Revenue modeling is a process of incorporating a sustainable financial model for revenue generation within a business model design. Revenue modeling can help to understand what options make more sense in creating a digital business from scratch; alternatively, it can help in analyzing existing digital businesses and reverse engineer them.
Myth: A revenue model is a business model
In the startup world, those are often used as synonyms.
Which is fine as long as it doesn’t limit the understanding of what you can do within a business model.
Indeed, a revenue model actually does inform the business model, and it often influences it from the foundation.
However, those are not the same. In fact, in many cases, a revenue model and stream are the only building blocks of an overall business model.
Take the case of Netflix, which for years has been running with a subscription business model, and that much much later on (only in 2021), Netflix started to roll out an ad-based revenue model.
Changing a revenue model is not just about changing the way you make money, but it implies changing a set of assumptions within a business model.
Going back to the case of Netflix, adding the ad-supported tier within its business model, requires an understanding of the implications that might carry on the overall business model.
Thus, Netflix is not just about running ads on top of its platform. It’s about understanding how the streaming ad ecosystem works, how to integrate it within its business model, and what consequences that might have on a current subscription model.
That is why, if you’re on Netflix when you start running ads, it’s not just about how and how much money you can make from it; it’s about asking a few fundamental questions about the overall business model, such as:
- What’s the impact of advertising on the overall business model?
- How is advertising different from subscriptions?
- What scalability advertising has vs. subscriptions?
- What margins do we have with advertising vs. subscriptions?
- Is advertising helping us build a better acquisition funnel?
- Who are the key players within the advertising ecosystem?
- How do we build a scalable advertising platform?
And so on.
In other words, my argument here is if you plug in a new revenue stream, that is not a business model.
With this holistic understanding, you are not constrained by a narrowed definition.
Revenue modeling as the avenue into the business model
Once you take into account the above, then, of course, you know that revenue modeling can be an avenue into a business model.
Thus, an understanding of the revenue model will help you:
- Reverse engineering any business (by starting the analysis by simply following the money).
- Speed up the experimentation process by plugging in new revenue models for your business.
- Start building or scaling a business model!
For the sake of this guide, we’ll look at a key distinction: symmetrical vs. asymmetrical in several contexts.
Remember that all classification methods have flaws and we can only take them into account as long as they help us better tune an existing business model.
I decided to use this classification, but any alternative classification works as long as we are able to grasp and understand the possibilities we have in terms of business model design.
Symmetrical vs. Asymmetrical business models
Business models can be of various types.
For that matter, there might be as many business models as the companies we have in the marketplace.
In this guide, we’ll use as reference symmetry vs. asymmetry to distinguish across two main business models categories.
In this particular case, we’ll look at revenue modeling by keeping a key distinction between symmetry and asymmetry from three different perspectives.
Cash: who pays the bill?
In many cases, platform business models success depends upon two key players:
- Users: who don’t pay for some or all the services offered by a platform (on the user-side), but they help the platform build it’s a core asset
- Customers: who pay for the services offered (on the customer-side) to take advantage of the core asset of the platform
In such a business model, the platform assembles the anonymized data of its users who get a free service in exchange.
The assembled data gets processed (by the platform AI and algorithms) and it’s used to scale the platform, build a valuable core asset that can be financed by a set of customers willing to pay for it.
Asymmetrical: users ≠ customers
The asymmetry here stands in the fact that users and customers are two separate entities (asymmetrical cash model: users ≠ customers).
Think of how Google sells ads to companies, while its core products are all free to users.
Symmetrical: users = customers
Thus, in a symmetrical revenue model, users and customers are the same entity (symmetrical cash model: users = customers).
Think of how Netflix’s users are also its customers.
However, it’s worth highlighting how Netflix has now launched an ad-supported version, which starts at $6.99 and is an ad-supported tier.
This is an interesting business model transition. Indeed, for all its life, Netflix has relied on a linear and symmetrical revenue model, where users were also customers.
As of now, that is still true. In fact, in the ad-supported tier, users are still paying customers. However, it’s worth emphasizing that users are now advertisers’ target.
Thus, by October 2022, as Netflix started to roll out its ad-supported plan, the company also started to move into an asymmetrical business model type.
Why is Netflix moving toward an asymmetric business model? The answer is simple: Scale!
To reach a subsequent stage of scale, where the company can successfully reach a billion users, an ad-supported business model can help with that.
