Once you are confident about investing in certain business, the first thing to decide is its revenue model. When it comes to online business, the alternatives are immense ranging from freemium to subscription. Many entrepreneurs do not understand initially, but the implication of choosing a revenue model is huge and can basically establish your brand image, and long-term business viability.
The fact of the matter is that you just cannot switch your revenue model at a drop of a hat. You need to be systematic in your approach and ensure that all the parties affected by that revenue model are on board.
One key step in determining the revenue model revolves around identifying the source of your revenue. You can stick to one or choose various revenue streams like,
-Product sales
-Service fees
-Advertising sales
-Data access fees
-License fees or commission
And, more.
Various factors are taken into account when deciding on the most ideal revenue model for an online business.
Another important aspect to keep in mind is that the revenue model that you choose, will eventually affect your business strategy and will be paramount in achieving your financial objectives (profits). There have been several cases in the past where startups have been unable to attain profitability despite having an innovative business model. In most cases, their revenue model was screwed or they did not choose the right one.
Most entrepreneurs believe that a startup should always follow KISS (keep it super simple) principle as consumers are typically wary of complex and artificial pricing. By doing this they tend to hurt their future prospects as well as financial growth. The challenge is to tread the fine line between a simple and complex revenue model that not only offers a fair ROI to you but also is acceptable by the consumer. During the early stages, you need to keep it simple and add multiple channels as you grow.
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There are different scenarios that you need to take into account when deciding which revenue model you should incorporate. These scenarios are directly related to your business model.
Let us take into account each and every scenario where a revenue model would be successful:
This is one of the most widely used revenue models, where marketplace owner charges a commission on every sale made. Aspiring entrepreneurs must opt for such a revenue model when the size of their marketplace is small and the sale is identical across all the categories. Although such a revenue model is most widely used in online retail, yet any other business can can incorporate this revenue model with ease. This is also known as a basic revenue model for online businesses that connect buyers with sellers.
This is a spinoff of global commission type revenue model, where website owner can individually assign commission based on each category. This type of revenue model is advised in scenarios where some of the categories on your marketplace are doing extremely good, while others are not returning many sales. Normally such a revenue model is applicable for high volume or high-value products or services.
For example, most ecommerce websites have high commission rate of items like electronics and mobiles, and commission rate for household products is low. Such a revenue model is not advised for online businesses like online food ordering and delivery, online care services, or online travel activity marketplace, where there are not high-value categories. The easiest way to implement this revenue model is to determine which categories are most popular on your website and put a higher slab of commission for those categories.
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There are often scenarios where entrepreneurs tweak their business model in order to stand out of the competition. This is where the subscription based business model comes into play. Online businesses which work on recurring purchases are most suitable for this type of revenue model. One popular example is online cosmetic store or food ordering website.
This revenue model can also be added to any other business model in addition to the commission-based revenue model. For example, an online marketplace can charge sellers subscription fees for the opening of an online store in addition to commission fees on every sale. Also, a peer-to-peer marketplace can work on a subscription-based revenue model for connecting sellers and buyers.
Although seldom used in ecommerce, this revenue model is the backbone of most of the websites. In the recent past, online businesses have started to test this revenue model to increase the income of their website.
You can offer featured listings for products and services on your platform to sellers on the front page, search and other areas of listing for more traction. However, such a revenue model is only recommended when you have a strong user base and ample sales. For example, you can charge restaurants advertising fees for featuring their outlet on the homepage or as a feature listing.
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All the above-mentioned revenue models have their own perks in terms of the amount of income being generated. However, as your online business grows, there is a need for a multiple channel approach. This is where a hybrid model comes into action. Such a revenue model is a collaboration of revenue models mentioned above. For example – an ecommerce marketplace can have a subscription revenue model in place where it charges sellers fees for listing products. In addition to it, the website can also charge a commission rate based on categories or products for every sale made. The website can even add a third revenue channel for offering features listings on the website for more traction. It is crucial to note that such an approach is only advised once you have strong hold over the market. Charging sellers at multiple points (subscription, commission, and advertisement) can often alienate them, which is not recommended for a new business. However, once you have captured a good share of the market and have a substantial user base, sellers would be more than welcome for any form of revenue model.
There is no hard and fast rule when it comes to an ideal revenue model. Online businesses need to test the waters themselves and analyze market trends for an ideal revenue model- it all depends on the size of your marketplace.
Early stage online businesses can start with a global commission type and can alter their revenue model as they increase their market cap. Other factors include the type of business model and current market trends. There are several online businesses that started with a subscription-based revenue model but moved on to global commission based revenues model and vice versa. You need to factor in your end users, your hold over the market, and a number of sales being generated to incorporate a certain business model.
The bottom line is that it is not a game show, so there is no need to do any form of guesswork. You should do your research work properly and identify key areas where you can implement a viable revenue model. The fact remains that the life of your online business depends upon it.
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