, but it bears repeating: Generative and predictive AI are changing the ecommerce game. They’re making teams more productive and giving them new and valuable ways to engage with customers.
Thanks to AI trained on large language models (LLMs) and historical business data, tasks that used to take your teams days or weeks now take just hours. For example, generative AI can automatically write accurate, detailed product descriptions. With low-code generative development tools, business users at all skill levels can create landing pages and localized sites with less time and effort. Ultimately, new technology means that ecommerce teams can work smarter and faster.
AI is also improving the customer experience. Remember when chatbots could answer only a few select questions? Now, their conversations are more human, more personalized, and more helpful.
Chatbots trained on LLMs can guide shoppers to specific products based on their purchase history, preferences, and past searches. The bots can answer more complex questions, such as: How does this blouse fit? Does it run true to size? By providing these kinds of tailored experiences in real time and at scale, businesses can greatly boost their bottom line and customer satisfaction.
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New channels .
Customers want to shop however, wherever, and whenever they like. This means online, offline, and, increasingly, in spaces like messaging apps, voice platforms like Amazon’s Alexa, or on social media. In the future of commerce , new channels will crop up. Businesses that find ecommerce success will be those that move quickly and engage customers in new spaces as they emerge.
Customers use multiple channels to browse products and shop online, and businesses must make sure this omni-channel experience is cohesive. That’s the purpose of unified commerce: It means all your back-end systems are connected with your customer-facing channels. This is what creates a seamless customer experience, whether a shopper visits your website, mobile app, social media, or anywhere else.
We know that customers already want personalized experiences. In fact, 53% of them expect companies to anticipate their needs. As AI improves the shopping experience with predictive intelligence and natural language processing, customers will notice which brands are doing it right. A staggering 81% of customers expect faster service as technology advances, and 73% expect better personalization.
An ecommerce channel is any digital space where a customer shops. Think of all the ways you can browse or buy online: You can search for items on a brand’s website, download the brand’s app on your mobile device, or shop on social media. These are a few of the most popular ecommerce channels:
Mobile commerce: Simply put, mobile commerce is shopping through a handheld device (like a smartphone or a tablet). As more customers prefer shopping this way, businesses must meet demands for stellar mobile experiences. No matter what device a customer uses, shoppers want it to be simple and intuitive to browse products, add to cart, and purchase. Social commerce: Social commerce brings the entire shopping experience — from browsing to checkout — to social media. Customers can discover products as they scroll their social feeds, browse your brand’s social posts for products that match their needs, and then buy directly on a social platform through shoppable content . For customers, social commerce is a convenient way to find and purchase products. For businesses, it’s a great way to quickly expand your reach and your customer base. Ecommerce websites: An ecommerce website is a powerful sales tool where customers can visit, browse, and purchase your products via mobile or desktop. These sites should include a home page that represents your brand well, product pages that entice shoppers to buy, and a pain-free checkout experience .
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Ecommerce brings businesses and customers together on different channels. To make ecommerce work, a business needs to create a user experience on a given channel where customers can easily search for and buy products. This requires certain elements and features, including:
Content: This is where you create and update your user experience. It includes all the content — images, video, product descriptions, and other written ecommerce content — across your entire site. Anything you see on an ecommerce site’s home page, product listing pages , and detail pages is all part of content management. Merchandisers, marketers, designers, and developers are responsible for creating the user experience and bringing it to life on the web.
Site navigation: Think of the last time you bought something online. Were products easy to find? Did you intrinsically know how to browse, add to cart, and pay for your items? That’s the result of a carefully thought-out site navigation strategy. Ecommerce works best when businesses consider the customer journey and how each shopper will use the site.
Payment: If it’s hard to make a purchase or if a payment process feels clunky, customers will find a competitor who does it better. Getting the payment experience right and making it as easy as possible is critical.
Order management: This involves the logistics of ecommerce and everything that happens after a shopper clicks the Buy button. Order management is what gets an item from a warehouse to a customer’s doorstep.
There’s an art and a science to successful ecommerce. Your digital storefront is the “face” of your brand, and it’s often a shopper’s first impression of your business. By combining the above elements with successful strategies for user experience (UX), design, and merchandising, you can create stellar, memorable shopping experiences that keep customers coming back. It’s hard to understate the importance of a digital storefront. So, what makes an ecommerce website shine? Here are a few successful examples:
Known for bringing clean beauty to the masses with affordable cosmetics, E.l.f. Beauty is a shining example of ecommerce. Neatly categorized products, uniform imagery, and easily scannable product details make it easy — and enjoyable — to browse the site.
