Common revenue models

You can create enormous value and still run out of money if you don't capture any of it back. The revenue model decides what the customer pays for and how. The same solution can make money in completely different ways — and the choice shapes the entire rest of the business.

The most common revenue models

There are a few basic forms you should know. Most businesses use one or a combination:

• One-off sale: the customer buys the product once and owns it. Simple, but you constantly have to find new customers.
• Subscription: the customer pays a fixed amount per month or year for ongoing access. An accounting program like Tripletex or Fiken lives off this.
• Usage-based: the customer pays by consumption — per API call, per transaction, per gigabyte. Common in cloud services.
• Freemium: a free basic version pulls in many users, and a paying share upgrades. Kahoot lets teachers use it for free, while businesses pay.
• Licensing: you grant others the right to use your technology, brand or content for a fee.
• Commission / marketplace: you connect buyer and seller and take a cut of each transaction. Otovo connects homeowners with solar installers; Finn and Tise are marketplaces.
• Advertising: the service is free for the user, and advertisers pay for the attention. Common for media and free services with large volume.

Note that most of these models can be combined. A web shop can have one-off sales as its main income and a subscription on top for its most loyal customers. A software company can use freemium to let people in, then move to usage-based billing as the customer grows. Combinations are powerful, but they also complicate both the accounting and the message to the customer — start simple, and add a new stream only once the first one works.

Multi-sided models and cross-subsidy

Some models have several customer groups that pay differently. On a marketplace, one side may be free to build volume while the other pays. This is called cross-subsidy: you let one group be cheap or free because it makes you valuable to another group that pays.

Vipps is a good example of the idea: it should be easy and cheap for the consumer, because the value lies in many people using it — something shops and businesses are willing to pay for. When you design a multi-sided model, be clear about who is subsidized and who pays, or you risk giving the value away to everyone.

Choose a model that fits the value

The big mistake is copying a revenue model because it is popular, without checking whether it fits the value you create. Ask three things:

1. When does the value arise for the customer? Is it ongoing (subscription fits) or one-off (a single sale fits)?
2. How does the value grow? Does it increase with use (usage-based fits)?
3. Who has the most to gain? Sometimes the party that gains the most should pay — like the seller on a marketplace.

A company like Remarkable sells a physical device (a one-off sale) and layers a subscription service on top (ongoing revenue). That is often how it works in practice: one main model, with an extra stream that reinforces it. The point is that the model should follow the value — not the other way around.

One last thing to keep in mind: the revenue model decides how predictable the business becomes. Pure one-off sales give you a peak now, but reset next month — you always start from zero. Subscription and commission, by contrast, build up over time, because yesterday's customers still pay today. That difference is so important that we spend a whole lesson on it later in this module, under recurring revenue.

Do this now

Write down which revenue model you use today (or plan to). Then pick one alternative from the list above and write two sentences on how your business would look with that instead. Which of the two captures the value best for your customer? Keep the question open — we test price in the next lesson.