revenue model for a business plan

Revenue models: 11 types and how to pick the right one

Finding the right revenue model for your company and products is an incredibly important part of starting and expanding your business. It's a key part of building a brand. Explore popular revenue models and how to choose the right one.

What is a revenue model?

• 11 different types of revenue models

Costs associated with revenue models 

• How to choose your revenue model

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In one of the most famous lines from the 1941 classic Citizen Kane , Mr. Bernstein proclaims: “ It's no trick to make an awful lot of money... if what you want is to do is make a lot of money .” If only that statement were as true as it seemed. It's probably more accurate to say, “There are a lot of ways to make a lot of money.”

That’s particularly true for software businesses, with the rise of the mobile internet stimulating an explosion in the number of viable revenue models. Choosing which revenue model works best for your SaaS business, though, is not easy (even if that's all you want to do is choose a revenue model for your SaaS business). Your choice will help determine your sales strategy , and from there the growth rates, the amount of money you’ll need to invest initially, and the kind of relationship you’re likely to build with your customers. More than that — the choice determines the future of your business. Let’s take a look at some of the most popular revenue models used today — why they’re popular, why they work, and why they will (or won’t) work for you.

A revenue model is the income generating framework that is part of a company’s business model. Common revenue models include subscription, licensing and markup. The revenue model helps businesses determine their revenue generation strategies such as: which revenue source to prioritize, understanding target customers, and how to price their products.

Revenue models often get conflated with revenue streams, probably because each is a single revenue generation source. They are also confused with business models, of which revenue models are a part. Revenue models help business owners determine how to manage their revenue streams and are required to complete a business model.

Without a considered revenue model, your business will incur costs it cannot sustain. With a revenue model, you can set, track, and forecast business growth based on specific customer segments.

11 different types of revenue models 

There is no such thing as a perfect revenue model, but the popularity of some of the methods below suggests that many of them are well-tailored for the current state of the market. Here we’ll walk through each type of revenue model and when they may be most beneficial and applicable.

1. Subscription

The  subscription model  is the “vanilla” SaaS revenue model, not that there’s anything boring about a well-worked subscription plan. Businesses charge a customer every month or year for use of a product or service. All revenue is deferred and then fulfilled in installments. The subscription model is perhaps the most popular among SaaS companies because of its versatility, promise of  recurring revenue , and high value:customer lifetime balance.  Done right it's a one-way-ticket to sustainable growth .

Companies working with recurring revenue models, such as  subscription or licensing , see more value from a customer across a given customer lifetime. Being able to offer a variety of value options means your company can respond to more than one set of customer needs, expanding your appeal. Hubstaff’s subscription plan, seen below, is a classic of the genre:

Hubstaff’s various plans are distinct from one another in price and feature. This flexibility in the subscription model means that tentative or lower-budgeted customers can still get what they need, all the while maintaining visibility of what extra they could get for a few dollars more a month.

The freemium model is often described as a subscription revenue model, but in fact it’s an acquisition model, not a revenue model. Freemium involves giving users free access to an app and then selling subscriptions for a premium tier that includes more features.

Markup is a very common revenue model for buyer companies (i.e., companies that buy the products they sell). It’s as simple as can be: Take the cost of goods you just bought, mark it up X%, and make a profit margin on the original purchase. There are various subgenres of the markup model, including the following:

• Wholesale: Sale of goods or merchandise to retailers, business users, or other wholesalers
• Retail: Identification of demand, and satisfaction of it through a supply chain via a number of possible outlets, including physical and ecommercial ones

Markup is particularly used by mediators like ecommerce marketplaces — Amazon, for example. On average, Amazon charges a seller who uses their site 15% of the sale, plus  FBA fees  (including storage, pick & pack, shipping).

5. Pay-Per-User

One of the most enduring legacies of SaaS in the world of business is the introduction of pay-per-user (PPU). It involves giving a customer potentially unlimited to access to a range of features while charging them only for the services they use. At the dawn of SaaS, as the software required no physical delivery and deployed so quickly and cheaply, PPU appeared to be the most sensible revenue model. However, as natural as it seemed back in the day,  pay-per-user is not popular  anymore. Ascribing value to your product is one of the key considerations of your revenue model, and that includes demonstrating why it’s worth your target customers’ valuable dollars, not just making everything so cheap and easy that they can’t refuse. The issue with PPU, then, is that it’s rarely where value is ascribed to your product. Moreover, PPU kills your Monthly Active User metric. The per-user metric is not the most useful to customers in terms of deriving value — its take-it-or-leave-it approach actively works against your Daily Active Users number, and thus contributes to your churn rate.

6. Donation

As evidenced by the rise and rise of  Kickstarter - and  Patreon -based ventures, altruism is, if unpredictable, a pretty effective revenue model by itself. Relying on the donations of regular users is a common revenue model for nonprofits, online media (i.e., YouTubers) and independent news outlets.

7. Affiliate

What is  affiliate marketing ? This new, popular model works by promoting referral links to relevant products and collecting commission on any subsequent sales of those products. Leverage your product’s synergy with another product in an adjacent space and you both stand to gain. The affiliate model can be as simple as including in an article an outlink to a book or other product mentioned or offering your customers specialized recommendations relative to purchase history (again, Amazon is a master of this art). Some companies, such as Etsy, even have a  specific program  for their affiliates, where other companies can earn a commission on qualifying sales that result from featuring links to Etsy products and services. The affiliate revenue model is increasingly popular, owing to the way it dovetails effectively with other revenue models, particularly ad-based models.

8. Arbitrage

Applicable mainly to sellers or marketplace-oriented companies, the arbitrage revenue model uses the price difference in two different markets of the same good/service to make a profit. You buy in one market (a security/currency/commodity) and simultaneously sell in another market, at a higher price, what you just bought, pocketing the temporary price difference. Arbitrage is popular with  affiliate marketers , as well as with many cryptocurrency firms, SFOX being a prime example.

9. Commission

This transactional revenue model involves a middleman charging commission for each transaction it handles between two parties or for any lead it provides to the other party. It’s particularly popular with online marketplaces and aggregators, as well as businesses like independent music distributors. It’s particularly easy to get up and running with a commission-based business model because you’re working off of existing products. However, unless your field is well-conditioned for a monopoly, and unless your company is (or can become) that monopoly, you’ll find the commission model  very tough to scale .

10. Data Sales

Ever heard the phrase, “If you can’t see how the money’s made, you’re the product”? That’s data-selling in action. Many companies  selling digital goods  and services could not exist without core underlying data assets. In the data sale revenue model, this data is sold directly to a consumer or business customer. While certain companies will use data sale as their primary revenue model, the use of  data sales  to augment another revenue model is virtually ubiquitous. While some are using it as an  entrepreneurial venture , it is also the subject of considerable justified  public concern  and should be handled with care in the event you decide to go with it as your revenue model.

11. Web/Direct Sales

The old-fashioned revenue model made new, web sales and direct sales involve payment for goods or services through a digital medium. Web sales involve a customer finding your product via outbound marketing (or a web search) and can used for software, hardware, and subscription-based offerings. Direct sales revolve around inbound marketing and is good for handling multiple buyers and influencers in big-ticket markets.

A good revenue model is not just about squeezing as much revenue possible out of a sales cycle; it’s also about balancing your ambitions in the market with your resourcing requirements. A startup revenue model may be significantly different than one for an established business because their resources are vastly different. When choosing your model, factoring in costs is paramount to ensure profitability.

Cost of revenue

The first cost you’ll be likely to factor in is your cost of goods — how much it costs to produce the goods or service that you then sell. For hardware, this can comprise testing and manufacture; for software, it’ll include the whole development cycle. Regardless of what you produce, administrative overheads will also apply. You will find cost of goods a considerably less comprehensive metric than cost of revenue, which is the total cost of manufacturing and delivering a product or service to consumers. That includes everything we’ve just covered, plus distribution and marketing costs. Cost of revenue is more often used in SaaS and other service-oriented industries because it makes the many costs incurred outside of production in SaaS easier to track.

Prototyping costs

Prototyping is a fundamental aspect of any production cycle and, unfortunately, is one of the most expensive. While testing prototypes or beta versions of your new product, even the smallest revisions can necessitate costly changes to your production/development process. This usually comprises a base-level cost, plus iteration costs on top of that. When forecasting prototyping costs, it’s wise to plan for several iterations; it’s highly unlikely you’ll get everything right the first time around, especially if your product is innovative or is composed of a number of features.

Equipment costs

One of the beautiful things about being a SaaS company is that there are no production lines to run. Nevertheless, equipment costs still factor into the bottom line. Firmware,  app development tools , server rental, plus any other administrative services bought on subscription (e.g. Slack or Hubstaff) will play a part in your equipment costs, but, generally, equipment costs should be the easiest of all to forecast.

Labor costs

An underpaid workforce is an unhappy workforce (if it’s a workforce at all); wage costs come out of your bottom line. Based on the interaction of salary and commission in your  compensation plan , as well as the type of commission you offer (entirely open-ended or capped? Will there be accelerators/decelerators involved?), you will have to plan for your expenditure on labor costs differently.

Advertising & marketing costs

Your advertising and marketing costs will be determined by the following:

• The size of your respective advertising and marketing teams
• The scale of exposure you’re shooting for
• Your method of approach to advertising and marketing: undefinedundefinedundefined

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Your revenue model is unique

So many revenue sources, so many revenue models, so little time. There are some fundamental differences between revenue models. For instance, if you’re a SaaS company producing your own software product, you’re unlikely to get all that far with an arbitrage model. Likewise, if your product is a medium or if you’re a seller, a subscription-based revenue model won’t do the trick. A product with a high ceiling for potential revenue is not best served by a donation model. Nevertheless, the choice of a main revenue model out of the batch that do work for your product, and how you then combine them with appropriate aspects of other models, is yours, and yours only. Your product and the market should be in mind at all times while you’re settling on, adding to, and refining your model. After that, bringing in the revenue itself should be as easy as  Citizen Kane  said.

Related reading

Revenue Models: 17 Types, Examples & Template [2023]

Revenue Models

How does (or will ) your business make money? It sounds almost too simple to ask, but having a clear understanding of your business' revenue model can be one of the most important ways to focus on key activities--and actually move the needles you care about most.

For indie businesses, settling on the right revenue model type rarely happens on first attempt. Instead, it's common to bounce around from subscriptions to digital products, membership communities and affiliate offerings until something finally *clicks* for you and your business.

This revenue models list component and template is intended to help you sort, consider and rank a list of common revenue models. In future, I'll be linking this table to related marketing channels, real data from other indie businesses and related templates--for now, let's take a quick look at the revenue models listed.

17 Common Revenue Model Examples

• Subscription
• Licensing (Digital Prod.)
• Advertising
• Affiliate Commission
• Project-Based Services
• Retainer-Based Services
• Tickets, Events, Workshops
• Manufacture (D2C)
• Library Access
• Community Access
• Marketplace

1. Subscription

The most common revenue model for SaaS and membership-based businesses. Customers pay a recurring fee, typically on a monthly or yearly basis, in exchange for access to your product or service.

Pros of subscription model

• Recurring revenue is more predictable and can be helpful in forecasting
• Can be a great way to build long-term relationships with customers
• Customers who are paying on a recurring basis are typically more engaged and have a higher lifetime value

Cons of subscription model:

• Can be difficult to acquire customers who are willing to pay a recurring fee
• Can be difficult to increase prices without losing customers
• There is always the risk of churn (customers cancelling their subscription)

The markup revenue model is most common in retail and ecommerce businesses, where goods are bought at wholesale prices and then sold to customers at a higher price.

Pros of markup model:

• Can be easier to get started since you don't need to develop a unique product or service
• There is less risk involved since you're not investing in developing or producing a good or service
• Can be easier to scale since you can simply buy more inventory as needed

Cons of markup model:

• Can be difficult to compete on price alone
• You may need to invest in marketing and branding to differentiate your business
• There can be slim margins if you're not careful with your pricing

3. Licensing (Digital Prod.)

The licensing revenue model is most common for digital products, where customers pay a one-time fee for access to your product.

Pros of licensing model:

• Can be a great way to generate one-time revenue from customers
• Customers who pays for a license typically have a higher perceived value of your product
• Can be easier to scale since you're not selling a physical good or service

Cons of licensing model:

• Can be difficult to acquire customers who are willing to pay a one-time fee
• There is always the risk of piracy (customers sharing your product without paying)
• Can be difficult to upsell customers or generate recurring revenue

4. Advertising

The advertising revenue model is most common for online businesses, where businesses sell advertising space on their website or in their email newsletter.

