What do you think the main motivation behind funding a startup is? Yes, you guessed it right, for most investors, it’s the high return on investment. So, whatever your product, service, target audience, or value proposition is, you need to generate revenue for your investors. And to successfully generate revenue, you need to have a solid revenue model for your startup.

There are many startup revenue models in existence, but we will only talk about the three most common revenue models in the tech startup industry, their advantage and disadvantages, and provide examples of companies who are using them so that you have a clear understanding. We will also discuss how you can choose the right revenue model for your startup and the mistakes you need to avoid while creating your revenue model. Let’s get started.

What Is Startup Revenue Model? 

It’s easy to get mixed up between the business model and revenue models. Let’s start with the business model before moving on to the revenue model.

A business model defines the structure of a business and how it creates and delivers value to its customers. It outlines the key components of your business, such as the product or service offered, value proposition, customer segments & relationships, key partners, cost structure, etc.

On the other hand, the revenue model is a part of the business model that focuses specifically on the sources of revenue and how they will be managed to ensure the sustainability and success of the business. Having a revenue model helps you prioritize your revenue streams and price your products effectively.

Why Your Startup Needs A Reliable Revenue Model

As you know, revenue is essential to the survival of your company so as a revenue model. Here is why your startup needs a reliable revenue model: 

• It helps your business determine which revenue sources to prioritize. By prioritizing revenue streams, you can focus efforts on the most promising sources of revenue and allocate resources accordingly, increasing your business’s overall profitability.

• Gives your business a roadmap for ensuring sustainable growth and success by forecasting and tracking revenue over time. That can help you monitor progress and provide a historical perspective for future predictions to ensure your business can grow and succeed over the long term.

• Allows your business to price products effectively so that you can cover your costs and reach your financial goals by understanding target customers, their needs, and their value. You can also attract more customers and increase sales by effectively pricing your product.

• Shows potential investors that the business has a clear plan for generating revenue and maximizing profit. This gives potential investors confidence that the business has thought through its financial strategy, which is crucial for attracting investment capital.

• Permits your business to change or pivot if the original revenue-generating strategy is not working effectively to help your business stay competitive, meet changing customer needs, and generate revenue in changing circumstances.

3 Most Common Revenue Models for Startup In 2023

Now that you understand the fundamentals of the revenue model, you might want to design a revenue model that maximizes your revenue. Here let’s look at the various forms of Common Revenue Models so that you can come up with your one revenue model. 

1. Subscription-Based Revenue Model

One of the most popular and widely used revenue models in the startup world. In a subscription-based revenue model, you charge customers a recurring fee, typically on a monthly or annual basis, for access to a product or service. The more subscribers there are, the more money you make. 

Your startup can use the recurring income from subscriptions to cover costs and generate profit. If your business includes online streaming services, software as a service (SaaS) providers, or print or digital media publications, you can use the subscription revenue model. 

Although this model seems fairly easy to implement, the complete subscription revenue cycle involves acquiring new customers and delivering high-quality service to them, which is not quite an easy task to accomplish. 

Once you have customers on board, you can look for opportunities to upsell or cross-sell by offering additional products or services that enhance the value they receive. To maintain a steady stream of recurring revenue, it’s crucial to work on retaining customers. By following these steps consistently, you can ensure the success of your subscription revenue model and generate a profitable and sustainable income stream over time.

Examples of Subscription Revenue Model

A real-life example of a subscription-based revenue model is Netflix. Netflix allows customers to access a wide range of video content for a fixed monthly or annual fee, providing a predictable, recurring revenue stream for the company. 

Another example is Spotify – a music streaming platform that offers users access to millions of songs and podcasts for a monthly subscription fee. The company offers both free and paid versions.

Amazon Prime is also a subscription service offered by Amazon that provides users with a range of benefits, including free two-day shipping, access to Prime Video, Prime Music, and other services. The monthly subscription fee also includes exclusive deals and discounts on Amazon products.

Advantages of the Subscription Revenue Model

Increased customer loyalty

When customers subscribe, they commit to your company for the long term. This can boost client loyalty while decreasing turnover, resulting in a more stable customer base. You can save money on customer acquisition costs (CAC) through your relationship with your customer.

Recurring & predictable revenue

Subscriptions provide a constant and predictable income stream, which allows your business to foresee future revenue and plan appropriately. Subscription revenue also increases your customer lifetime value (LTV).

Upsell and cross-sell opportunities: 

As a business with subscribers, you can upsell and cross-sell, offering additional products and services that can enhance the value you receive from your customers. This can lead to increased revenue and help you grow your business.

Increased customer interaction: 

By offering ongoing access to your products and services, you create an opportunity for your customers to build a deeper connection with your company, which can result in higher satisfaction and a more favorable brand image for you.

Easy scalability:

With a subscription-based revenue model, you can easily scale your business by simply adding more subscribers. As your subscriber base grows, so too will your revenue, allowing you to achieve sustainable growth over time.

