CeBIT Conferences 2017  

15
Aug

Understanding tech start-up revenue models

Understanding tech start-up revenue modelsOne of the most important things you need to consider in the early days of your business is how you’re going to make money. This might seem as obvious as saying ‘your business needs a name’ or ‘your business needs customers’ but you would be surprised at how many entrepreneurs don’t really stop to consider:

  • How a revenue model will help them grow in those early stages
  • What models are suited to scaling
  • How the right revenue model can help demonstrate the possibilities of your proposition to investors
  • How to integrate future revenue streams down the line

Today we explore the different types of models that will help you scale your business.

Revenue stream versus revenue model versus business model

But before we do, it’s important to discuss the differences between the terminology. A lot of businesses tend to use the terms interchangeably, even though they all have very specific functions.

A revenue stream is a company’s source of revenue. Typically a business will have at least one stream, but as the business expands and matures, it might branch out into more.

A revenue model is the way a company decides to manage those revenue streams. A good revenue model will have be strategic and will consider

  • How to prioritise and allocate resources to each of the revenue streams
  • What future streams could be developed in the future

business model looks at every single aspect of the business and asks: Are all the parts working together as they should be?

For example, if you have a software product, you would be examining:

  • How should we be promoting this product?
  • Are our current promotions bringing in the amount of customers we would like?
  • Does the price of the product work?
  • Is the revenue model working?
  • Is the business as a whole making money?

What is the best revenue model for you?

So now that these terms are a bit clearer, you need to ask:

What is going to be the best revenue model for me? To establish this, you need to consider how a revenue model:

  • Will be the best fit for your company, product and back-ground
  • Will allow you to grow at your projected rate
  • Will help you to find the right investors
  • Can potentially evolve to mirror the changes of your business

Examples of revenue models

Product/Service is free, revenue is raised from advertising

Examples: Facebook, Twitter, bloggers

When should you adopt it?

This is particularly popular with internet start-ups as it’s relatively easy to set-up and it can be very lucrative. However, there are a few draw-backs. In order to make this successful, you need to potentially attract hundreds of thousands of followers and you need to ensure that the ads don’t swamp your page, or it will repulse your customers. You also need to have a heavy upfront investment to build your customer base.

Freemium model

What is it: The basic services are free, but additional services are available for a price

Examples: LinkedIn, Spotify, Dropbox

When should you adopt it?

The freemium model works best in instances when the ‘free’ part of the service acts as a strong marketing hook. It’s a favourite for many online companies because it scales easily.

However for the freemium model to work, you master the difficult balancing act between the free offering and the premium offering. You need to make sure that the free offering is alluring  enough for people to want to use, but not so superior that there is no enticement to upgrade.

Retail Sales

What is it: You are selling a physical product in a traditional retail space.

Examples: Apple, Optus

When should you adopt it?

If you have a product, it’s a good way to give prospective customers a sense of the scope of it, especially if your product has a lot of features. It also gives you the chance to develop real rapport with your clientele. Having a physical space also allows you to develop your brand identity and make the user experience an enjoyable and memorable one. However, this revenue model isn’t without its drawbacks. Obviously, this isn’t ideal for service or digital-only companies. The overheads involved (rent and retail staff) can also be very expensive for fledgling start-up businesses.

Subscription Model

What is it: The subscription model is based on customers paying a weekly/monthly/annual fee to access your services.

Examples: Netflix

When should you adopt it?

The subscription model is a popular one because it is so simple for the customer to use. You just have to set up the automated payment and not worry about it afterwards. For a start-up, this kind of income is particularly good because you can rely on having a certain amount come into your account every month, which can help mitigate early cashflow problems, as well as giving potential investors a good sense of your revenue potential. They are also very flexible and very easy to scale.

However there are a few drawbacks - customers can fear committing to regular payments and being stuck in a nightmarish contract, if something goes wrong with stock, or the systems are down, committing to delivery on a certain date and honouring your agreement can become difficult and because this model is so well known, customers can get subscription fatigue, and may not want to commit to another lengthy payment contract.

We hope this piece gave you a good sense of the different types of models out there.

Would you like to have more control over the ins and outs of your start-up business? Then you need to download this Start-up Cashflow Template today.

CeBIT Australia: The Start-up Cashflow Template