Pros of advertising model:

• Can be a great way to generate revenue from customers who are not ready to buy your product or service
• Advertising can be a complementary revenue stream to other revenue models

Cons of advertising model:

• Advertising can be disruptive to the user experience
• Advertising rates can fluctuate based on market conditions
• You may need to invest in marketing and branding to attract advertisers

5. Donation

The donation revenue model is most common for non-profit organizations, where customers donate money to support the cause or organization.

Pros of donation model:

• Can be a great way to generate revenue from customers who are passionate about your cause
• Donations are typically tax-deductible for the donor
• There is less pressure to generate revenue since donations are not expected to be recurring

Cons of donation model:

• Can be difficult to acquire customers who are willing to donate money
• May need to invest in marketing and branding to attract donors
• Donations can fluctuate based on economic conditions

6. Affiliate commission

The affiliate commission revenue model is another common for online businesses, where businesses pay a commission to affiliates for referring customers.

Pros of affiliate commission model:

• Can be a great way to generate revenue from customers who are already interested in your content
• Affiliates can provide valuable marketing and promotion for your business
• Can be easier to scale since you're not producing all the products you sell

Cons of affiliate commission model:

• Not always easy to find good affiliate programs
• You may need to invest in marketing and branding to attract affiliates, as well as readers
• Commissions can vary based on affiliate performance

7. Sponsors

The sponsorship revenue model is becoming increasingly common for online creators.

Pros of sponsorship model:

• Can be a great way to generate revenue from businesses or individuals who support your cause
• Sponsors typically have a high perceived value of your organization

Cons of sponsorship model:

• Can be difficult to acquire sponsors who are willing to pay
• May need to invest in marketing and branding to attract sponsors
• Sponsorship can fluctuate based on economic conditions

8. Data Sales

The data sales revenue model is most common for online businesses, where businesses sell data that they have collected.

Pros of data sales model:

• Scale advantages
• Data can be a valuable commodity for businesses

Cons of data sales model:

• Difficult to acquire unique data sets
• Longer sales cycle
• Data rates can fluctuate based on market conditions

9. Project-Based Services

The project-based services revenue model is most common for businesses that provide consulting or other services.

Pros of project-based services model:

• Can be a great way to generate revenue from customers who need your services
• Projects can be customized to the customer's needs

Cons of project-based services model:

• Very hands-on
• Need to keep your pipeline filled
• Projects can fluctuate based on economic conditions

10. Retainer-based services

The retainer-based services revenue model is most common recurring stream for businesses that provide consulting or other services.

Pros of retainer-based services model:

• Can be a good way to introduce recurring revenue to a services business
• Customers typically pay upfront for your services

Cons of retainer-based services model:

• Need to find a service that's profitable on retainer;
• Reducing churn;
• Pricing your retainer.

11. Tickets, Events, Workshops

The ticketing revenue model is most common for businesses that host events or workshops.

Pros of ticketing model:

• Can be a great way to generate revenue from customers who are interested in your event
• Tickets can be sold in advance of the event
• Virtual events and workshops can be easier to scale since you're not selling a physical good or service

Cons of ticketing model:

• Need to consistently market events
• Margins need to be high for it to be sustainable
• Often need to pay staff to help facilitate event

12. Royalties

The royalty revenue model is most common for businesses that sell digital content, such as books, music, or software.

Pros of royalty model:

• Royalties can be collected on a per-sale or per-use basis
• Highly asynchronous

Cons of royalty model:

• Can be difficult to track sales and commissions
• Typically low % commission
• Royalties can be volatile from year to year

13. Manufacture (D2C)

The manufacture model, going direct to customer, is probably the most familiar. You make a product and then sell it to the customer, whether that’s through your own store, a third-party retailer, or some other means.

Pros of Manufacture (D2C)

• You have complete control over your product
• You can build your own brand
• You can reach customers directly

Cons of Manufacture (D2C)

• It can be expensive to get started
• You have to invest in marketing and branding
• You have to manage inventory and shipping

14. Library Access

The library access model is common for businesses that offer digital content, such as books, music, or software. Customers can access your content through a subscription or pay-per-use basis.

Pros of Library Access

• Can reach a wide audience of potential customers
• Can generate revenue from customers who are interested in your content

Cons of Library Access

• Possibility of duplicating digital content without license
• Retaining users after they pay for first access
• Offering a unique library

15. Rent/Lease

The rent/lease revenue model is common for businesses that offer physical goods, such as equipment or vehicles. Customers can rent or lease your products on a short-term basis.

Pros of Rent/Lease

• Can generate revenue from customers who need your equipment
• Can be quite 'Passive' income
• Scalable if margins and demand are high enough

Cons of Rent/Lease

• High expenses upfront
• Potential damages costs

16. Community Access

The community access revenue model is common for businesses that offer physical goods or services. Customers can access your product or service through a subscription or pay-per-use basis.

Pros of Community Access

• Compounding as the community grows
• Plenty of online community software and tech popping up

Cons of Community Access

• Difficult to upgrade to a 'paid tier'
• Community moderation can be time-consuming
• Sustaining high community engagement

17. Marketplace

The marketplace revenue model is common for businesses that offer a platform for other businesses to sell their products or services. Customers can access the marketplace through a subscription or pay-per-use basis.

Pros of Marketplace

• Buyers will typically bring their own customers
• Can generate revenue from both sides of the market: buyers and sellers
• Don't need to produce your own products (beyond the marketplace itself)

Cons of Marketplace

• Quality control can be difficult
• Chicken-egg problem: getting your very first buyers and sellers
• Settling disputes and investing in customer support

Choosing A Revenue Model For Your Business

This Notion template database also includes some properties to help you understand more about the various revenue models listed, and how they compare with one another on a few important factors. These are:

• Volume needed;
• Typical Margins;
• Capital needed upfront;
• Relationship to customer (direct or indirect);
• Scalability;
• Revenue model examples; and

Volume Needed

The volume needed property gives an indication (on a scale from 'Very Low' to 'Very High') of how many customers are typically needed for this type of revenue model to work. For example, a subscription revenue model that charges $1.99/month will need a Very High volume of customers in order for the model to work; whereas a high-ticket services business may only need 1 or 2 big clients per year.

Typical Margins

The typical margins property is there to help you understand how profitable this revenue model can be, given the right circumstances, per sale or customer. For example, a business selling digital products will typically have very high margins (if they are priced correctly), whereas a business that relies on advertising as its primary revenue source may have lower margins.

Capital Needed Upfront

The capital needed upfront column describes (loosely) of how much money you will need to spend in order to get the business up-and-running. For example, a subscription business can be started with very little capital as there are no inventory or product development costs; whereas a manufacturing business may need a lot of money to get started as there are significant inventory and product development costs.

Relationship to Customer (Direct or Indirect)

The relationship to customer property gives an indication of whether the revenue model is direct, indirect or two-sided (e.g. marketplaces). A direct revenue model is one where you have a direct relationship with the customer; whereas an indirect revenue model is one where you do not have a direct relationship with the customer.

For example, a subscription business has a direct relationship with the customer as they are paying the business directly for a product/service; whereas an advertising-based revenue model has an indirect relationship with the customer as they are paying the advertiser, not the business.

Scalability

The scalability property gives an indication of how easy it is to scale this type of revenue model. A scalable revenue model is one that can grow without a significant increase in costs; whereas a non-scalable business is one that has fixed costs which limit its growth.

For example, a subscription business is usually more scalable than a manufacturing business as there are no inventory or product development costs; whereas a business that relies on a small number of high-value clients is usually less scalable as it is difficult for you to service more such clients with the same number of hours in a day.

Revenue Model Examples

This column provides an example of a real business that is deploying this revenue model. I've tried to select primarily indie businesses, however this isn't the case for all of the businesses listed (where I couldn't find an indie business, I chose something that may be relevant or a company that I just generally like).

It's also worth noting that many of the businesses listed under a certain revenue model type employ multiple revenue models, alongside the stream that they're listed under. This is quite common for indie businesses (to have multiple revenue streams) and can be a good hedge against any single revenue stream going dry.

As you look through the list of possible revenue models, you can give each a ranking and sort the list based on those that are best suited.  

Getting Started

Duplicate this template into your own Notion workspace, and start ranking the various revenue models as they suit your own business, today.

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Revenue Climb

Revenue Modeling: A Comprehensive Guide to Growth Planning and Execution

As a business leader, one of your most critical responsibilities is to develop a thoughtful revenue model that projects growth targets and outlines the strategies and resources needed to achieve them. An accurate and well-constructed model provides clarity on the investments required to scale efficiently. It also enables your leadership team to course-correct when projections diverge from actual performance.

This comprehensive guide will provide readers with research-backed best practices, real-world examples, data, and actionable tactics to build a robust revenue model that connects strategic planning to execution.

Why Revenue Modeling Matters

Before diving into the components of an effective revenue model, it's helpful to understand why it's a foundational exercise for any scaling SaaS company. Here are some key reasons:

Capital allocation planning - A revenue model allows you to match expenses to growth targets so you can determine funding requirements. This prevents over- or under-investment.

Capacity planning - By modeling growth against current capabilities, you can identify resource gaps in sales, marketing, product, engineering, support, etc.

Goal setting - Models provide a benchmark for performance goals across the customer journey, from acquisition to renewal.

Risk mitigation - Models surface potential bottlenecks or unrealistic projections, giving you time to course correct.

Investor relations - For startups raising capital, a thoughtful model demonstrates planning rigor and execution readiness.

According to research by Bain & Company, companies that take a strategic approach to revenue modeling grow 19% faster on average and are 29% more profitable compared to peers. The data shows why this exercise is so critical.

Key Components of a Strategic Revenue Model

Now that we've covered why modeling matters, let's explore the key planning elements that compose a comprehensive model.

Growth Target

Every model starts with a growth target which is often represented in revenue or ARR (annual recurring revenue). Common goal timeframes are annual or multi-year. Growth targets are based on assessing market opportunity, competition, current customer traction, and other inputs. Setting an ambitious but achievable target provides focus and orients the remaining model.

Go-to-Market Roadmap

The GTM roadmap outlines the strategies across marketing, sales, and customer success required to hit growth goals. It connects high-level planning to tactical execution across stages:

Top of funnel - The advertising, content marketing, email nurturing, and other programs that generate pipeline

Middle of funnel - The sales development and customer success teams and playbooks that qualify and close new business

Bottom of funnel - The account management, cross-sell, upsell, and renewal tactics that expand existing accounts

Sales Capacity Model

To understand what revenue is possible, you need to model sales team capacity and productivity. Key elements include:

Headcount - How many sales reps and customer success managers needed to hit goals based on market segment specialization

Ramp time - The number of months for reps to ramp up to full quota capacity

Productivity - Revenue targets for each rep mapped to their ramp

Expenses - Cost of expansion factored in, including salaries, commissions, tech stack, and other operational needs

New Customer Acquisition

This section models the strategies that drive new customer growth. Key factors include:

Total addressable market (TAM) - The target market opportunity broken down by customer segment, industry, region, etc.

Target buyer personas - The customer profiles determined to have the highest propensity to buy your product(s)

Sales funnel metrics - Projected lead velocity, sales qualified lead (SQL) conversion rates, opportunity creation, win rates, etc. which contribute to new ARR forecast

Go-to-market costs - The total investment required across marketing, sales, and revenue operations to acquire new customers

Expansion Revenue

To complement new ARR, your model needs to project expansion revenue from your existing customer base through:

Upsells - Adding higher tiered products, premium features, and additional seats/licenses

Cross-sells - Selling complementary products that increase account value

Account-based sales - Strategic sales approaches to grow enterprise and commercial accounts

Customer marketing - Loyalty programs, referrals, and other tactics that generate expansion pipeline

Retention Revenue

Retaining and renewing existing revenue is more cost effective than acquiring net-new ARR. Model out:

Gross revenue retention (GRR) - Total renewal revenue from active contracts

Net revenue retention (NRR) - Renewal revenue minus any lost revenue from churn and downsells

Renewal sales capacity - Customer success and account management resources needed to maximize renewals

Churn risks - Analysis of historical churn causes to inform retention programs

Customer health scoring - Leading indicators to measure renewal propensity and prevent churn

Revenue Waterfall

The revenue waterfall ties everything together into a financial projection based on new business growth, expansion, renewals, and churn. The model flows from the top-level target down through every stage of the customer lifecycle. Graphing the waterfall provides a visual representation of the growth levers and helps identify potential gaps vs. the plan.