Improved cash flow:

With a steady stream of recurring revenue from subscribers, you can improve your cash flow and reduce your risk of running out of funds, ensuring the stability and long-term success of your business.

Disadvantages Of The Subscription Revenue Model

Expensive customer acquisition:

To generate revenue through the subscription model, you need to invest in acquiring and retaining a significant number of subscribers, which can come at a cost. But when you’re in the startup phase, revenue can be very uncertain – all the expenses become pointless.

High cancellation rate:

The subscription revenue model offers a steady and predictable income stream through recurring payments from your subscribers. However, there’s also a possibility of high customer churn or cancellations, which can greatly affect your business’s success.

Dependence on recurring revenue:

The subscription revenue model has a dependency on factors like high customer churn or shifts in the market, which can disrupt this steady stream and impact your overall revenue.

Needs continuous, high-quality products or services:

To maintain a successful subscription revenue model, you must consistently deliver high-quality products or services that meet your subscribers’ expectations. Failing to do so can result in decreased customer satisfaction which ultimately is a harm to your business.

Limited one-time revenue opportunities:

In a subscription revenue model, you focus on recurring revenue from subscribers rather than one-time sales, such as premium products or services, which may limit your business’s ability to generate additional revenue.

2. Advertising-Based Revenue Model

The advertising revenue model is a business model where your company can generate revenue by selling ad spaces on your platform or within your content. The advertisements can be banner ads, video ads, display ads,  or sponsored content. 

You earn revenue each time a viewer clicks on or views one of the advertisements. There are three types of payment you can receive – cost-per-click (CPC), cost-per-action (CPA), or cost-per-thousand-impressions (CPM). 

Before implementing an advertising revenue model, you need to consider key factors such as understanding different types of ads, target audience, ad performance tracking and optimization, content strategy, laws and regulations for online advertising, and pricing. You should also be aware of ads’ impact on user experiences, such as relevance and website loading speed. 

Examples of Ad based revenue model

Google’s search engine and many of its other products, including YouTube and other digital properties, are free to use, but the company generates the majority of its revenue from advertising.

Advertisers pay to display their ads alongside search results or on other Google products, and Google earns money from clicks or impressions on those ads.

Another example is BuzzFeed – a media company that produces articles, videos, and other content. Advertisers can create sponsored content that is integrated into BuzzFeed’s articles or videos, and BuzzFeed earns money from clicks or impressions on those ads.

The most popular social media platform Facebook also generates revenue through advertising. Advertisers can create targeted ads based on user data and pay to have them displayed on the site.

Advantages Of The Advertising Revenue Model 

Minimal operating costs: 

When it comes to the advertising revenue model, there is no need for direct costs. This means you don’t have to worry about producing physical products or investing in services, making the advertising revenue model an attractive option for startups looking to minimize overhead costs. 

Flexibility: 

You have the flexibility to experiment with different types of ads and pricing strategies to see what works best for your target audience. With the advertising revenue model, you can also easily change your advertisements and target different audiences as your business grows and evolves. 

Highly scalable:

As your startup grows its audience, you can increase the number of advertisements you display and the revenue you generate. Later when your company expands, it also allows you to quickly and easily increase your revenue without changing your business model significantly. 

Additional revenue stream: 

Having an advertising revenue model can provide you with an additional source of income, giving you a chance to diversify your revenue streams and reduce your reliance on a single source.

Profitability:  

You can provide advertisers with performance-tracking data. This valuable information allows advertisers to create targeted marketing campaigns, and they are willing to pay for this opportunity, generating profit for you.

Disadvantages Of The Advertising Revenue Model: 

Impact on user experience: 

If the advertisements displayed on your website are poorly designed or intrusive, they can have a negative impact on the user experience. This can potentially drive users away from your website, leading to a decrease in traffic and potential loss of revenue.

Ad fraud and click-bait:

You may face challenges with ad fraud and clickbait, which can lower the credibility of your advertising platform and harm your reputation. This can negatively impact the trust your audience has in your platform.

Dependence on third-party advertising platforms: 

You may need to use third-party advertising platforms, like Google AdSense, to display ads on your website. This can limit your control over where the ads are placed, the pricing of the ads, and who they are targeted to.

Ad-blocker usage:

As more and more users adopt ad-blockers, the number of ads that they see on your platform may decrease, potentially impacting your ability to generate revenue from advertising. 

Difficulty in attracting high-quality advertisers: 

You may find it challenging to attract high-quality advertisers if you are a startup. This can limit your potential to generate significant revenue from advertising.

3. Licensing Revenue Model

The licensing revenue model involves a company granting the right to use its intellectual property, such as patents, trademarks, or copyrights, to another company in exchange for a fee, which can either be a one-time payment or a recurring royalty based on product sales. 

Let’s assume you have a software company; you license your software to another company for their products and receive a portion of the profits from those sales. From the example, as you can see, this model benefits you and your licensee. 