Information: does the user know how the platform makes money?
If there is information asymmetry, it means there is one of the parties knows more than the other side.
Asymmetrical: hidden revenue generation
Symmetrical: revealed revenue generation
In a symmetrical model, revenue generation is revealed, thus enabling the customers to know what they get for the service paid.
Scale: does the platform retain its margins as it scales?
Scale is the ability of a company to grow exponentially while keeping its margins growing with the platform’s revenues.
Symmetrical and Linear: margins tighten as the platform scales
In a linear symmetrical revenue model as the platform scales its margins tighten up, thus reducing the profitability of the platform.
Asymmetrical and Non-linear: margins keep growing as the platform scales
Revenue model examples
Razor and blade
Hybrid revenue models
A good example of a business model that has different revenue models is Amazon. Based on each side of its business, Amazon has different revenue streams and models:
Within the Amazon core consumer e-commerce platform, there are two main types of revenue streams:
- Amazon-branded products: on those products which are labeled and sourced by Amazon, the company sells them directly to consumers. Therefore, this is part of the revenue model, where Amazon has the highest margins and more control.
- Amazon’s third-parties products: those are products that Amazon hosts on its own e-commerce platform. Those products benefit from Amazon’s e-commerce visibility and sustained traffic. At the same time, Amazon will have the advantage of increasing the variety of products available in its stores, thus making them more appealing to consumers. However, compared to the branded product, Amazon will have less control and reduced margins. Indeed, Amazon will split the revenues with third-party sellers.
To enable more capabilities to third-party e-commerce stores, and at the same time, guarantee a better experience on its e-commerce (and we can argue also to have more control and margins) Amazon introduced over the years the third-party seller services:
- Amazon third-party seller services: fulfilled by Amazon, perhaps enables sellers to host their inventories, and deliver with Amazon, thus collecting a royalty as a result of the sales made on the platform. Here, the revenue model is flipped. Indeed, Amazon will collect most of the revenues coming from the product sales (remember that Amazon also takes care of storing the inventory and fulfilling it to customers) and the seller will collect a royalty, thus a % of the sale.
Other revenue streams comprise:
- Product advertising: Amazon is the most popular product search engine. Over the years it gave the options to e-commerce built on top of Amazon, to gain more visibility both on an impression or on a click-through rate basis. This means that Amazon sells advertising with a bidding model (similar to Google Ads).
- Amazon Prime: born as an attempt by Amazon to increase the repeat business on the e-commerce platform, Prime turned into a real streaming entertaining business, competing with other companies, like Netflix. This revenue stream follows a subscription-based model.
- Amazon AWS: Amazon AWS turned into a cloud infrastructure able to support many small, medium, and enterprise customers. The revenue model here runs primarily based on a consumption basis. Therefore, with a logic of pay-as-you-go.
Revenue model vs. cost structure
To complete the picture, it’s critical to trace the difference between the revenue model and cost structure.
And from there, how the two elements come together to help build a viable business model.
The cost structure is tightly connected to the revenue model. Each revenue stream might carry
Remove model and distribution
In many cases, having a more holistic view of how the revenue model and cost structure interact is critical also to assess when a revenue model goes beyond making money alone.
Don’t get me wrong; a revenue model does focus primarily on how to make money for a business.
However, in some cases, a revenue model might bring in the money as a side-effect of building distribution for the business.
Let’s take a few examples.
When you look at Spotify’s business model, there is no doubt that the premium members’ revenue stream (for now) is the one that most contributes to the business.
Above, you can see how the premium membership revenue is many times over that of the ad-supported tier.
And there is more to it.
Even if we look at it from a cost structure standpoint, the premium membership revenue has a much lower cost compared to the ad business.
Indeed, Spotify, in 2021, generated €8.46 billion in revenues from the premium members’ revenue stream.
And of that, an almost 30% gross profit margin.
On the other hand, in the same period, Spotify generated €1.2 billion in revenue from the ad-supported stream at a 20% gross profit margin.
Does that mean the ad-supported revenue stream is not as good as the premium members?
If you look at it from a revenue generation standpoint alone. That is what you can imply.
However, you do understand that the ad-supported side of the business also represents the marketing funnel, which helps Spotify get recognized by hundred of millions of users across the world.
And that many of these free, ad-supported members become, over time, paid subscribers.
You can get a more comprehensive picture.