Turning Your Model Into Action

An insightful revenue model is useless without consistent tracking and execution. Here are best practices to activate your model:

Establish a revenue rhythm - Hold monthly and quarterly reviews of model projections, surfacing risks and opportunities. Adapt quickly.

Report on metrics - Manage sales, marketing, and customer success to key performance indicators aligned to model assumptions.

Forecast accurately - Build a sales forecasting process and pipeline hygiene discipline tied to the revenue plan.

Resource and invest - Use the model to support budget, headcount, and capacity planning to meet growth.

Iterate annually - Reassess market potential and rebuild the model annually as you expand and conditions change.

Case Study: HubSpot's Revenue Model Evolution

HubSpot, the leading SaaSinbound marketing and sales platform, provides a compelling case study in revenue model maturation. Their ability to accurately model growth and execute led to a highly successful IPO and market leadership. Examining their model evolution shows what's possible.

HubSpot started with a bottoms-up model driven by rep-level productivity assumptions. As they scaled, they strengthened model accuracy by:

Factoring in customer acquisition costs, sales ramps, and churn

Adding functionality to model renewals, upsells, and cross-sells

Incorporating marketing attribution and funnel metrics

Building a specialized SMB vs. Enterprise model

Testing model accuracy quarterly and annually

According to HubSpot, their revenue modeling competence increased overall sales forecast accuracy by up to 10%. The model and rigorous approach to testing assumptions led them from $15M to over $1B in revenue.

Key Takeaways

Strategic revenue modeling addresses the most pressing challenge for SaaS companies - scaling efficiently and predictably. The companies that invest in models and process will compound growth faster. To recap:

Model to match revenue goals to required resources. Avoid over or under investing.

Project new customer acquisition, land & expand, renewals, and churn accurately.

Map modeled growth to sales, marketing, and customer success capacity.

Use the model to guide budgeting and goal setting across the org.

Review model accuracy frequently and iterate annually.

With a rigorous approach to modeling, your leadership team will have the insights required to confidently accelerate growth and gain market share. If you make modeling a competency across your org, it will enable the speed, efficiency and value creation potential of a truly scalable business model.

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What Is a Revenue Model?

Published: October 06, 2021

Deciding how you’ll generate revenue is one of the most challenging decisions for a business to make, aside from coming up with what you’ll actually sell.

You want to ensure that you’re accounting for production costs, salaries for workers, what your consumers are willing to pay, and that you generate enough to continue business operations. You also want to make sure that your strategy fits with what you’re trying to sell.

Various revenue models will help you set your business on the right path. In this post, we’ll outline what they are and how to choose the right one for your company.

What is a revenue model?

A revenue model dictates how a business will charge customers for a product or service to generate revenue. Revenue models prioritize the most effective ways to make money based on what is offered and who pays for it.

Revenue models are not to be confused with pricing models , which is when a business considers the products’ value and target audience  to establish the best possible price for what they are selling to maximize profits. Once the pricing strategy is set, the revenue model will dictate how customers pay that price when they purchase.

RevOps  teams also use pricing models to predict and forecast revenue  for future business planning. Knowing where your money is coming from and how you’ll get it makes it easier to predict how often it will come in.

There are various revenue models that businesses use, and we’ll cover some below.

Types of Revenue Models

Recurring revenue model.

Recurring revenue model , sometimes called the subscription revenue model, generates revenue by charging customers at specific intervals (monthly, quarterly, annually, etc.) for access to a product or service. Businesses using this model are guaranteed to receive payment at each interval so long as customers don’t cancel their plans.

Recurring Revenue Model Example

Businesses that benefit from recurring revenue models are service-based (like providing software), product-based (like subscription boxes), or content-based (like newspapers or streaming services). Businesses you may be familiar with that use this strategy are Spotify, Amazon, and Hello Fresh.

Affiliate Revenue Model

Businesses using affiliate revenue models  generate revenue through commission, as they sell items from other retailers on their site or vice versa.

Sellers work with different businesses to advertise and sell their products, tracking transactions with an affiliate link . When someone makes a purchase, the unique link notes the responsible affiliate, and commission is paid.

Affiliate Revenue Model Example

Businesses you may be familiar with that use the affiliate revenue model include Amazon affiliate links and ticket promoting services. Influencers also use this model to advertise products from businesses and entice users to purchase them through custom links.

Advertising Revenue Model

The advertising revenue model involves selling advertising space to other businesses. This space is sought after because the advertiser (who is selling the space) has high traffic and large audiences that the buyer (who is purchasing the space) wants to benefit from to give their business, product, or service visibility.

Advertising Revenue Model Example

Various types of online businesses use this model, like YouTube and Google, and so do traditional outlets like newspapers and magazines.

Sales Revenue Model

The sales revenue model states that you make money by selling goods and services to consumers, online and in person. Therefore, any business that directly sells products and services uses this model.

Sales Revenue Model Example

Clothing stores that only sell their products in a storefront or business-specific retail website use the sales revenue model as they sell directly to consumers with no third-party involvement.

SaaS Revenue Model

The Software as a Service (SaaS)  revenue model is similar to the recurring revenue model as users are charged on an interval basis to use software. Businesses using this model focus on customer retention, as revenue is only guaranteed if you keep your customers. The image below is the HubSpot Marketing Hub pricing page that uses the SaaS recurring subscription model pricing.

SaaS Revenue Model Example

Businesses using this revenue model include video conferencing tool Zoom, communication platform Slack, and Adobe Suite.

How to Choose a Revenue Model

Choosing a revenue model is entirely dependent on your specific business needs and your pricing strategy.

There is no one-size-fits-all solution, and some businesses have multiple revenue streams within their revenue model. For example, if you use a recurring revenue model, you still may sell advertising space on your website to other businesses because you have a high-traffic page.

There are some key factors to keep in mind, though:

1. Understand your audience.

When picking a revenue model, the most important thing to remember is the target market and audience your pricing strategy has identified. You want to understand their pain points and what model makes the most sense for charging them.

For example, if you’re a service that sells meal kits, your target audience is likely busy and wants the convenience of food that is set up and easy to make after a long day. Using the recurring revenue model makes sense, as you’ll automatically charge them on an interval basis, and they won’t have to remember to submit payment — speaking directly to their desire for convenience .

2. Understand your product or service.

It’s also essential to have an in-depth understanding of your product or service and how your audience will use it. For example, if you sell shoes, your audience likely won’t need a new pair every month, so it may make sense to go with the Sales Revenue Model. Instead, your customers can come to you directly every time they need a new pair.

Choose the Model That Best Fits Your Needs

Ultimately, choosing a revenue model is centered around understanding what makes the most sense for what you’re selling and what makes the most sense (and will be most convenient) for the audiences you’re targeting.

Take time to develop your pricing strategy, choose a revenue model aligned with it, and begin generating revenue.

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Maximizing Profitability: Explore Effective Revenue Models for Your Business

Choosing the right revenue model can help you earn more and create an effective pricing strategy. Explore the different types of revenue models here.

Imagine you're walking down the street on a hot summer day and see the neighborhood kids setting up a lemonade stand. Nothing sounds better on a day like this than an ice-cold lemonade. You approach their stand and find the price is $2 for a cup. While you know it wouldn't cost $2 to make just a glass of lemonade at home, you are willing to pay this price because you are thirsty and also want to support the kids.

From a business perspective, these kids are making a good amount of profit from their lemonade stand. They're actually using a markup revenue model where they increase the price of a cup of lemonade to account for their operating costs. It seems like the perfect model for making money. However, this might not be the case in every business situation. Depending on the scale and complexity of your business model , you need to consider different methods of developing revenue streams.

There are various revenue models implemented by businesses across the board. Many business models are far more complex than a simple lemonade stand and thus require a different revenue model strategy. There are subscription-based, advertising, and commission-based models, to name a few—but what is a revenue model, and how do you choose one?

If you're considering which revenue model to incorporate into your business strategy, keep reading to learn more.

What is a revenue model?

A revenue model is a blueprint for how a company produces income from its services or products. Simply put, it outlines the methods through which a business makes money. There are several components within a revenue model, including how you price your products and which sales channels you choose. A revenue model is established to answer how a company plans to financially optimize its business model.

Revenue models can be seen as roadmaps for understanding how your business will operate financially. They define how a company generates revenue, covers costs, and eventually turns a profit. A revenue model should outline the various sources of income to help guide decision-making related to the overall business strategy.

Benefits of implementing revenue models

Developing a revenue model is an essential step for growing your business. Here are some of the main benefits of implementing revenue models:

Financial sustainability

An effective revenue model establishes consistent income streams, providing financial security and sustainability. Your revenue model should help you understand how much revenue to expect so you can properly plan expenses, growth, and investments.

Pricing strategy

Factors such as market demand, competition, and product costs are considered within a revenue model. Each of these factors can inform your pricing strategy. Based on the revenue model, you can determine which prices maximize revenue while remaining appealing to customers.

Profitability analysis

Revenue models show how your business generates revenue. Understanding the costs incurred by creating your products or services, along with the generated revenue, allows you to analyze the profit margin of your business. Subsequently, you can make informed decisions to improve your resource allocation and pricing strategy.

Scalability

Growth is key to your business revenue model thriving. Implementing a revenue model provides insight into the scalability potential of your business. You can easily assess potential revenue growth by attracting more customers and introducing new products or services. Knowledge is power—the more information you have about how your business operates, the better you can plan for the future and make smarter investments.

Decision-making

A sound revenue model produces meaningful insights to influence strategic decision-making. Your revenue model indicates which products or services generate the highest income, enabling you to better allocate resources and focus on areas with the highest profitability potential.

Investor confidence

A smart revenue model will inspire investor and stakeholder confidence. Potential investors will be impressed by a well-defined revenue model that demonstrates a clear plan for generating multiple revenue streams.

Types of revenue models

There are various revenue models that can be implemented based on your specific business operations and needs. Understanding when and how to choose different types of revenue models will help you better calculate revenue growth rates.

Here are just a few revenue model examples:

Advertisement-based

An advertising revenue model is a popular type of revenue model. The main source of income is generated by displaying advertisements. In this model, your company sells advertising space to other businesses or brands who want to advertise with your customer base and users. How your business earns revenue is by charging advertisers for ad placements.

Pros of advertising-based revenue models

• Successful advertisement-based revenue models typically generate significant income.
• An advertising model can greatly boost revenue streams if you have a large user base or a popular platform.
• There's a low barrier to entry, meaning it's relatively easy to set up and requires minimal investment upfront.
• This revenue model also offers flexibility and opportunities for diversification since you can provide many ad types and have a full roster of advertisers.

Cons of advertising-based revenue models

• Advertisers aren't guaranteed.
• You need to attract advertisers who are willing to pay for placements on your platform.
• The advertising market constantly fluctuates, meaning your revenue may fluctuate whenever advertisers reduce their budgets and don't buy ad space.
• You must also consider user experience and how incorporating display ads will impact your engagement.

YouTube is well-known for using an advertising model. Content creators on the platform can monetize their content by displaying ads on their videos. YouTube earns revenue by selling advertising space to companies that want to reach a vast audience. In this case, content creators can also receive a share of the ad revenue based on several metrics, including clicks, view time, and impressions.

The affiliate model is a more common type of revenue model. It's where a company or person makes a profit by promoting and selling products on behalf of another business. In the affiliate revenue model, an affiliate acts as the middleman between potential customers and the products or services.

Pros of affiliate revenue models

• Affiliate models are generally low-risk and cost-effective.
• As an affiliate, you don't need to create your own products, nor do you handle inventory or customer segments.
• It offers the potential for passive income by earning commissions without active involvement.
• You can also generate income from various affiliate partners, making this model great for diversification and scalability.

Cons of affiliate revenue models

• As an affiliate, you have little to no control over the products or services you promote. This means that negative customer experiences may harm your reputation.
• This type of model also creates revenue dependence on partners.
• Generating a profit with affiliate marketing may be easy, but intense competition and market saturation can make it difficult to generate significant income.

Affiliate marketing is a common revenue model. Amazon Associates is an example of an affiliate revenue model that allows individuals or businesses to make money through commissions on Amazon products they promote. Amazon provides unique affiliate links that lead to participants earning a percentage of the sales on products they advertise.

Commission-based

Similar to the affiliate model, commission-based revenue models allow companies to generate revenue by receiving a commission from each transaction it facilitates. Again, the company acts as a mediator between sellers and buyers.

Pros of commission-based revenue models

• The commission-based revenue model can be extremely scalable.
• The more users you gain, the more transactions will occur, leading to an increase in revenue growth.
• Another benefit of this model type is risk-sharing between the company and the sellers.

