- Define a revenue model and distinguish it from a business model [SLIDE 1] While the terms are sometimes used interchangeably, a business model and a revenue model are not the same thing. Recall that business models serve three main purposes: they help entrepreneurs to fulfil unmet needs in an existing market, to deliver existing products and services to existing customers with unique differentiation and to serve entirely new customers in new markets. In other words, a business model describes how a venture will create deliver and capture value. A revenue model is a key component of the business model and identifies how the company will earn income and generate profits. In other words, it explains how entrepreneurs will make money and capture value from delivering on the customer value proposition (CVP) outlined in the business model. If you have a clear strategy for generating revenues, this will give you a better chance of attracting investment when the time comes. This involves asking a few simple questions, such as: As an example, consider Shane Kost, founder of Chicago Food Planet Food Tours and Food Tour Pros. Kost has managed to set up a business that generates revenue in two principal ways: from food tasting tours and from business courses for other entrepreneurs wishing to start food-tasting tour businesses. The revenue from these revenue streams have provided Kost with the lifestyle he has always wanted. Different types of revenue models have different revenue streams. Some companies operate on just one primary revenue model while others use a combination. Each type determines different ways in which revenue is generated, which also affect who the customers will be. For instance, customers that buy online may be different from customers who buy offline. We'll look now at the 10 different types of revenue model. [SLIDE 2] The Unit Sales Revenue Model measure the amount of revenue generated by the number of items (units) sold by a company. Typically, retail businesses rely on the unit sales revenue model by selling products or services directly to consumers, whether face-to-face or online. The idea is that you earn revenue when you sell the product or the service to the end user. There are two different types of unit sales: physical goods, which include clothing, food and beverages, cars and so on, and intangibles, which may be digital products such as music sold through online platforms, or apps sold for smartphone. Software support may also be unit priced, meaning that customers pay by the minute or by the hour. A variation on this model is called the "razor and razor blade model," coined by Gillette, which generates huge revenues by offering a physical product (razors) at low-to-no cost to encourage sales of the more expensive blades. This is also known as the printers-and-ink model -- the printer is cheap but the ink and toner cartridges are priced much higher. Coffee pods and single-serve coffee machines follow the same model. [SLIDE 3] The advertising revenue model relies on the the amount of revenue gained through advertising products and services. The advertising revenue model is one of the oldest revenue models; today, it has evolved from its traditional focus on print and broadcast adverts to encompass the digital world. In the digital world, generating meaningful advertising revenue is dependent on attracting traffic or dominating a niche. For example, Google AdWords is not only Google's main advertising product, but also its main source of revenue. The AdWords service is a type of advertising revenue model called cost-per-click (CPC) which charges the advertiser a fee every time a user clicks on the ad. The model is intended to attract traffic to the advertiser's business while generating income for providing the AdWords service. AdWords also include the cost-per-action, or CPA advertising model, whereby advertisers pay only when the click converts to an actual sale. Another example of online advertising is promoted content, which is also known as sponsored or suggested content. This works by having ads appear in the flow of content that users are reading. Often, these ads are blended in so nearly to the content that users may not even realize that they have been paid for. Many types of businesses use digital platforms such as Twitter, Facebook, LinkedIn, and Yelp to publish paid ads to promote their services. Although these postings are marked as sponsored, they generally attract more people than traditional ads because they are perceived as more credible. They also increase brand awareness by reminding people of the existence of the brand, thereby encouraging sales. [SLIDE 4] Companies use the Data Revenue Model when they generate revenue by selling high-quality, exclusive, valuable information to other parties. For example, the social network PatientsLikeMe is a forum for people with certain diseases to share factual information about their condition. PatientsLikeMe generates revenue by aggregating the data and selling it on to companies in the healthcare industry. While other social networks such as Google, Twitter and Facebook have huge databases of users' personal contact information, they tend to use this data for targeted advertising only, and do not sell the databases to third parties. [SLIDE 5] The intermediation