In addition, the ad-supported side of the business, if scaled up, can also enable Spotify to generate much more revenues, in the future, at much wider margins.
Indeed, advertising networks, compared to membership networks, work better as they are scaled up!
That is why it’s critical to develop a holistic mindset to grasp the complete picture of how companies’ business models work.
This is the essence of business engineering.
Breaking down the wall between product and distribution
The lesson we learned from the Internet playbook and way of doing business is the aspiration, over time, to break the walls between product and distribution.
In short, the product becomes both a revenue generator and a marketing/distribution channel.
- Revenue Modeling Defined: Revenue modeling involves creating a sustainable financial plan for generating income within a business model. It aids in analyzing existing digital businesses, reverse engineering them, and designing new digital ventures.
- Distinguishing Revenue Model and Business Model: While often used interchangeably, a revenue model and a business model are not the same. A revenue model is a foundational element within a business model that informs and influences various aspects of the business.
- Netflix Case Study: The example of Netflix demonstrates how changing a revenue model (adding an ad-based tier) impacts the entire business model. This shift requires considerations about the impact on the overall model, differences from subscriptions, scalability, margins, acquisition funnel, ecosystem players, and platform scalability.
- Holistic Approach to Revenue Modeling: Revenue modeling goes beyond just making money; it involves understanding how a new revenue stream integrates with the business model, impacting distribution, marketing, and financial aspects.
- Importance of Asking Fundamental Questions: When introducing a new revenue stream, it’s crucial to address fundamental questions about its effects on the overall business model, differences from existing streams, scalability, margins, and more.
- Avenue into Business Model Design: Revenue modeling serves as an entry point to designing a business model. It helps in reverse engineering businesses, accelerating experimentation with new revenue models, and facilitating the process of building or scaling a business.
- Business Model Defined: A business model is a comprehensive framework that systematically creates long-term value for an organization by delivering value to customers and capturing value through monetization strategies. It guides understanding, design, and testing of business assumptions.
- Revenue Model Defined: A revenue stream is a foundational component of a business model, representing the economic value customers pay for products and services. It influences how a business model functions and delivers value.
- Symmetrical vs. Asymmetrical Business Models: Asymmetrical models don’t directly monetize users but leverage user data and technology, often having a key customer pay to sustain the core asset. Google’s data-driven ad monetization is an example of an asymmetrical model.
- Various Business Model Types: Business models come in different types, such as scalability, incubator, pivot, freemium, open source, seed funding, cash flow, accessibility, blue ocean, churn, evangelist, growth hacking, MVP, leaner MVP, product-market fit, business engineering, and more.
- Transitional Business Models: Transitional models are used to enter markets, gain traction, and shape long-term scalability visions.
- Revenue Streams Matrix: Classification of revenue streams based on customer interactions and ownership of those interactions aids in revenue modeling.
- Pricing Strategies: Developing pricing models that align with customer needs and financial sustainability is an integral aspect of revenue modeling.
- Considerations in Designing Business Models: A holistic understanding of revenue modeling is crucial, as it influences distribution, marketing, financial models, and other key aspects of a business model.
- Applying Holistic Approach to Business Growth: Utilizing revenue modeling for designing innovative revenue strategies contributes to business growth and sustainability.
What is revenue and business model?
Most business people tend to confuse the revenue model with the business model. While the revenue model informs a business model, those are two separate things. The revenue model is one of the building blocks of a business model. Yet a business model comprises many other aspects such as distribution, cost structure, financial structure, and more.
What is revenue model example?
Examples of revenue models that work on the Internet are ad-supported, subscription-based, consumption-based, and SaaS. Those revenue models help web companies to grow and scale their business models.
What is the best revenue model?
In the Inernet era, a revenue model that proved quite effective is the ad-supported business model, where companies like Google provide free tools to billions of people across the web. Those free tools are paid for by companies who advertise on Google. Google opened the way for many other companies to use a similar model to finance the web.
Other Key Components of a Business Model
Other Revenue Model Case Studies
Other business resources:
- What Is Business Model Innovation
- What Is a Business Model
- What Is A Heuristic
- What Is Bounded Rationality
- What Is Business Development
- What Is Business Strategy
- What is Blitzscaling
- What Is a Value Proposition
- What Is a Lean Startup Canvas
- What Is Market Segmentation
- What Is a Marketing Strategy
- What is Growth Hacking