Cons of commission-based revenue models

• One of the major downsides to this model is dependency on transaction volume. If there are few transactions happening, the opportunities for generating revenue significantly decrease.
• You'll also experience limited control over pricing, which can lead to price competition among sellers and lower commission rates.

Airbnb uses a commission-based model. The platform makes money by connecting individuals with accommodation. Airbnb earns a commission on every booking made on the platform, making the company reliant on users securing lodging through their platform in order to generate revenue.

Another popular revenue model is donation-based. This strategy is implemented by soliciting and accepting voluntary donations instead of selling services or products.

Pros of donation revenue models

• One of the main benefits of a donation revenue model is the flexibility of revenue generation.
• Organizations can receive revenue streams from diverse donors.
• It's one of the most common revenue models implemented by charitable organizations and comes with tax benefits.

Cons of donation revenue models

• The downside of relying on donations is having an unsteady and uncertain revenue stream.
• Organizations are dependent on donors and are also required to spend money and time on fundraising.
• There are certain stipulations associated with receiving donations and how that money can be used

The Red Cross uses a donation revenue model. As a global humanitarian organization, the Red Cross relies on voluntary contributions to fund its services and programs. The Red Cross doesn't sell products, but they provide services for the community. The donation model is used to support the execution of these services.

The markup model entails a pricing strategy of marking up the cost or adding a margin on top to ensure financial viability. This strategy is used to cover expenses and generate profit despite external factors.

Pros of markup revenue models

• A markup revenue model is simple in practice.
• It doesn't require complex calculations and ensures the profit calculation is straightforward and transparent.
• The markup model also offers flexibility in pricing, meaning businesses can adjust the markup percentage depending on market conditions, supply, competition, and more.

Cons of markup revenue models

• The markup model can be difficult to implement in competitive markets.
• Competing while maintaining profit margins can be challenging when competitors implement aggressive pricing.

The retail industry generally relies on the markup model. There are specific production costs associated with making a pair of shoes. Retailers typically purchase the shoes from wholesalers at a fixed price. Then, they add a markup percentage to determine the selling price so it covers operating expenses and allows the retailer to earn money.

An interest revenue model refers to businesses generating income by earning interest. In this case, companies are making money by leveraging interest rates rather than making direct sales.

Pros of interest revenue models

• Interest models allow companies to earn passive income and diversify their revenue streams.
• This revenue model is also highly scalable and can benefit from changes in interest rates, leading to enhanced earning potential.

Cons of interest revenue models

• There's a level of risk associated with the interest revenue model. Risks include borrowers defaulting on loans, interest rate fluctuations, regulatory and compliance laws, and intense market competition.

Credit card companies use the interest operating model. They lend money to borrowers and earn interest back based on interest rates. These companies manage credit and loan portfolios while taking advantage of interest rates to increase profitability.

Subscription

A subscription revenue model relies on customers who subscribe and pay for your products or services. Customers pay fees to access the company's collection of products or services, allowing for steady revenue sources. The subscription-based revenue model allows a company to generate revenue by offering long-term subscriptions, resulting in consistent income such as monthly recurring revenue .

Pros of subscription revenue models

• The subscription model provides a reliable and predictable revenue stream.
• Customers pay in regular installments, allowing businesses to easily forecast finances.
• This revenue model also promotes customer retention and loyalty while lending itself to upselling and cross-selling opportunities.

Cons of subscription revenue models

• Acquiring customers with the subscription model can be challenging, meaning you may need to spend more time and money on marketing and sales.
• Customers can also cancel their subscriptions, leading to an increase in customer turnover.

Netflix is one of the most popular subscription revenue model examples. Users pay a monthly fee to access the streaming platform. Revenue generation results from monthly subscriptions. Not all subscription models are successful, but Netflix is the best example of how a subscription model can succeed in making money.

Which revenue model is right for you?

Choosing which revenue model is right for your business will depend on a variety of factors, such as your target audience, operating costs, and overall business model.

The first step for choosing a revenue model is to understand your market and the needs of your target audience. For example, media organizations will have different audiences than healthcare companies. Conduct market research to understand your customers and their needs, preferences, and pain points. These findings will inform your business strategy and how you decide to conduct business operations.

The next step is to specify your value proposition by clearly defining the unique value of your product or service. Identify key benefits and determine what sets your business apart from the competition. Consider how your business performs in terms of innovation, convenience, and quality. Communicating these benefits clearly and concisely enables your target customers to connect with your company.

Know your product or service inside-out. Understanding how your product functions, what it offers to target customers, and what your mission is will help you determine your company's business model. The ultimate goal is to generate revenue, so the more you understand your product or service, the better you can make sound business decisions.

There are several common revenue models to choose from. Online businesses, such as an e-commerce platform, might consider an advertising revenue model to diversify income streams. A local bakery may opt for other revenue models more suitable for their needs and production model. Select a revenue model after thorough research and consideration to ensure a steady and effective revenue stream.

Grow your profits with the right revenue model

Business models rely on generating income. The best way to grow your profits is to choose a revenue model that fits your company's unique needs. A company's revenue streams are dependent on more than just direct sales. Make sure to consider all different revenue model types when developing your strategy. A smart strategy is essential for a scalable business .

Whether you're just getting started or considering a switch in your revenue model, you can land more sales by leveraging market insights . Unlock your full earning potential by exploring the different tools and resources available for choosing a revenue model and growing your business. Rely on actionable data to make informed business decisions and hit your targets.

500+ business plans and financial models

8 Most Popular Startup Revenue Models Explained

• October 1, 2022
• Forecast your business

There have different ways to earn revenue. A business’ revenue model is very important as it is a component of its business model: which product/services it sells to whom and how.

You might haven’t yet decided which revenue model to opt for. Or you might simply be wondering which is one is best for your business. In this article we explain you what are the 8 revenue models and their pros and cons. Read on.

What is a revenue model?

A revenue model defines how a business generates revenue. For instance, a clothing shop sells clothes to its customers for a one-time fixed payment. Instead, Netflix charges its customers a recurring fee, every month, so they can continue watching content on their platform. Both companies make money, yet differently.

Revenue model vs. revenue stream

You might have heard of revenue stream (instead of revenue model). Whilst both terms are similar, they don’t exactly mean the same thing:

• Revenue model : how a business generates revenue
• Revenue stream : a business’ source of revenue

For instance, while a business might have a subscription revenue model, it might have 2 different revenue streams: subscription “Premium” and “Corporate”.

Instead, the clothing store above has a transaction-based revenue model. Yet, it might have 3 revenue streams: shirts, trousers and accessories.

Can a business have different revenue models?

The short answer is yes. For instance, a software company (e.g. Enterprise SaaS) might offer subscriptions to all its customers. In addition it can also provide on-demand consulting services to some of its customers: its sales team might offer onboarding and training paid services for instance. Therefore, the software company is combining 2 revenue models: a subscription and a service-based revenue model.

Why a business might have different revenue models?

Multiplying the sources of revenue a business has can make it more resilient. Indeed, revenue models have different characteristics which make them more or less prone to risks and, ultimately, impact growth.

Combining different revenue models can also bring other benefits, among others:

• It broadens the types of products and services a company might offer, expanding revenue
• It might increase profitability, as some revenue models may be more profitable than others

1. Subscription revenue model

Subscription businesses have become quite popular over the past 10 years. Originally a new form of licensing (see below) created by the first software companies, subscription revenue business now spans virtually all industries globally. Whether sold to businesses (B2B) or consumers, subscription businesses are everywhere: gym memberships, phone subscriptions, SaaS, ecommerce subscription, etc.

• Scalable : once you have created a product (e.g. software) for one customer, you can sell it to another without any additional production costs
• Predictable : because customers are paying a fee periodically, revenue is easier to forecast
• High customers acquisition cost : due to competition from other players, the costs to acquire one customers are usually quite high. See our article on CAC and LTV for SaaS businesses for more information
• High retention costs : because customers keep paying until they churn, subscription businesses typically as much (if not more) in customer retention than customer acquisition.

Expert-built financial model templates for tech startups

2. Transaction revenue

Transaction revenue is the oldest, and most common source of revenue model. Typically, a business that uses transaction-based revenue falls into one of the 3 following categories:

• Companies which produces and sells the products to a reseller
• Direct-to-consumer (DTC) businesses which produces the products and sell them straight to the end consumer
• Companies who buy products / services from a company to sell it to another, or to an end-consumer instead. These businesses do not manufacture nor produce anything, they simply make money from the spread between the supply cost and the sale price.
• Low customer acquisition cost
• Simple sales process
• Difficult to scale
• Margins might be low for some businesses (e.g. retail, airlines) and profitability requires a very large volume of orders
• Can be subject to cyclicality and/or seasonality

3. Ads revenue

• Can be very profitable in the long term . Indeed, the costs to produce content (videos, articles) and maintain a website or a blog for instance can be limited. As such, the running costs are very low: once content is produced, maintenance is limited
• Scalable : the larger the audience, the more revenues you generate. If your blog, website or youtube channel starts to benefit from network effects , growth can be exponential
• Low startup costs : building a targeted audience doesn’t necessarily need substantial investment upfront. Instead, you will have to invest in curated, targeted content for your audience which you will need to publish periodically. As such, ad revenue businesses can be one people businesses (e.g. Youtube channels)
• Audience needs to be targeted , else publishers will not agree to pay attractive price for your ad space. Remember: publishers are buying ad space to generate revenues for themselves, or their clients. If publishers do not see a minimum ROI on their investment, they will go somewhere else
• Large volume is required to start generating meaningful revenues . Average eCPM varies between channels (videos, rewarded videos, articles, etc.) yet is in average $4-$10 : you will need 1,000 ad impressions to generate only $4-$10 in revenue
• Building an audience typically takes time .

4. Commission (affiliate) revenue

The transaction can be done either on your website (e.g. marketplace) or processed on another merchant’s platform (e.g. affiliation).

The commission can either be variable (a percentage of the value of the product or service) or fixed (fixed fee per transaction).

Like ads, commission and affiliate revenue business models are often not the primary source of revenue for a business. Instead, it can be a very attractive additional source of revenue. For instance, a IT consulting firm selling advisory services might resell some of its leads (the newsletter signups for example) to a software company it partnered with. By doing so, the IT advisory company may earn a 20% revenue share with the software company.

• Similar to ad revenue, it can be very profitable in the long term . Indeed, you need to build an audience first to acquire leads. Yet, maintenance costs can be quite low and therefore commission revenue highly profitable (note this is especially true for affiliation businesses)
• No inventory costs : because you act as intermediary between a supplier and a buyer, you do not hold any inventory. This significantly reduces your risks
• Commissions rates can vary significantly . They can be as high as 20-30% for marketplaces, and lower than 5% for some affiliation businesses. The level of commission you manage to negotiate with the seller depends on your bargaining power which itself is a function of your audience: the larger and more targeted your audience is, the higher the commission rate

5. Service-based revenue

• Virtually no startup costs . Starting your own advisory services firm needs very little upfront investment. Usually, a website and, if any, some digital ads costs are enough to acquire customers. Some freelancers on marketplaces such as Upwork or Fiverr do not even have any website, for them startup costs are close to zero
• Highly profitable . Because you are selling your expertise (your time), typically you do not have any ongoing expenses nor production costs: a significant part of revenues are profits (usually >90% profit margin)
• Origination can be costly . Because service-based businesses typically provide customised solutions, each new customers requires time to assess workload, define the job scope and draft a contract. All of this time spent originating transactions cannot be spent elsewhere, and therefore is a cost to take into account
• It is not scalable . Because revenue is a function of the time spent, more revenues mean more manpower. By definition it isn’t scalable at all.
• After-sale customer requests can be tricky to manage . Customers might ask for follow-up questions, discuss potential amendments or even tweak the original job scope. Often, a service contract might generate more work than expected, and therefore be less profitable.

6. Interest revenue model

• Interest revenue business models often have very little variable costs . Because you’re charging an interest for lending capital (to an individual or a business), the only variable costs are processing, clearing and currency conversion fees.
• Whilst you typically have very low variable costs, interest revenue business models typically have high fixed costs instead . These fixed costs mostly are salaries. Think about banks: they need substantial manpower to review business opportunities (e.g. loan applications for example) and run the business.
• This business model is only viable at scale : you typically need a lot of volume (for example you would need to process many loans) to be profitable. This is due to 3 factors: low interest rates, high fixed costs and credit risk
• Credit risk : when you run an interest revenue business model, you need to factor in that a certain percentage of your customers will default

7. Leasing model

The most common businesses that use a leasing model include: real estate companies, equipment or car rental businesses , etc.

