Breaking Down the Types of Revenue Models

Who are you selling to? How are you selling it? Two of the most important questions a founder has to answer. Sometimes it’s an easy answer, other times it takes some experimentation to find the right model that works for your ideal customer. Use this guide to learn about some of the most common revenue models, and how they work.

Freemium Model

A freemium pricing model is a strategy in which a company offers its product for free, but charges for additional features or access to premium content. The idea is that if people like the core product, they’ll be willing to pay for extra features. The most famous example of this kind of pricing is probably Spotify: the basic service lets you stream music without ads, but if you want more control over what songs get played and where they go on your playlist, then it’s time to upgrade your account.

Freemium products can also come in two flavors: true freemiums are free forever; these products make money by charging users who want more out of them (for example, with an advertising-supported version). The other type of freemium has no free version at all—instead it’s “try before you buy” where users are given some form of access in exchange for providing personal information (think Facebook). This kind of product doesn’t actually cost anything upfront; rather it relies on advertising revenue earned from its users’ attention or monetizing their data.

Subscription Model

With subscription models, users pay on a regular basis for access. This is the most popular way to make money on a product. It’s also one of the most flexible ways to do it, since you can choose how often and how much you charge.

Typical subscription models offer monthly and/or yearly payment options. Sometimes these can be simple and clearcut: you pay $ABC and get access to XYZ as long you maintain payments. Other times it may be a little more complex, such as Slack or Dropbox which charge based on both the number of users who have access form your organization as well as the organization’s overall usage of the service. Typically, most companies deploying a subscription model offer an “Enterprise” tier for companies that may need a bit more customization.

Advertising Model

Advertising is another way to monetize your product. It allows you to use the app for free and have an ad shown between each action, or at the end of your actions. The advertiser pays a fee to get their ad shown while people use this app. Ads can be targeted based on factors like age, location, interests etc., so they’re more relevant to users than they used to be—but they’re also more annoying! This can be good if you’re looking for new products—but bad if all you want is a distraction-free experience.

Youtube is a perfect example here. Up until a few years ago, they were a fully advertising driven business before introducing subscription models like Youtube Premium. Instagram would also be a great example as well. These apps pull in money by selling advertisements to people who want to reach you (or your target audience) with their marketing message. A general rule of thumb, if you aren’t quite sure how a product makes money, chances are you (i.e. the consumer) are the product.

Markup or Commission Model

Markup models are where Company A offers the products or services of Company B for a higher price than they pay for access to said products or services. An example here would be a marketplace for creative goods. Say you have a network of artists or creatives offering home goods. They list their products within your app or website (ideally because they believe that this will help increase their discoverability and generate sales they wouldn’t have gotten otherwise) and you charge the end consumer an additional fee on top of that list price, keeping that fee for yourself, usually referred to as a “platform fee”.  

Delivery apps such as Instacart would be a great example here. Many of the stores available also come with labels letting users know the prices they see are “higher than in-store prices”. 

Licensing Model 

Licensing happens when one company allows another company to produce or distribute its products for a fee. 

Disney is a great example here. They license their characters to different toy companies who then have the rights to create and sell toys based on those characters. With each toy sold for the duration specified period of time, Disney gets a cut, also known as the “licensing fee”.

Production Model

With production models, an organization funds its own research and development of new technology and products, then sells them commercially, either direct to consumers or to other businesses. 

An example here would be Apple with the iPhone or Microsoft with the Xbox.

Choosing the right revenue model isn’t always an either or choice. In many instances, as your company evolves, you’ll start to roll out additional models as your product offerings grow and you look to monetize your target demographic in new ways. That’s why knowing who you’re selling to and how they make purchasing decisions should be top priority.

Ready to power up? Let’s chat about revenue optimization withSenzu.