To ensure success, you must be careful of implementing license agreements, ensuring licensee compliance with regulations like copyright law, protecting your intellectual property from misuse or abuse, etc. If you want to know better about the tech licensing revenue model, you may read the research article by Bowman Heiden and Thomas on Licensing-Based Business Models.

Advantages of Licensing Revenue Model

Increase market visibility for you.

By licensing your product or service, you can increase its visibility and reach a wider audience. This can build brand awareness and increase your market visibility for you.

A steady stream of income:

You can monetize your intellectual property and earn regularly. This can generate a steady stream of income for your startup. 

No investment in commercialization:

When you license your intellectual property, you won’t need to invest in the commercialization of your product. Instead, the licensee will be responsible for handling the costs associated with manufacturing, distribution, packaging, marketing, and sales.

Break into a new market:

As a business, licensing your product or service can be a significant way to break into new markets that may have otherwise been difficult or impossible to access.

Reduced  Risk: 

The licensing revenue model provides flexibility in market participation, allowing you to participate in markets without overextending your capacity, reducing your risk.

How To Choose The Right Revenue Model For Your Startup

Choosing the right revenue model is crucial for the success of your startup as it enables your business to gain traction in the market and scale up efficiently. Here are some steps that will help you to choose the right revenue model:

• Determine what your product or service is, what makes it unique, who your target customers are, and what pain point you are solving. Don’t forget revenue models that are consistent with your business idea and solve a problem for your target market are always the most successful.

• Look at what revenue models are being used by other companies in your industry and analyze their success. Combining several revenue streams not only allows you to increase your overall earnings but also allows you to provide your clients with more cutting-edge options.

• Analyze your target customer’s behavior, preferences, and willingness to pay for your product or service. Because it’s important to remember that consumers’ expectations of value must be greater than the amount they pay

• It’s important to consider the cost structure associated with your product or service. This includes the costs of prototyping, producing, marketing, and selling your product or service. Understanding these costs will help you determine how to price your product or service

• For risk management, identify and understand your key risk factors so you can address them. Once you have identified the risks, you can develop strategies to mitigate them and increase the likelihood of success for your chosen revenue model.

• Startup is the perfect ground for experimentation. You can test and experiment with different revenue models and adjust as necessary based on customer feedback, market response, and a lot of other variables until you find your unique revenue model.

The idea is to identify a revenue model that coincides with your business goals and allows you to earn long-term revenue while giving value to your consumers. Remember that there is no such thing as a one-size-fits-all revenue strategy. Even with careful consideration, there are several factors that can lead to the failure of a revenue model.

Pitfalls In Your Startup Revenue Model that Could Lead To Failure

As we mentioned earlier, choosing the revenue model is no easy task, and the road to choosing the right one is full of pitfalls. Here are some of those you should actively avoid.

• Even if you have the best revenue model, it can fail if it’s not executed properly. This may be due to poor implementation, lack of resources, or ineffective marketing. It’s important to ensure that you have the necessary resources and expertise to execute your revenue model effectively and to continuously monitor and evaluate its performance. 

• If a new competition enters the market with a better product or service, your revenue model may fail as customers may switch to the new offering. It’s important to stay aware of new entrants to the market and continue to innovate and improve your own product or service to stay competitive. 

• You should keep in mind that economic conditions can change rapidly and unexpectedly, making it difficult to sustain your revenue model. Factors such as inflation, recession, or changes in the consumer behavior can impact your revenue streams and threaten the viability of your startup. It’s important to regularly assess economic trends and adjust your revenue model accordingly to stay competitive and profitable.

• If your revenue model is inflexible and unable to adapt to changing market conditions or customer needs, it may become obsolete. It’s essential to regularly review and update your revenue model to ensure it remains relevant and effective. 

• Sometimes your customers can change their behavior, such as moving to a new platform or channel, and your revenue model may no longer be effective. It is important to stay up-to-date with changes in customer behavior and adapt your revenue model as necessary to ensure its continued success. 

• If external factors, such as changes in regulations, occur, they can have a significant impact on the viability of your revenue model. For instance, new regulations or changes in tax laws can affect your pricing structure or cost structure, making it difficult to sustain your business model. Therefore, it is important to monitor the regulatory landscape and adapt your revenue model accordingly to minimize any negative impact.

If you are starting a startup or have already been working on one, then you need to finalize your review model as soon as possible. Not only that, but you may also figure out things like developer hiring, team structure, capital division, etc. The following articles would help you in that case.

How to do Market Research for Startups

How to Name a Startup 

How to Split Equity in a Startup

How to Hire Developers for a Startup

Tech Startup Team Structure

In-house Development vs Outsourcing

In case you are thinking of reducing costs in development, outsourcing software development might be an option. And here at Technext we provide quality startup services to help founders get rid of development headaches and achieve more with less.

Best of Luck!