• Little variable costs (see interest revenue model above)
• Lower risk of default : because you’re leasing a physical asset, this asset has a value. Therefore, unlike interest revenue, if your customer isn’t able to pay interest, you can always get back the asset and sell it at salvage value
• Unlike interest revenue model, there are some variable costs related to the assets you lease (installation, maintenance, etc.)

8. Licensing

For instance, Microsoft has historically sold access to its most common softwares (e.g. Word, Powerpoint, Excel) as licenses (vs. subscriptions)

• Like subscriptions, it’s very scalable . You can sell as many licenses as you want without increasing production costs.
• Unlike subscription revenue, you earn a fixed time fee. As such, there is no retention and limited upsell opportunities
• Because you need to charge a higher upfront fee vs. the subscription fee you would typically charge for the same product, you may lose customers to your subscription competitors . Indeed, some customers may not be able to afford to pay a high upfront fee and/or may be reluctant vs. a smaller annual/monthly fee

Privacy Overview

Revenue Model Types in Software Business: Examples and Model Choice

• 12 min read
• 28 Dec, 2022
• No comments Share

Here's our video breakdown of revenue models

For those exploring the world of business strategy planning, we’ll elaborate on the definition of the revenue model, and the correlation between business models and revenue streams. We’ll also analyze different types of revenue models and look at some examples to scrutinize the pros and cons of each approach. Finally, we’ll reflect on how to choose or develop a model for your business.

What is a revenue model?

A revenue model is a plan for earning revenue from a business or project. It explains different mechanisms of revenue generation and its sources. Since selling software products is an online business, a plan for making money from it is also called an eCommerce revenue model. The simplest example of a revenue model is a high-traffic blog that places ads to make money. Web resources that present content, e.g., news (value), to the public will make use of its traffic (audience) to place ads. The ads in turn will generate revenue that a website will use to cover its maintenance costs and staff salaries, leaving the profit. Revenue models are often confused with business models and revenue streams. To avoid any misinterpretations, let’s quickly define these three terms that form a business strategy.

Revenue model vs business model

A business model (BM) is a broad term outlining everything concerning the main aspects of the business, all of which are contained in the answers to the following questions.

• What value will we create?
• How will we deliver it?
• How will we bring in revenue?
• How will we earn profit?

Numerous forms of business models can’t be classified in a single list because each part is highly individual to the industry, type of product/service, audience, or profitability. Business models are often depicted strategically on a business model canvas . This is a compound representation of all the key elements of a BM.

A  business model canvas template by AltexSoft

So the BM describes how a business will work from the standpoint of value generation. Revenue models, on the other hand, are a part of the business model used to describe how the company gets gross sales.

Revenue model vs revenue stream

A revenue model is used to manage a company’s revenue streams, predict income, and modify revenue strategy. The revenue itself is one of the main KPIs for a business. Measuring it annually or quarterly allows you to understand how your business operates in general and whether you should change the way you sell the products or charge for them. But what are revenue streams ? A revenue stream is a single source of revenue that a business has. There can be many of them. Streams are often divided by customer segments that bring revenue via a given method. The two terms – revenue stream and revenue model – are often used interchangeably, since, from a business perspective, the subscription revenue model will have a revenue stream coming from subscriptions. However, models can name multiple streams divided into customer segments, while the principle of revenue generation (subscription) will remain the same.

Revenue model types

Any start-up, tech company, or digital business may combine different revenue models. The revenue model will look different depending on the industry and the product/service type. Here we will pay more attention to the most common revenue models used in the software industry and online business.

Transaction-based revenue model

A transaction-based model is a classic way a business can earn money. The revenue is generated by directly selling an item or a service to a customer. The customer can be another company (B2B) or a consumer (B2C). The price of the product or service constitutes the production costs and margin. By increasing the margin, the business can generate more income from sales. Selling products or services entails using different pricing tactics. While some of them may be considered separate revenue models, these tactics are often used in pairs. Because pricing tactics can be seen as pricing plans in a software business, we can clearly define the following types. Licensing/one-time purchase. This entails selling a software product by license that can be used by a single user or a group of users. The general idea is to offer a product that requires making only one payment for it, e.g., Microsoft Windows, Apache Server, and some video games. Subscription/recurring payment. Unlike licensing, a user receives access to the software by paying a subscription fee on a monthly/annual basis, e.g., Netflix, Spotify, and Adobe products. Pay-per-use. This pricing tactic is mostly used by different cloud-based products and services that charge you for the computing powers/memory/resources/time used. Examples are Amazon Web Services and Google Cloud Platform. Freemium/upselling. Freemium is a type of app monetization in which a user may access the main product for free, but will be charged for additional functions, services, bonuses, plugins, or extensions, e.g., Skype, Evernote, LinkedIn, and many video games. Hybrid pricing. Sometimes pricing plans are a mixture of more than one. So that freemium plan might morph into some form of pay-per-use tiered plan. After passing some limit in computation or resources, a user can be forced to use or offered another type of pricing. Examples are Mailchimp, Amazon Web Services, and SalesForce. Various combinations of pricing tactics can be used simultaneously, which is more often seen in cloud-based products that offer multiple payment options at once. The revenue model in this case remains based on the transaction and purchases made by the customers. The difference in pricing tactics will modify how the revenue is generated and basically depends on the type of product/service you sell. The pros. You have full control over the pricing strategy. The cons. The cons will depend on the industry/product type and pricing tactics, as the model itself imposes a constant generation of sales with the help of advertising and marketing strategies. The only con we might mention here is the financial burden connected with sales you will carry on your own. Transaction-based revenue model examples. Nearly any company that produces and sells its products uses this type of revenue model. Examples are Samsung, Rolls Royce, Nike, Microsoft, Apple, Boeing, and McDonald’s, to name a few.

Advertisement-based revenue model

The advertisement-based revenue model is a plan with which businesses make money by selling ad spaces. It is one of the most standard methods of producing top-line growth, and it’s valid both for online and offline businesses. It’s often used by websites/applications/marketplaces or any other web resource that attracts huge amounts of traffic. The pros. Having a high-traffic resource allows you to monetize the ad space nearly instantly. Often, there is a strong demand for advertising space, especially with organic traffic and platforms with the target audience. The cons. Running advertising campaigns to gain web visibility on various platforms like social networks is a standard marketing activity with targeting instruments more precise than ever. However, advertisements are everywhere, so you might think twice about whether you want to distract a user by placing an ad in your app – even if it is a secondary revenue stream. Ad-based revenue model examples. YouTube, Instagram, Facebook, and Google are just a few prominent examples. All these platforms generate revenue by displaying advertisements to users and charging businesses for exposure. In addition to promotion, these platforms may also generate revenue through other sources, such as premium subscriptions or licensing agreements.

Commission-based revenue models

A commission-based revenue model is one of the most common ways businesses make money today. A commission is a sum of money a retailer adds to the total cost of a product or service. A commission may be charged per marketplace or transaction and can be assigned as a

• flat rate, a fixed sum of money for any type of transaction, e.g., a $450/300/1500 transaction is charged with a $20 commission;
• percent of transaction size, e.g., a $100 transaction is charged with a 10 percent commission – $10; or
• tiered commission, a percent or flat rate that grows based on the transaction volume, e.g., 50,000 transactions are charged a 4 percent commission, 150,000 transactions a 7 percent commission.

Marketplaces and eCommerce platforms, in particular, utilize commissions the most. Another large category includes businesses that connect service providers/renters with consumers. Think of any ride-hailing company, food delivery, online travel agency (OTA) , or alternative accommodation services. The pros. Revenue is easily predictable because of the sheer fee. The cons. There are many problems bound to the concept of a commission, but the major one goes to the scalability of a business that’s attached to a transaction size or volume. In general, dependency on the product supplier’s sales makes generating revenue require upfront investments and competitive superiority. Commission-based revenue model examples. Airbnb is a platform that allows individuals to list and rent their homes or apartments as short-term rentals . It generates revenue by charging a commission on each booking made through its platform. The commission is typically a percentage of the total booking cost and is paid by the host (property owner). Other examples are Booking.com, Uber, Lyft, Ticketmaster, Priceline, and Upwork.

Markup revenue model

Markup is the type of revenue model with which you buy a product at a certain cost and then sell it for a higher price: The difference between the two is your profit margin. This model is often used by wholesale, retail, and service-based businesses. For example, a wholesaler may be a bed bank — a B2B company that purchases rooms from accommodation providers in bulk at a discounted, static price for specific dates, and sells them to OTAs , travel agents, destination management companies, airlines, or tour operators. Pros. Markup revenue models are straightforward, allowing businesses to easily calculate their profit margins on each sale. With this approach, businesses can be flexible with their pricing by adjusting the markup to reflect changes in the cost of goods or changes in market conditions. Cons. While markups provide a great deal of flexibility, some organizations may not have enough resources to manage revenue and apply changes to their markup strategy based on the market state. So they set a uniform markup for all of their products or services. This may lead to prices being too low or too high and businesses may not be able to fully capitalize on the value of certain products. Markup revenue model examples. In addition to bed banks, airline consolidators leverage a markup model to earn revenue: They are brokers that book flight seats in bulk at discount rates and then resell them to travel agencies. Examples are Mondee, Picasso Travel, and Centrav.

Affiliate revenue model

The affiliate model is similar to the commission-based model. The main difference is that, with the affiliate model, you do not sell the product or service on your own platform, but rather redirect the customer to the original provider's platform to make the purchase and earn a commission on any resulting sales. An affiliate model is a contract between a supplier of a product/service and a promoter. A promoter can be another business/media resource/blogger that recommends a supplier’s product. The earnings will come as a percentage of sales or fees for the number of registrations done via referral links. Businesses utilizing the affiliate model include metasearch engines as a unique example. Metasearch tools can be found almost everywhere. Their main difference with retailers is that they don’t sell products directly but offer comparison and search as a value. Advertising and affiliate programs are the main revenue models used to get earnings in this case. The pros. Just like the advertisement-based revenue model, once you have a huge traffic resource, you might apply for an affiliate program to earn money. This will bring you income without any investments because you will basically generate traffic and leads for the affiliate program provider. The cons. Unfortunately, the percentage of affiliate programs promised to the promoter is quite low. Sometimes it fluctuates between 1-2 percent and requires a high volume of sales generated through your links. Affiliate revenue model examples. Blogging and event-promoting platforms like Broadway.com or TheaterMania generate revenue using this model. Among other examples are Amazon affiliate websites, e.g., Cloud Living and ThisIsWhyImBroke.

Interest revenue model

An interest or investment revenue model relates to any type of business that generates revenue in the form of interest on their loans or deposit payments. These are most often banking or electronic wallet companies that work with financial operations. The revenue is generated by making a loan to a customer or by a customer depositing or investing money (or other resources) into the business. At the end of a return period, a percentage of the loan sum will return as revenue. Debit/credit money provided with the bank accounts also relates to this model. That’s just one of the ways financial companies can make money, combining it with transaction fees for using their e-wallet/bank account. The pros. The interest rate provides a clear view of what revenue a business will generate, as the percentage stays unchanged until the return period is over. The cons. The regulations of an interest rate impact both the customer and the business. Sometimes it depends on the economic environment. Think of currency rate changes that influence potential and existing borrowers. Interest revenue model examples. Many banks, credit card companies, and other financial institutions use the interest revenue model. For example, peer-to-peer lending platforms, such as LendingClub and Prosper, generate revenue by charging interest on loans funded by investors.

Donation-based or pay-what-you-want revenue models

This is a revenue model based on investments made by businesses or customers on a voluntary basis. The product or service itself is free to use by default, so that’s the primary value a company brings to the customer. The revenue is generated in the form of donations, or sometimes in the form of “pay-what-you-want.” It’s important to mention that there is a difference between a donation-based business and a charity organization. A donation-based company is still required to pay taxes. The pros. Because of the free access to the product, some companies manage to get increasingly popular, resulting in donations becoming a major part of their revenue. The cons. The model is never used on its own and the revenue generated by it remains a secondary source because of its random/unstable nature. Donation-based revenue model examples. AdBlock generates revenue through donations from users who support the development and maintenance of the software. At the same time, AdBlock offers a premium version of the software for a fee, which includes additional features and support. Among other examples is Wikipedia which relies on donations as a significant source of revenue. Additionally, the platform makes money through grants and partnerships. There are many other revenue models, and a business or project may use more than one revenue model. It is important for businesses and projects to carefully consider their revenue model as it can have a significant impact on the overall success of the venture.