revenue model describes the different methods by which third parties such as brokers or middlemen can generate money. Brokers are people who organize transactions between buyers and sellers. These middlemen play important roles in connecting people to different services. For example, eBay is an auction broker that manages the transaction between buyers and sellers in exchange for a listing fee or commission. Real estate brokers are another common example, as are credit card companies, who earn revenue through the sales transactions process. In recent years, newer forms of intermediation models have emerged. One example is Airbnb which is a platform where travelers can connect with homeowners to find short-term accommodation at a fraction of the price of hotels. Airbnb takes 3% of the commission earned by the homeowner and a fee of between 6-12% of every booking made by visitors. [SLIDE 6] The licensing revenue model is a way of earning revenue by giving permission to other parties to use protected intellectual property such as copyrights, patents and trademarks. Licensing frequently takes place in the technology industry where technological innovations are licensed to other users. For example, when we use our personal computers, they are under license from the developer of that software. Technological innovations are often sold to larger companies that have the financial and technical expertise to maximize their potential. Take apps, for instance. Many people design iPhone apps and then license them to Apple which has the capability to market them to a wider audience. The most successful apps, such as music-streaming service Pandora, generate revenue not only from licensing but also from user subscriptions and from on-screen advertising. [SLIDE 7] The franchising revenue model describes the process whereby an existing business allows another party to trade under the name of the business. We introduced you to the concept of franchising at the beginning of this course, and discussed how it can be a beneficial way from entrepreneurs to get a head start in launching their own businesses. With a franchise, entrepreneurs do not need to spend the same amount on building the brand, developing processes, marketing, and sourcing products. For example, Dawn LaFreeda runs 75 Denny's restaurant franchises, earning close to $100 million in annual revenue. However, increasingly there are franchises that are not quite as familiar as Denny's, McDonald's and Subway. For instance, there are 15 Geese Police franchises in the Northwest and Midwest dedicated to chasing away geese from lawns at businesses, parks and golf courses. The Naked Cowboy is a performance artist who began entertaining the public in Times Square, New York City, and now franchises his performance to artists in other cities. [SLIDE 8] The subscription revenue model involves charging customers to gain continuous access to a product or service. This type of model has traditionally been applied to magazine and newspapers where customers pay a subscription fee to receive each issue of the publication. Today, a growing number of start-up companies also use the subscription revenue model. For example, Netflix earns revenue by provider subscribers with access to movies and television shows, Birchbox delivers beauty products monthly to subscribers and Barkbox is similar but for dog treats. Another type of subscription model is applied to user communities such as Angie's List, where members pay for access to a network of reviews on local businesses. [SLIDE 9] The professional revenue model provides professional services on a time and materials contract. For example, consultants, lawyers and accountants often charge by the hour for their services. Websites like Get a Freelancer and Upwork also use this model by allowing freelancers to charge a fixed fee for projects posted online by other companies. [SLIDE 10] The utility and usage revenue model charges customers fees on the basis of how often goods or services are used. This is also known as a pay as you go model. Some mobile phone carriers use this model by charging users a fee for the number of minutes used on calls, or for the volume of text messages. The greater the number of minutes or volume of texts, the higher the payment. Hotels use this model by charging customers by the night and car rental companies charge on the basis of daily or weekly use of their vehicles. [SLIDE 11] The Freemium Revenue Model involves mixing free (mainly web-based) basic services with premium or upgraded services. In this model, businesses create at least two versions or tiers of products or services. The company gives away the low-end version of the service for free, and the free version usually comes with limits on usage and functionality. The company also creates and sells higher end versions that offer more functionality and performance. For example, the business networking site LinkedIn gives members free access to build a profile and maintain a professional network. It charges a fee for its premium service which further benefits job seekers and recruiters with added functions such as search filtering, sending personalized messages and tracking visits to one's profile. In the next lesson, we'll take a close look at how some companies have profited from this model.