YETI makes tough, long-lasting outdoor gear built for all kinds of adventures, and its ecommerce site reflects that: Shoppers can easily browse by activity: hunting, fishing, travel, and more. Promotions are highly visible. Adding an item to your cart? Simple. Checkout is streamlined and the entire shopping experience is seamless.
Wireless audio devices can be complex. Are the items compatible with a customer’s other technology? What are the product specifications? Wireless-speaker system leader Sonos offers filters by product type and feature to help customers find what they’re looking for. Product detail pages neatly display all the information a shopper needs to make a decision.
Ecommerce provides the best in convenience and accessibility. It’s a highly efficient way to sell goods and services, whether you’re an all-digital business or you use ecommerce to supplement your physical stores. But the benefits of ecommerce go far beyond the convenience of running your business online. Here’s what you can look forward to once you launch your online store:
- Cost savings: Brick-and-mortar stores come with overhead, such as money spent on leases, staffing needs, and utilities. Physical locations also require business hours, which means you’re making sales only during a percentage of customers’ waking hours. Ecommerce lets you bypass these costs and sell at all hours of the day.
- Borderless transactions: A physical store limits business operations to a specific geographical area. With an ecommerce website, your business can reach more customers, globally — maximizing your selling potential.
- Earnings while you sleep: With a physical store, you likely operate during regular business hours. With ecommerce, customers around the world can buy your products at any time.
- First-party data: Ecommerce lets you collect more customer data than you could at a brick-and-mortar store. With the right ecommerce platform , you gain access to detailed information and real-time data about how customers shop: their click paths, search history, order history, and product pairings. Business leaders use this data to make informed decisions for their ecommerce, marketing, and sales strategies. The result? A hefty boost to your bottom line.
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- Scalability: As your customer base grows, you can expand your ecommerce businesses to accommodate more sales. While expanding your physical store typically means relocating or renovating (which can be expensive), with an ecommerce platform you simply need to increase its bandwidth to handle more traffic and orders. And, you can predict future sales based on past sales data and scale your platform up or down accordingly.
- Personalized experiences: With ecommerce, you can take advantage of AI to create personalized shopping for your customers. AI-enabled upselling and cross-selling lets you present customers with products they’re most likely to be interested in, increasing your business’ sales.
- Access to innovative technology: As technology continues to improve, you’ll find more ways to streamline your business processes. With a physical store, there can be limitations to what technology can do. With ecommerce, you’ll find a range of apps and integrations that help you market your products, improve team collaboration, and provide faster customer service.
- Effective, targeted marketing: Rather than rely on traditional marketing methods like print ads to drive traffic to a physical store, you’ll have a range of affordable marketing channels to drive customers to your ecommerce business. Search engine marketing, organic and paid social media ads, and email marketing let you reach a segmented market for a lower cost.
Whether you sell products directly to customers or sell services to other businesses, there’s an ecommerce model for you. Here are some of the different types of ecommerce businesses to consider before launching your online store.
B2C (Business to Consumer)
B2C ecommerce refers to selling goods or services to individual customers. B2C is what most people think of when they hear the term “ecommerce business.”
Traditional B2C sales occur between a business and a single consumer. In this model, a shopper finds a business online and places an order, and the business sends the product to the customer. A B2C ecommerce strategy, then, involves using customer data to get a full view of customers across their online shopping journeys.
B2B (Business to Business)
B2B ecommerce refers to selling products or services to businesses. B2B companies typically have a higher order value and more recurring purchases.
B2B ecommerce products and services may include manufacturing equipment, distribution, website hosting services, financial services, or software solutions for businesses, just to name a few. These businesses provide other businesses with the products or services they need to grow.
D2C (Direct to Consumer)
Like B2C, the D2C ecommerce customer is an individual consumer. The difference is that D2C allows manufacturers to sell directly to consumers instead of (or in addition to) using third-party retailers or wholesalers.
What is ecommerce? It’s what powers every online purchase
Ecommerce is a proven business model that helps drive revenue growth for some of the world’s largest brands. By getting started with ecommerce, you’ll reach more customers online and significantly increase your business revenue.
Ready to embark on your ecommerce journey? Start here:
- Learn how to prepare your business for ecommerce success. Get the step-by-step guide to organize your teams, goals, and road map for a painless digital transformation.
- Want to get started quickly? Consider a minimum viable product approach . It’s one of the fastest ways to get a commerce site up and running.
- Explore flexible tools to help you reduce costs, increase sales, and adapt quickly. To grow your revenue online, check out all Commerce Cloud has to offer.
Set up your ecommerce storefront, fast
Grow your business with the most complete commerce platform.
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Lauren Wallace is an editorial lead for Commerce Cloud. She’s written for B2C and B2B companies in many different industries — most recently cybersecurity and healthcare. When she’s not writing about commerce, you can typically find her outside running or biking around San Diego.
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