How to choose a revenue model for your business?

Before choosing a revenue model, you need a fully developed business strategy that will include a prepared business model with all its key instances. That means you must take a few steps prior to selecting the revenue model. Define your value proposition. Map out your product strategy by describing what the product is and what value it brings to the customer. Not all products can be sold: Can you recall the last time you upgraded your WinRAR to a full license? Also, you can analyze the future traffic for your app to understand if you can use ads in it. Explore the market state and customer groups. This step is to define your user persona and understand how these users usually buy things. Some markets are inclined to purchase just one product, some are inclined to ignore upgrades or in-app purchases. A good example in this field is the death of music-selling platforms that were totally replaced by subscription-based streaming services like YouTube Music, Apple Music, Spotify, and others. You may also explore the techniques on how to market your product in our dedicated article. Analyze competitors and their products. You’ll need to learn what mechanisms and revenue streams your competitors use and how they manage their costs. This information will probably show you the market’s pitfalls and dead ends. Looking at this simple matrix below, we can analyze the capabilities and needs of your company to help you decide the type of revenue model to use.

How to choose a revenue model framewor k

Depending on your business model, the product or service you’re presenting to the user is a subject of exchange. This is your value proposition on the market, so you are in charge of choosing what you want to get back based on the market factors, target audience, etc. Paid value proposition. In most cases, your value proposition costs money to use. Whether it’s a service or a software product, a customer will need to pay in some form to gain access to your value. Your revenue model in this case will be based on transactions. So develop pricing tactics that will depend on the nature of the product, the type of audience you’re trying to reach, the type of deployment, specifics of product usage, etc. Free-to-use value proposition. If the value proposition doesn’t require money to use or you choose it to be free, then you need a third party to generate revenue for you. This could be anything based on the previously mentioned types, whether it’s ad space, donations, affiliate programs, or reselling. The combination of the two will basically present you with the revenue streams that will focus on each of the customer segments. In the case of the paid value proposition, each pricing plan will be a separate revenue stream.

• What Is a Revenue Model and Why Does It Matter?

by William Lieberman | Feb 20, 2024 | Financial Strategy

Your company’s revenue model affects every aspect of your business, including growth, scalability, and value. Whether contemplating a change or selecting a model for the first time, thoughtful planning is critical. As a fractional CFO , I have helped many CEOs choose and refine their revenue models. I will explain what a revenue model is, how it impacts your business, and how to change it when needed.

What is a Revenue Model?

A revenue model is a framework that clarifies how your business will provide or sell its goods or services to generate income. For instance, many software providers use subscription-based revenue models with tiered pricing for individual and corporate subscribers.

The best types of revenue models often involve recurring revenue streams. Businesses with such models are more sustainable and less stressful than those relying on one-time sales. Yet, there is room for creativity, such as mixing and matching models to achieve your goals. For instance, software providers might combine subscription revenue models with one-time implementation services for corporate clients.

Why Does Your Revenue Model Matter?

Your revenue model is critical to your overall business model, the blueprint for running your organization and consistently delivering value to its stakeholders. Besides affecting your longevity, it impacts your cash flow, how others (like lenders or investors) perceive your company’s worth , your ability to plan, and how you market and sell. Therefore, performing market research before selecting a model and revisiting it occasionally is essential to ensure it is appropriate for your needs.

How Revenue Models Impact Planning

Once you choose a revenue model, you can develop other business model aspects, such as your cost structure, pricing strategy, objectives, target customers, and marketing and sales. Then, you can use that insight to build a financial model to analyze cash flow.

If the model shows you will earn a profit within a reasonable timeframe, great. But if you learn that you will likely experience cash-flow issues, your revenue model and cost structure may be incompatible, and you must rethink your plans.

How Models Affect Execution

Another thing to keep in mind is that your revenue model will influence foundational aspects of your business. It affects your marketing materials, the structure of your contracts, invoicing, collection practices, and even compensation packages. It will also help you establish key performance indicators (KPIs) for tracking and reporting results.

In other words, it touches everything. It provides vital information for coordinating efforts and impacts your ability to secure funding or explore opportunities like partnerships or acquisitions. Your revenue model of choice becomes core to how you present yourself as a business.

4 Common Types of Revenue Models

Below are some common revenue model examples grouped by similar characteristics. But please remember that this is just a sampling, and each approach has pros and cons, so the trick is to create the right mix for your environment.

1. Pay-Per-Use Models

Sometimes referred to as transaction revenue models or sales revenue models, pay-per-use involves direct sales to end customers with no guarantee of repeat business.

With some pay-per-use models, vendors determine price by taking the cost of the product or service and adding a margin. Then, they adjust in response to supply and demand trends. That can result in shallow profit margins and unreliable revenue, making this model less stable. Common examples include:

• Markup Revenue Models
• E-commerce Revenue Models

In contrast, sometimes vendors set prices based on the value (or perceived value) of their products and services. They may provide a luxury shopping experience, a superior product, or specialized knowledge or skills. When that is the case, profit margins are more generous. Examples include those above, plus:

• Project-Based Revenue Models
• Commission Revenue Models

Vendors using pay-per-use models typically generate more income in other ways to create stability. Common tactics include upselling, offering complimentary products or services, or encouraging loyalty by making buying easier (i.e., Amazon Prime’s free shipping).

2. Recurring Revenue Models

Any model that delivers a predictable source of income could fall in the recurring revenue category. Investors and lenders prefer these models, but they often involve high upfront costs, so you must be able to show that your cost structure is sound. Getting funding could help you float that investment until you generate revenue, but you need a clear path to a return on the investment. These models include:

• Subscription Revenue Models Customers pay a set fee every month or year. The subscription approach appeals to customers because fees are usually relatively low, and there is less commitment, while sellers like them because of the predictable income stream. Software as a Service (SaaS) revenue models typically fall under this category.
• Consulting Models Many consultants offer services on a retainer basis (a set number of hours or deliverables for a monthly fee). Such arrangements are mutually beneficial. Providers get a steady income, and customers get valuable skills while keeping their headcount low. Like the employer/employee relationship, finding the right fit isn’t easy, but once you do, these arrangements can work well for quite some time.

The trick with recurring revenue models is to make your product “sticky,” so customers stick around, even if their usage ebbs and flows. For instance, one way to make a product sticky is to make the customer’s life increasingly easier, so switching to a competitor is no longer appealing.

3. Advertising Revenue Models

The advertising revenue model often supports news and entertainment-related content and has done so since well before the age of digital media. Content providers sell space to advertisers who want access to their audience in whatever venue they control – streaming services, movie theaters, websites, YouTube, search engines, podcasts, billboards, etc. These models include:

• Pay-Per-Click, View, or Impression Revenue Models Display advertising, where you earn fees based on viewer behavior.
• Affiliate Revenue Models Content providers earn commissions for personally promoting products.

The advertising model is great because you can earn money purely from giving others access to your audience. But first, you must build that audience and earn (and maintain ) their trust. That typically means a significant investment in educational, informative, or entertaining content and a commitment to strict standards.

4. Passive Revenue Models

Another type of revenue model involves creating or acquiring something valuable and allowing others to use or buy it indefinitely. It’s a “passive” revenue model because once you invest, the result is mostly margin, but there will likely be ongoing costs for upkeep. Therefore, like every revenue model, ensure you understand precisely how the business operates before diving in. These models include:

• Royalty Revenue Models Income from the use of intellectual property (manuscripts, designs, or formulas for which you have a copyright, patent, or trademark).
• Digital Product Revenue Models Create courses, eBooks, apps, etc., once, then sell them for as long as you like.
• Membership Revenue Models Provide access to communities, resources, and exclusive opportunities for a fee.
• Rental Revenue Models Buy property, then charge others for using the space.

How to Change Your Revenue Model

Changing your revenue model isn’t easy because it is integral to many aspects of your business, but sometimes it is necessary. For example, perhaps you want to offer new products or services. Or maybe your current model has become less profitable due to technological advancements or customer sentiment changes. When that happens, explore options and develop plans by asking yourself the following questions.

1. Why do we want to make a change?

How will changing your revenue model affect your business? Will it make selling your products or services easier, help you manage costs better, create a new revenue stream, or something else? Consider the risks and opportunities, capture them in writing, and ensure team alignment.

2. How does the proposed approach compare to what our competitors are doing?

Would the change bring you up to speed with what your competitors are doing? If so, it may be unavoidable. If, however, you are considering something unique, you must weigh the costs and benefits. It might become a valuable differentiator, but it could also make it harder to compete in certain situations.

3. What will our customers think of the change?

Will it make your customers’ lives easier, or will they need to adjust their behavior or incur extra costs? Naturally, the latter scenarios are less appealing. If you are unsure how they will respond, consider running surveys so you can make an informed decision.

4. How would external stakeholders (like investors or lenders) view the model?

Sometimes, a change of this nature will result in customer attrition, but you might be ok with that if it will make your company more valuable in the long run. Resurface the financial model we discussed earlier and rerun the numbers to ensure you can defend any proposed changes when speaking with stakeholders.

5. What steps must we take to adopt a new revenue model?

Some changes are simple. For instance, adding a premium offering to your subscription-based service may be manageable, requiring little more than tweaks to your solution, new marketing materials, and small billing changes. However, shifting from a cloud-based to an on-premise solution is likely another ballgame. Still, it might be worthwhile if it will make your business stronger financially.

The Bottom Line

Choosing a revenue model for your business is a big decision with lasting effects, so you are right to be cautious. It impacts every aspect of your organization and its future opportunities. If you would like to discuss your unique situation, please reach out , and I would be happy to talk.

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Mr. Lieberman is the founder and CEO of The CEO’s Right Hand, Inc., a New York-based consulting services firm that provides the full breadth of strategic, financial and operational advice to founders, CEOs and Executive Teams. As an experienced entrepreneur himself, he has served in various C-suite leadership and advisory roles across a wide spectrum of industries.

His first venture was CMR Technologies, a FinTech company based in San Francisco serving the investment management consulting space. From CMR, Mr. Lieberman formed Xtiva Financial Systems, a software company specializing in sales compensation solutions for the financial services industry. Mr. Lieberman served as Xtiva’s CEO, building the company to over $10 million in revenues and 100+ clients. He also served as the President and CFO for Interactive Donor, a New York-based Benefit Corporation which incentivizes charity through rewards.

Mr. Lieberman holds double Masters degrees, one in Business Administration and the other in Computer Science from the University of California at Los Angeles. He completed his Bachelors in Computer Engineering from the University of California at San Diego.

Contact William Lieberman [email protected] 646-277-8728

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Revenue Model: Understanding its Structure and Role in Business Success

✅ All InspiredEconomist articles and guides have been fact-checked and reviewed for accuracy. Please refer to our editorial policy for additional information.

Revenue Model Definition

A revenue model is a strategic framework that outlines the methods a business uses to generate income from its products, services, or content. It is an integral part of a company’s business model, providing insight into the monetization strategy and the process by which the company turns its products or services into profits.

Types of Revenue Models

Starting with the Sales Revenue Model , it primarily revolves around selling either tangible goods or intangible services directly to customers. The revenue is generated through the pricing of these goods or services, and often includes a mark-up on the cost of production. A typical example is retail businesses, where the customer pays to acquire a product.

The License/Fee Revenue Model is mainly used by companies that create software or other types of proprietary technology. Here, users must pay a license or fee in order to legally utilize the product or service. This fee might be a one-time charge, or it could be a recurring cost, such as a yearly license renewal.

Next, is the Subscription Revenue Model , which involves charging customers a recurring fee to access a product or service. This model is typically used by media outlets, software as a service (SaaS) companies, and fitness clubs among others. The defining feature of this model is the continuous payment plan, providing a predictable and steady income stream to the companies.

Then, there’s the Transaction Fee Model that involves earning revenue from every transaction facilitated by a company’s platform. This model is often utilized by payment processors, online marketplaces, or auction sites where the company levies a charge on the transferring parties as a fee for their service.

Finally, the Advertising Revenue Model generates earnings through selling advertising space. Companies that have high levels of website traffic or strong media presence can benefit from this model, charging other businesses or entities for visibility on their platforms, such as search engines and social media sites.

Additionally, there are other revenue models including Freemium , where basic services are offered for free, while more advanced features need to be paid for, and Affiliate Marketing , wherein a company receives a commission for referring new customers to another business.

