revenue-modeling

Revenue Models: The Advanced Guide To Revenue Modeling

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.

What is a business model?

business-model
A business model is a framework for finding a systematic way to unlock long-term value for an organization while delivering value to customers and capturing value through monetization strategies. A business model is a holistic framework to understand, design, and test your business assumptions in the marketplace.

What is a revenue model?

revenue-stream
A revenue stream is one of the foundational building blocks of a business model, and the economic value customers are willing to pay for the products and services offered. While a revenue stream is not a business model, it does influence how a business model works and delivers value.

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

asymmetric-business-models
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus have a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility.

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 cash 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.

Information: does the user know how the platform make money?

If there is information asymmetry it means there is one of the parties which knows more than the other side.

Asymmetrical: hidden revenue generation

googles-business-model

In a hidden revenue generation model, the users of the platform ignore how it makes money while the platform knows a lot about its users.

Symmetrical: revealed revenue generation

netflix-business-model
Netflix is a subscription-based business model making money with three simple plans: basic, standard, and premium, giving access to stream series, movies, and shows. The company is profitable, yet it runs on negative cash flows due to upfront cash paid for content licensing and original content production.

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 grow 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

In a non-linear asymmetrical revenue model as the platform scales margins keep growing, thus keeping the platform highly profitable.

Revenue model examples

In this chapter, we’ll see some revenue model examples you can use or borrow to build your business model.

Ad-supported

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 that is ad-supported. The company recorded an operating loss of €378 million in 2017.

Freemium

freemium-business-model
The freemium is usually a growth and branding 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 either marketing or sales funnel. The free users not converting in customers help spread the brand.
dropbox-business-model
Dropbox generated over 90% of its revenue via its self-serve channels to convert users in paying customers through in-product prompts and notifications, time-limited free trials of paid subscription plans, email campaigns, and lifecycle marketing. Dropbox generated over $1.1 billion revenue in 2017, with an average revenue per paying user of $111, $305 million in free cash flow and 11 million paying users

Subscription-based

netflix-business-model
Netflix is a subscription-based business model making money with three simple plans: basic, standard, and premium, giving access to stream series, movies, and shows. The company is profitable, yet it runs on negative cash flows due to upfront cash paid for content licensing and original content production.

Consumption-based

amazon-aws-business-model-scalability
Amazon AWS is a business unit of Amazon which sells cloud services, which are primarily consumption-based.

Commission-based

airbnb-business-model
Airbnb is a platform business model making money by charging guests a service fee between 5% and 15% of the reservation, while the commission from hosts is generally 3%. The platform also charges hosts who offer experiences with a 20% service fee on the total paid amount.

Hidden revenue

googles-business-model
In an hidden revenue generation the service provided is free, in so targeted or relevent that the average user doesn’t even realize how the platform makes money.

Razor and blade

amazon-razor-blade-business-model
In a regular razor and blade revenue model, the company sells the “razor” product at cost, while selling the “blade” at extremely high margins.

Direct

tesla-business-model
Tesla is vertically integrated. Therefore, the company runs and operates the Tesla’s plants where cars are manufactured and the Gigafactory which produces the battery packs and stationary storage systems for its electric vehicles, which are sold via direct channels like the Tesla online store and the Tesla physical stores.

Indirect

apple-distribution-strategy
While Apple uses a hybrid distribution approach. A good portion of Apple’s products are sold via indirect distribution channels, like third-party cellular network carriers. This matter to understand, how, for years Apple has been able to sell expensive tech products at a wide audience, as it leveraged on indirect channels.

Hybrid revenue models

amazon-case-study
Amazon runs a platform business model as a core model with several business units within. Some units, like Prime and the Advertising business, are highly tied to the e-commerce platform. For instance, Prime helps Amazon reward repeat customers, thus enhancing its platform business. Other units, like AWS, helped improve Amazon‘s tech infrastructure.

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 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 delivery 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 primary based on a consumption basis. Therefore, with a logic of pay-as-you-go.

Other business resources:

Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which target is to reach over two 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 in touch with Gennaro here