Revenue models

In any business idea we must consider the income model. Let’s see the 5 most frequent models, pros, cons, examples and how to combine them.

Sometimes the revenue model is often confused with the business model. It would not be the first time that I ask about the business model and they answer me “Membership site” or “Freemium”. And it is normal, because sometimes they are used interchangeably.

But in reality, the revenue model only refers to the money inputs of your business model. Just this week I was dedicating the episode to talking about it, and next week I’ll talk about the business model.

So let’s see what income models we have, and what tools and software we need to set up each of them.

1. Single payment (eCommerce)

The first is the most classic and veteran. Set up an online store, a virtual store, an eCommerce. We can easily do this with WooCommerce, which is a free WordPress plugin.

If you want to know how to set up an eCommerce, I recommend the and the . As you can see, it is not complex or difficult to set up an online store quickly.

An eCommerce is like a store of a lifetime, but instead of having a store facing the public at street level, we have everything on a website, in catalog format. Obviously, the income will come from the sale of the products.

In its favor we have to say that it is a market in its golden age, with an annual growth of more than 30%, and forecasts of 62% throughout this year.

The weak point of an online store is that if you don’t sell, you don’t enter. Thus, depending on the sector and its seasonality (holidays, weekend, bridges…) we will have more or less income. It is true that it is not as exaggerated as in physical stores, which even when it rains they suffer (in fact, rainy days work best for eCommerces) but they also have better and worse streaks.

This model is the most classic and we are all used to it as customers, so let’s move on to the most modern and interesting ones.

2. Recurring payment (membership site)

We now turn to my favorite, the membership site. This income model consists of receiving an income on a recurring, periodic basis, in exchange for a product or service.

This is nothing new, and it was around before the internet. For example, a gym for which you pay the fee each month, the fee for the book club, or the digital channel. Today many new companies have joined this model: Spotify, Netflix, or even hosting providers.

It is important to note that these recurring revenues are not only exclusive to services, but also to products. In fact, we can turn our product into a service through the .

To set up a membership site we can use free software, such as WordPress, and WooCommerce, or special plugins for it, such as Paid Membership Pro or WooCommerce Memberships. If you are interested, here you have the and the , in which you can see it step by step.

The grace of the membership site compared to eCommerce is that it is much more stable, since each month you have a secure income, when the membership fees are renewed. This stability is not 100%, because there are always defaults or cancellations, but it is not nearly as volatile as an eCommerce, in which on the 1st of each month you have no idea how sales are going to go.

complementing both

Sometimes it’s great to combine both income models. For example, let’s look at the case of my wife’s business, which I often talk to you about. She has an online store of, and combines it with the. If you look closely, they are the two models combined.

The club gives him a certain stability, since thanks to him, water, electricity, internet and various supplies, and the store gives him the extra margin, although much more volatile. For example, in August it closed on vacation and the store’s income dropped a lot, but the club remained a champion.

To get an idea, we can compare the online store with running, and the membership site with cycling. If you stop running, you stop advancing (get into), but if you ride a bike and stop pedaling, you will keep moving for a while due to inertia. This is the same. The membership site allows you to have that inertia.

3. Freemium (partially free)

The freemium income model is very interesting, and we see it more and more in our day to day. It is about “giving away” part of the product or service to everyone who wants it, and then charging a part of the users for “extra” services.

I discuss this further in the episode, but the basic idea is for people to “test” you to see if it’s what they need, and pay for the full service.

We have more than seen this in the software market. From games like Pokemon Go or Candy crush, to WordPress plugins like WooCommerce. Let’s remember that it is completely free, and its revenue model falls entirely on “premium” extensions.

The same happens in the market for mobile applications, such as the App Store or Google Play. The vast majority of apps are free, but have “in-app purchases” where you can get add-ons, features, or upgrades by paying for them.

The freemium model It’s excellent and it works very well., since it completely eliminates the fear barrier of the client, who does not know if what you sell “is going to work for him”. Take, for example, the revenue distribution of the App Store in 2014.

Last year, 72% of the income has been from “In App Purchases”. As you can see, it is a very interesting model in most cases.

4. Free (advertising)

Now it’s time to talk about the great income model that has starred in the first decades of the birth of the Internet: Free. Or put another way, advertising.

Publishing free content in exchange for placing ads on it is something that has been inherited from classic revenue models: free magazines with ads and radio and TV channels with ads.

Until recently, all television was free. How were the presenters, cameras, councillors, technicians of a television program paid? With revenue from advertisers and sponsors, of course.

If we go for this revenue model, the main goal is to increase reach. We must reach the maximum number of people, because the more people, the more you pay for ads. Hence, in these sectors we always talk about the audience, the share, and the number of viewers. Advertisers want to reach the maximum number of people. More audience, more money.

Even today, an interesting variation of this model has emerged, based on affiliate marketing, in which you can collect a commission for each sale you manage to make of a third-party product.

If you want to know more, you can take a look at , but the basic idea is to advertise or mention a product or service using a special link, so that the seller knows that you have obtained this sale, and pays you a commission.

Well, even affiliates are more of the same: You need to reach a large number of people so that a part of them make the purchase, and you collect the commission. The greater the number of readers, the more conversions, more commissions, and more income.

But one fine day, Canal+ arrived and changed the income model. He decided to “scramble” his broadcast. And curiously, he did it with a freemium revenue model. It offered part of its programming in the open, and encoded movie premieres, or soccer matches.

And in the same way that we have seen how the “free” income model was transformed to “freemium” or “membership site” on television, now the same is happening in other sectors, such as online newspapers, which begin to charge to access their newspaper libraries, or even podcasts that offer paid episodes and content.

It is true that at a cultural level it is not easy to take this step as a country, but it is also true that over time we are learning the new paradigms. Who would have thought that the music industry would stop selling CDs to become a membership site like Spotify or Apple Music?

5. Margin or rotation

Finally, I want to mention one last aspect, which despite not being the income model itself, is closely linked to it. It is the modality itself, and is tied to the .

We must know if our product or service is based on margin (few sales, with a lot of profit margin each) or rotation (lots of low margin sales).

On many occasions this will not be your decision, but will depend on the sector in which you find yourself. To situate you, here is a graph of the industries with more and less margin last year.

But be careful, because sometimes there are products that seem to be in the same industry, but they are not. To understand each other, it would be like comparing a “Montblanc” fountain pen with a “Bic” ballpoint pen. While Montblanc is priced much higher, with a huge margin for each product sold, Bic is priced very low, but sells billions of units of pens.

Both companies are doing very well, but their approach is very different. And it is that in realityBic is in the stationery industry, while Montblanc is in the jewelry industry.

So, if we opt for rotation, we must make sure that the market is big enough to live from it. And if we opt for the margin, that the market is willing to pay a high price for that product or service.

Summary and conclusion

There are several income models that we can opt for if we set up an online business, and we must ask ourselves which business model best suits your idea:

eCommerce or membership site?
Paid, freemium or free?
Margin or turnover?

Now combine and play with them. What suits your business the most? A rotating freemium eComerce? A margin membership? A combination of both?

And now don’t be afraid to experiment. Although it may not seem possible at first, it does not mean that it does not work:

A restaurant where you can eat for free, sponsored by brands (Free, advertising)
A freemium coffee shop where black coffee is given away (Freemium)
An eCommerce where a product is always given away, in each sale (Freemium)
A paid social network for wealthy singles looking for a partner (Membership, margin)

Think, try, value. Surely there is an optimal combination for your idea. And if you find it, you can increase or stabilize income, both things more than appreciated for any entrepreneur.

And you already know: If you want to know more about how to undertake…

revenue models