These are broad categories that form the majority of revenue models. Each model has its unique characteristics that make it suitable for specific types of businesses. It’s also important to note that the chosen revenue model must align with the overall business model and strategy in order to be truly effective.

Choosing the Right Revenue Model

Customer preferences.

As any effective business strategy puts the customer at its core, understanding your customer’s preferences is a critical factor when deciding on your revenue model. Consider what forms of payment your customers are most comfortable with or what payment structures align with their purchasing behavior. For instance, if you’re selling high-cost items, customers may prefer installment payments to a one-off large payment, suggesting a subscription model may work best.

Product Nature

The nature of your product or service also plays an integral role in shaping your revenue model. For example, if your product is a one-time purchase, a direct sales model may be the best fit. However, if your product entails regular updates or maintenance, a subscription model could be more appropriate. The goal is to choose a revenue model that aligns with the way customers use your product.

Industry Norms

While innovation is a key driver of business success, it’s also essential to recognize the importance of industry norms. Analyze the revenue models of successful competitors in your industry. Doing so can provide useful insights and help you avoid pitfalls. It’s also vital to understand what your customers will expect based on general industry standards.

Strategic Objectives

The chosen revenue model must align with your company’s strategic objectives. If your goal is rapid growth, for instance, you may want to consider a freemium model to attract a large user base quickly. Conversely, if your focus is on long-term customer relationships, a subscription model might be preferable due to its ability to provide ongoing value and foster stronger customer relationships. Remember, what works for one company may not work for yours. It’s vital to consider your unique situation and goals.

Revenue Model and Business Strategy

Understanding the importance of an agreement between a firm’s revenue model and its overall business strategy is an integral part of any successful business management. The revenue model, providing a blueprint of income generation, should ideally fall in line with the strategy designed to navigate the company towards its long-term objectives.

Interplay Between Revenue Model and Business Strategy

The impact of this alignment is far-reaching and touches virtually every aspect of the company’s operations. Being in sync means the company’s financial resources are directed towards the said strategy in a manner that optimizes revenue generation and profit margins. The revenue model acts as the driving force that propels the strategic decisions of top management.

Impact on Financial Performance

A well-aligned business strategy and revenue model can significantly improve a company’s financial performance. For instance, if a firm’s strategy revolves around market penetration and the revenue model is focused on low price, high turnover – there’s harmony. This congruence prompts cost efficiencies, maximizes revenues, and enhances financial performance.

Influence on Competitiveness

Competition in any industry is intense. Firms that fail to align the revenue model with the business strategy could lose competitive edge. If the strategy is to offer unique, high-quality products but the revenue model is based on volume sales, the discord creates inefficiencies; potentially leading to quality compromise or reduced profitability. Ensuring alignment bolsters the firm’s ability to fulfill its value proposition and uphold its competitive position.

Sustainability and Long-Term Success

In the long run, a company’s sustainability hinges heavily on the synergistic working of the revenue model and business strategy. An organization must consistently innovate and update both to keep pace with market evolution. A well-crafted strategy ensures a company stays relevant and valuable to its customers, and a supporting revenue model, tuned to the strategy, enables the company to reap financial benefits of this relevance – a foundation of business sustainability.

Thus, the intertwined fate of the revenue model and business strategy cannot be overlooked – it forms a critical cornerstone of the entire economic structure of a competitive firm.

Revenue Model in a Digital Economy

Focusing on the digital economy, businesses face a unique set of challenges and opportunities when deciding upon a revenue model. The dynamics of business operations have significantly changed due to digitization, thus impacting how companies garner their earnings.

Challenges in a Digital Economy

The digital economy is characterized by its fluid nature and fast-paced changes, which can make it challenging for firms to select an appropriate revenue model. Identifying the right pricing strategy can become complex with several options at disposal, such as freemium, pay-per-use, subscription, and others. Furthermore, managing digital goods with almost-zero replication and distribution costs can also confuse traditional pricing notions.

Digital businesses face high customer acquisition costs owing to increasing competition. The challenge here is not just to acquire but to retain these customers, derived from providing consistent value. It becomes paramount to understand customer behavior, preferences, and willingness to pay, which demands substantial time and resources. Also, the global nature of the digital economy requires businesses to consider diverse regulations, tax implications, and currency exchanges in their revenue model.

Opportunities in a Digital Economy

While it comes with its challenges, the digital economy offers vast opportunities for businesses to morph their revenue models creatively. Companies can monetize their offerings in multiple ways – digital ads, commission structure, direct sales, or a blend of these. The global reach of online platforms offers an expanded customer base, increasing potential revenue streams.

The increasing tendency of customers towards subscription services presents another opportunity. As per a report, the subscription e-commerce market has grown by over 100% a year in the last five years. Companies can take advantage of this trend by establishing a recurring revenue model, ensuring dependable income flow.

Similarly, digital content consumption is at an all-time high. Businesses can tap into this trend by adopting an ad-based or a freemium model, wherein users can access content for free, but additional features or ad-free access would come with a fee.

In conclusion, defining a revenue model in the rapidly evolving digital economy presents a fascinating mix of challenges and opportunities. With careful consideration, businesses can select a revenue model that aligns best with their strategic goals, the nature of their offering, and their customer preferences. Staying abreast of trends such as growing preference for subscription and high digital content consumption can guide companies in this process

Revenue Model and Price Determination

The critical role of a revenue model resides in its capacity to establish a connection between product or service price and the value that the customer perceives. Essentially, the model helps to identify and define the approach for charging for a product or service, which significantly influences the customer’s impression of the product’s worth.

Customer Perception of Value

The choice of revenue model plays a significant role in consumer perception. For instance, a subscription model may create an impression of long-term value; the customer is investing in the benefits derived over a period, be it monthly, quarterly, or annually. In contrast, a pay-per-use model emphasizes an immediate return on investment, with each usage perceived as a unique value point. Thus, the revenue model can directly shape how attractive the product appears to the customer, impacting their willingness to pay and influencing their perceived value.

Implicate on Demand

Once the revenue model shapes the customer’s perceived value, demand for the product or service inevitably follows. A revenue model that successfully convinces customers of tangible benefits, whether short-term or long-term, will spur them towards consumption, thus driving up demand. Conversely, a model that fails to do so will struggle to generate interest, let alone demand.

Influence on Firm Profitability

Ultimately, the profitability of the firm rests heavily upon the revenue model chosen. An effective revenue model results in a strong relationship between the price of a product or service and consumer’s perceived value. This relationship directly impacts demand, revenue inflows, and subsequently, profitability.

Price Determination

Price determination is a complex process involving operational costs, market conditions, competition, and margins. The revenue model is critical as it gives strategic direction in setting the price. For instance, a freemium model may permit lower initial prices (or even free services) to attract customers, with revenues generated from subsequent upgrades or premium services. By influencing the price, the model also has indirect control over profitability, thus underscoring its importance.

In sum, the revenue model serves as a vital link between price, customer value perception, demand, and profitability. The choice and execution of the model play a defining role in a firm’s success.

Revenue Model Adaptation and Evolution

The ability for a firm to skillfully adapt its revenue model to changing circumstances is an often underappreciated key to success. The market dynamics do not remain static; they are in a constant state of flux. Changes in consumer behavior, emerging market trends, and fluctuations in the economic landscape necessitate continuous updates to retain relevance and maintain profitability.

Alterations following Market Dynamics

Consequently, the need to adapt the revenue model becomes quintessential in response to shifting market dynamics. A firm may find itself in a situation where its current offerings no longer resonate with its customer base. Alternatively, an entirely new market segment may emerge due to societal changes or shifts in demand. Adapting the revenue model in these instances could involve diversifying the product portfolio, price adjustment, tapping into new distribution channels, among others. A failure to do so could mean a significant drop in revenues, or worse, risks obsolescence.

Tech-Driven Adaptations

The rapid pace of technological advancements also challenge firms to constantly revamp their revenue models. For instance, companies that relied heavily on brick-and-mortar stores have had to rethink their strategies due to the surge in e-commerce and digital based transactions. These companies have had to adjust by integrating elements of subscriptions, advertising and transaction fees, leveraging digital platforms’ versatility.

Navigating Competitive Pressures

Robust competition also frequently necessitates the modification of revenue models. Competitors may introduce a disruptive innovation or a highly effective go-to-market strategy that necessitates a reaction. In extreme cases, a competitor’s action may challenge the viability of a firm’s core business model, necessitating a broader strategic shift.

Although this process can seem daunting, it is critical to remember that the successful adaptation of a revenue model can often lead to periods of increased growth and profitability. By staying abreast of market dynamics, harnessing the power of technological advancements, and carefully navigating competitive pressures, firms not only survive but thrive amidst changes.

Impact of Revenue Model on Stakeholders

The revenue model of a company holds significant implications for various stakeholders. These stakeholders include investors, employees, customers, and society at large.

Impact on Investors

Investors, both potential and existing ones, base their decision to invest on a company’s revenue model. A robust and sustainable revenue model suggests that the company can generate consistent income, creating a level of security for investors. Conversely, a weak or unpredictable revenue model can be a red flag, dissuading potential investors and worrying those who have already invested.

Impact on Employees

The revenue model also impacts an organization’s employees. The resolution of an organization to ensure stability and profitability directly impacts the job security of its employees. Moreover, organizations that generate substantial revenue are in a position to offer benefits, competitive salaries, and growth opportunities, thereby fostering a stable and conducive work environment.

Impact on Customers

Customers are also significant stakeholders. An organization’s revenue model can influence the price of products or services, the quality delivered, and even the level of customer service received. A company operating on a freemium model, for instance, may offer basic services at no cost to the consumer, while offering more advanced or specialized features at a premium. This availability and price variation can affect a customer’s purchasing decisions.

Impact on Society

On a broader scale, companies and their revenue models can have significant societal impacts. For instance, a firm with high revenue and profitability may contribute to economic growth through taxes, job creation, and local investments. On the downside, businesses with a single-minded pursuit of revenue may make decisions that are detrimental to the environment or society at large, such as unsafe labor practices, pollution, or causing local gentrification.

Role of CSR in Revenue Model Formulation

The increasing significance of Corporate Social Responsibility (CSR) also plays a key role in shaping the revenue model of a firm. Companies are not just expected to make a profit, but to do so in a manner that is ethically sound and socially responsible. Firms are acknowledging that aligning their revenue models with their social responsibility goals can boost their reputation and customer base and ultimately contribute to long-term revenue growth. For instance, many companies are shifting towards a shared value model, where they create revenue-making business models that also have positive societal impacts.

In conclusion, the revenue model can influence multiple facets of a business and its interactions with its stakeholders. As businesses grow and evolve, understanding these impacts is of paramount importance.

Revenue Model Risks and Mitigation

Regulatory changes.

Businesses often face the risk of changes in regulatory requirements, which can significantly impact the existing revenue model. For instance, new laws may prohibit certain practices, or impose additional costs that may undermine the revenue model’s viability. Therefore, businesses need to be proactively aware of any impending regulatory changes, and devise strategies to adapt their revenue models accordingly. This could involve lobbying against proposed laws, researching alternative practices, or re-strategising their revenue model for compliance with the new regulations.

Market Volatility

Revenue models are also susceptible to threats from market volatility. Changes in customer requirements, economic downturns, or competitive displacement can destabilize the revenue model. Therefore, to mitigate the impact of market dynamics, businesses should diversify their revenue streams. Diversification results in reduced vulnerability to changes in any one market domain. In addition, businesses should frequently reassess market conditions and adjust their strategies accordingly.

Technological Disruption

In today’s rapidly evolving technological landscape, technological invention or innovation can disrupt established revenue models. A novel technology might render a company’s offering obsolete or introduce more cost-effective substitutes. To mitigate this risk, companies should continuously invest in research and development, periodically update their products or services, and adapt their revenue models to harness new technologies.

Customer Churn

Customers are at the core of any revenue model. Therefore, a decrease in customer retention can have a detrimental impact on the revenue model. This could result from several factors, ranging from poor product quality to weak customer relationships. Businesses must focus on customer satisfaction and maintain avenues for customer feedback to mitigate this risk. Striving to create a strong customer experience can help increase customer retention and ensure the stability of the revenue model.

Competitive Pressure

In any industry, there are always threats posed by existing and new competitors. If competitors offer better products, lower prices, or improved customer experience, they can shrink a firm’s customer base. Businesses need to continuously innovate and improve their value proposition to withstand this pressure. Regular market research, competitor analysis, and agile adaptation can enable businesses to stay ahead of the competition.

Risk management forms a crucial part of maintaining a robust revenue model. By identifying and strategically mitigating these potential risks, businesses can ensure the stability and resilience of their revenue model.

