revenue-model-patterns

Three Proven Revenue Model Patterns To Scale Up Your Business

Revenue model patterns are a way for companies to monetize their business models. A revenue model pattern is a crucial building block of a business model because it informs how the company will generate short-term financial resources to invest back into the business. Thus, the way a company makes money will also influence its overall business model.

Just get started, don’t overthink it

April 23rd, 2005, Jawed Karim a German-born young fellow, who had moved to Minnesota with his family thirteen years before, uploaded a video entitled “Me at the zoo:”

Nothing remarkable so far, this wasn’t the first ever video on a video-sharing platform, that started to grow at an exponential rate. By July that platform went from zero to over seven million unique visitors.

Only to become among the most popular sites on earth, which got acquired by another tech giant, Google. This is the story of YouTube and how it grew to a multi-billion dollar business.

The reason I started from YouTube story is that – I argue – the most popular video-sharing platform on earth has all the essential ingredients of business model patterns that were built-in to scale up.

We’ll take into account three primary proven business model patterns that helped many companies to scale up and thrive.

If you’re looking for ways to grow your business exponentially, those might be for you. However, keep in mind that a business model pattern is just one of the ingredient for a successful business model.

Yet these are a good starting point!

Freemium pattern

freemium-business-model
The freemium – unless the whole organization is aligned around it – is a growth strategy rather than a business model. A free service is provided to a majority of users, while a small percentage of those users convert into paying customers through the sales funnel. Free users will help spread the brand through word of mouth.

A freemium patter is primarily a service, given for free either entirely (in this case the service might be ad-supported) or a basic version of it. In the latter case, if you want to have more advanced or unlimited features of the service, you’ll have to pay a fee.

Entire industries have been built on the premise of freemium business models. One element that makes this pattern powerful is its virality element. In short, if you have a great product, that solves an actual need for a set of users. Those users will be able to find it and use it with no friction.

Also, those same users will also spread the word on a massive scale. This element of virality and enhanced word of mouth makes possible to companies running on a freemium pattern to grow exponentially, at least the users’ adoption.

A few successful examples of a company that scaled up thanks to its freemium pattern that triggered virality growth are Spotify, MailChimp, and DropBox.

spotify-business-model
Spotify is a two-sided marketplace where artists and music fans encounter on a single platform. Founded in 2008 with the belief that music should be universally accessible with a seamless experience based on streaming audio and video. It generated over €4 billion in 2017, of which almost 90% based on premium memberships and 10% based on a free service which is ad-supported. The company recorded an operating loss of €378 million in 2017.

Marketplace pattern

marketplace-business-models
A marketplace is a platform where buyers and sellers interact and transact. The platform acts as a marketplace that will generate revenues in fees from one or all the parties involved in the transaction. Usually, marketplaces can be classified in several ways, like those selling services vs. products or those connecting buyers and sellers at B2B, B2C, or C2C level. And those marketplaces connecting two core players, or more.

A marketplace is another business model pattern that can help you build a business at scale. While it isn’t easy to create a marketplace, being successful at it means being able to build a multi-million if not billion organizations.

That’s because the marketplace would benefit from network effects, where the more users joining would make the overall platform more valuable for those joining afterward.

Marketplaces like Airbnb have become extremely popular. One key economic advantage of the marketplace is the fact it can extract financial value from each interaction happening on the platform.

airbnb-business-model
As a peer to peer network, Airbnb allows individuals to rent from private owners for a fee. Airbnb charges guests a service fee between 5% and 15% of the reservation subtotal; While the commission from hosts is generally 3%. Airbnb also charges hosts who offer experiences a 20% service fee on the total price.

Two-sided platform pattern

If I ask you, what’s the most valuable platform for connecting with professionals? Chances are you’ll think right away about LinkedIn, the professional social network that combines both people looking for jobs and companies looking for qualified candidates.

The key element of building a successful two-sided platform is to start focusing on one of the sides of the equation.

For instance, when LinkedIn started, it soon realized how the profile page had become for many a business card to show to their employees. When that became viral, the company began to enjoy from network effects which made the platform also valuable to employers.

Indeed, in a world made of bits where data is the most valuable asset, having millions of people curating their professional page was a massive enhancer for LinkedIn growth.

As more people joined in, the platform also became valuable for companies willing to invest money in it to find qualified candidates.

On the other side of the platform, professionals were looking for ways to connect more effectively with employers, with advanced features. LinkedIn is a compelling case of a freemium pattern, a two-sided platform that has become valuable for millions of people worldwide!

linkedin-multi-sided-platform

How do apps make money?

how-do-apps-make-money
Apps in the Apple Store follow five primary business model patterns: the free model where the app might make money via paid ads. Freemium model where the app charges for premium features; subscription-based model, paid model, and paymium model, which is a mix of paid and freemium.

How do influencers make money

how-do-influencers-make-money
Online influencer marketing is a relatively new creation, but it has fundamentally changed how brands communicate with consumers. People with targeted audiences are now the focus of advertising efforts. Influencers can tap from small to larger audiences thus, giving companies another way to promote their products. Indeed, influencers make money by selling digital products via sponsorships and affiliations, brand ambassadors programs, and physical products.

How do e-commerces make money? 

e-commerce-business-models
We can classify e-commerce businesses in several ways. General classifications look at three primary categories:
– B2B or business-to-business, where therefore a business sells to another company.
– B2C or business-to-consumer, where a business sells to a final consumer.
– C2C or consumer-to-consume, or more peer-to-peer where consumers sell to each other.

How food delivery companies make money?

food-delivery-business-model
In the food delivery business model companies leverage technology to build platforms that enable users to have the food delivered at home. This business model usually is set up as a platform and multi-sided marketplace, where the food delivery company makes money by charging commissions to the restaurant and to the customer.

How do open source projects make money?

open-source-business-model
Open source is licensed and usually developed and maintained by a community of independent developers. While the freemium is developed in-house. Thus the freemium give the company that developed it, full control over its distribution. In an open-source model, the for-profit company has to distribute its premium version per its open-source licensing model.
open-core
While the term has been coined by Andrew Lampitt, open-core is an evolution of open-source. Where a core part of the software/platform is offered for free, while on top of it are built premium features or add-ons, which get monetized by the corporation who developed the software/platform. An example of the GitLab open core model, where the hosted service is free and open, while the software is closed.

Key takeaway

Scaling up an organization is among the hardest endeavor, in a world governed by a winners-take it all effect. In this scenario, being able to prepackage a business model made of patterns that proved successful is a good starting point.

Above we saw three proven patterns (freemium, marketplace and two-sided platform) that have proved to work over and over again.

If you’re starting a digital business, you might want to look at the options above!

Tools and resources for your business:

Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which reached over a million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get The FourWeekMBA Flagship Book "100+ Business Models"

Leave a Reply