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How to Create an Effective Revenue Model for Startups

Arbaz Sayed

Revenue model is how a business makes money. It is important for the company's long term projections. It provides Current and future potentials to earn profit. Building a great revenue model convinces investors that you are worth investing in. Designing an effective and profitable revenue model for startup is difficult but is significant.

What is a Revenue Model ? How to Create an Effective Revenue Model for Startups? Top 10 Most Effective Revenue Model For Startups FAQ

What is a Revenue Model ?

The Revenue model is a strategy for managing company revenue. It will determine the types and sources of revenue that your business will generate. It projects how a product and service will generate revenue.

How to Create an Effective Revenue Model for Startups?

Choose a revenue model that is suitable for your startup and your market.

Research the market you are entering extensively. Study your customers, address subscription options to them. Analyze how your product will fulfill the customers. On the other hand, if you are looking to sell your product to larger companies licensing is the fittest option for high returns.

Revenue is a key component of the business model. Also While identifying your market, analyze your competitors as well.

Create a Revenue model that expresses the value of your startup

Your revenue model should communicate your value. How different your products and services are from the competition. A prominent selling point is to stand out your product that people will sign up for.

Build a Revenue that helps you find the top investors for your startup

Build a great revenue model that convinces investors that you are worth investing in. Focus on investors that will be in for the long haul. The investors should get a complete idea of your business values by just looking at your revenue model. Investors also focus on how profitable your revenue model is.

Determine your revenue model

An important point to figure out is how you're going to charge your customers. There are two comprehensive types to charge your customers.

Transactional: You can Charge customers on a per transaction basis. Once the customer purchases the product from you they don't need to pay again. Examples: Tesla, Apple (hardware), Starbucks

Recurring: You can charge your customers a monthly or annual subscription fee for the ongoing service. Examples: Netflix, Blue Apron

Determine your customer acquisition model

There are many customer Acquisition models but we will shortlist three important customer acquisition model

• Direct: Does Your company has direct contact with the customers of your product. This typically means contracting salespeople who engage directly with and sell the product to customers. This tends to work best for products that demand a high price. Examples: Tesla, Palantir, Boeing.
• Indirect : If your company does not has direct contact with the customers of your end product. Indirect customer acquisition includes retail sales, channel partnerships, independent dealerships, consultants, etc. Examples: Mattel, Ford, Oracle, Coca-Cola.
• Inbound: Customers have no or little contact with your company. This typically entails driving traffic to a website or app with  sign-up and payment interfaces. This works best for low price products or services that customers understand easily. Examples: Netflix, Amazon Prime, Spotify.

Top 10 Most Effective Revenue Model For Startups

1. ad-based revenue model.

Ad based revenue models require creating ads for product, service, or app and placing them on high traffic channels. Google's Adsense is one of the most practical and common tool to get ads for your website. For most websites, AdSense will make about $5-10 per 1,000 page views.

2. Affiliate Revenue Model

Affiliate revenue is an affiliate web-based revenue model in which you signup with a company to promote their products via links. You receive a small commission for the sales of the product or if someone executes the desired action.

3. Subscription Revenue Model

The subscription revenue model is a model where the company earns revenue by charging customers a recurring fee at regular intervals. A quite common and popular example of the subscription Revenue Model is a popular streaming platform Netflix.

4. Arbitrage Revenue Model

An arbitrage revenue model is a model that is followed by traders since ancient times. This is a quite simple revenue model. In the arbitrage revenue model, a product is purchased from a market or a region to be sold at high profit in a different market.

5. Direct Sales Revenue Model

In the Direct Sales Revenue Model, The business or brand directly interacts with the customers for selling their products. There are two types of Direct Sales

Inside sales - When the customer calls to place the order for the product.

Outside sales - When the brands sell their product using face to face sales transaction.

6. Licensed Revenue Model

The licensed revenue model is quite a profitable revenue model that is commonly used by music industries for licensing their songs. The brands or companies earn revenue by licensing their products. It is quite common in media industry and for patents, copyrights, trademarks.

Examples of Best Brand Licenses

• Angry Birds & Star Wars.
• Microsoft & Fuji Xerox.
• Microsoft & Canon.
• Victoria Secret & NFL.
• Lego & Star Wars.
• Lego & Warner Bros.
• Monopoly & McDonald

7. Data Sales

Data sales can be explained by a simple phrase “If you can’t see how the money’s made, you’re the product” . The data sale revenue model is a complicated revenue model and is hard to maintain. In this revenue model, the data is sold to the business or consumers.

Specific companies use data sales as their primary revenue model while some use it to augment another revenue model. Data should be handled with care an proper public concern if you decide to go with it as your revenue model.

8. Retail Sales Revenue Model

In the Retail sales revenue model, you have to set up a traditional department store or retail store in which you offer physical goods to your customers. A retail business generates revenue from sales of the product with the help of its retail stores.

9. Channel Sales(or Indirect Sales)

Channel sales are the most complex pursuance in the world of sales and marketing. In simple words, brands or companies rely on a third party to sell their goods.

10. Freemium Model

Fremmium Revenue model is a model in which the consumers are offered service for free of cost but additional cost is charged for premium features. Many companies use this type of revenue model for example Skype, Zoom , Spotify and many more.

What does a revenue model include?

A revenue model includes the offerings of value, the revenue generation techniques, the revenue sources, and the target consumer of the product offered.

What are examples of revenue streams?

Subscription fees, Renting, leasing, Licensing content to third parties, Brokerage fees, and Advertising fees.

What is the best revenue model?

Subscription-Based Business Revenue Model is one of the best types of revenue models for startups.

Build a revenue model for startup that is equipped for the future. Research the market you enter effectively. Creating a revenue model might seem challenging but not having one is not an option. The revenue model for startup is crucial to driving the success of your company.

Must have tools for startups - Recommended by StartupTalky

• Convert Visitors into Leads- SeizeLead
• Payment Gateway- Razorpay
• Spy on your Competitors- Adspyder
• Manage your business smoothly- Google Workspace

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Small Business Trends

How to create a business plan: examples & free template.

This is the ultimate guide to creating a comprehensive and effective plan to start a business . In today’s dynamic business landscape, having a well-crafted business plan is an important first step to securing funding, attracting partners, and navigating the challenges of entrepreneurship.

This guide has been designed to help you create a winning plan that stands out in the ever-evolving marketplace. U sing real-world examples and a free downloadable template, it will walk you through each step of the process.

Whether you’re a seasoned entrepreneur or launching your very first startup, the guide will give you the insights, tools, and confidence you need to create a solid foundation for your business.

Table of Contents

How to Write a Business Plan

Embarking on the journey of creating a successful business requires a solid foundation, and a well-crafted business plan is the cornerstone. Here is the process of writing a comprehensive business plan and the main parts of a winning business plan . From setting objectives to conducting market research, this guide will have everything you need.

Executive Summary

The Executive Summary serves as the gateway to your business plan, offering a snapshot of your venture’s core aspects. This section should captivate and inform, succinctly summarizing the essence of your plan.

It’s crucial to include a clear mission statement, a brief description of your primary products or services, an overview of your target market, and key financial projections or achievements.

Think of it as an elevator pitch in written form: it should be compelling enough to engage potential investors or stakeholders and provide them with a clear understanding of what your business is about, its goals, and why it’s a promising investment.

Example: EcoTech is a technology company specializing in eco-friendly and sustainable products designed to reduce energy consumption and minimize waste. Our mission is to create innovative solutions that contribute to a cleaner, greener environment.

Our target market includes environmentally conscious consumers and businesses seeking to reduce their carbon footprint. We project a 200% increase in revenue within the first three years of operation.

Overview and Business Objectives

In the Overview and Business Objectives section, outline your business’s core goals and the strategic approaches you plan to use to achieve them. This section should set forth clear, specific objectives that are attainable and time-bound, providing a roadmap for your business’s growth and success.

It’s important to detail how these objectives align with your company’s overall mission and vision. Discuss the milestones you aim to achieve and the timeframe you’ve set for these accomplishments.

This part of the plan demonstrates to investors and stakeholders your vision for growth and the practical steps you’ll take to get there.

Example: EcoTech’s primary objective is to become a market leader in sustainable technology products within the next five years. Our key objectives include:

• Introducing three new products within the first two years of operation.
• Achieving annual revenue growth of 30%.
• Expanding our customer base to over 10,000 clients by the end of the third year.

Company Description

The Company Description section is your opportunity to delve into the details of your business. Provide a comprehensive overview that includes your company’s history, its mission statement, and its vision for the future.

Highlight your unique selling proposition (USP) – what makes your business stand out in the market. Explain the problems your company solves and how it benefits your customers.

Include information about the company’s founders, their expertise, and why they are suited to lead the business to success. This section should paint a vivid picture of your business, its values, and its place in the industry.

Example: EcoTech is committed to developing cutting-edge sustainable technology products that benefit both the environment and our customers. Our unique combination of innovative solutions and eco-friendly design sets us apart from the competition. We envision a future where technology and sustainability go hand in hand, leading to a greener planet.

Define Your Target Market

Defining Your Target Market is critical for tailoring your business strategy effectively. This section should describe your ideal customer base in detail, including demographic information (such as age, gender, income level, and location) and psychographic data (like interests, values, and lifestyle).

Elucidate on the specific needs or pain points of your target audience and how your product or service addresses these. This information will help you know your target market and develop targeted marketing strategies.

Example: Our target market comprises environmentally conscious consumers and businesses looking for innovative solutions to reduce their carbon footprint. Our ideal customers are those who prioritize sustainability and are willing to invest in eco-friendly products.

Market Analysis

The Market Analysis section requires thorough research and a keen understanding of the industry. It involves examining the current trends within your industry, understanding the needs and preferences of your customers, and analyzing the strengths and weaknesses of your competitors.

This analysis will enable you to spot market opportunities and anticipate potential challenges. Include data and statistics to back up your claims, and use graphs or charts to illustrate market trends.

This section should demonstrate that you have a deep understanding of the market in which you operate and that your business is well-positioned to capitalize on its opportunities.

Example: The market for eco-friendly technology products has experienced significant growth in recent years, with an estimated annual growth rate of 10%. As consumers become increasingly aware of environmental issues, the demand for sustainable solutions continues to rise.

Our research indicates a gap in the market for high-quality, innovative eco-friendly technology products that cater to both individual and business clients.

SWOT Analysis

A SWOT analysis in your business plan offers a comprehensive examination of your company’s internal and external factors. By assessing Strengths, you showcase what your business does best and where your capabilities lie.

Weaknesses involve an honest introspection of areas where your business may be lacking or could improve. Opportunities can be external factors that your business could capitalize on, such as market gaps or emerging trends.

Threats include external challenges your business may face, like competition or market changes. This analysis is crucial for strategic planning, as it helps in recognizing and leveraging your strengths, addressing weaknesses, seizing opportunities, and preparing for potential threats.

Including a SWOT analysis demonstrates to stakeholders that you have a balanced and realistic understanding of your business in its operational context.

• Innovative and eco-friendly product offerings.
• Strong commitment to sustainability and environmental responsibility.
• Skilled and experienced team with expertise in technology and sustainability.

Weaknesses:

• Limited brand recognition compared to established competitors.
• Reliance on third-party manufacturers for product development.

Opportunities:

• Growing consumer interest in sustainable products.
• Partnerships with environmentally-focused organizations and influencers.
• Expansion into international markets.
• Intense competition from established technology companies.
• Regulatory changes could impact the sustainable technology market.

Competitive Analysis

In this section, you’ll analyze your competitors in-depth, examining their products, services, market positioning, and pricing strategies. Understanding your competition allows you to identify gaps in the market and tailor your offerings to outperform them.

By conducting a thorough competitive analysis, you can gain insights into your competitors’ strengths and weaknesses, enabling you to develop strategies to differentiate your business and gain a competitive advantage in the marketplace.

Example: Key competitors include:

GreenTech: A well-known brand offering eco-friendly technology products, but with a narrower focus on energy-saving devices.

EarthSolutions: A direct competitor specializing in sustainable technology, but with a limited product range and higher prices.

By offering a diverse product portfolio, competitive pricing, and continuous innovation, we believe we can capture a significant share of the growing sustainable technology market.

Organization and Management Team

Provide an overview of your company’s organizational structure, including key roles and responsibilities. Introduce your management team, highlighting their expertise and experience to demonstrate that your team is capable of executing the business plan successfully.

Showcasing your team’s background, skills, and accomplishments instills confidence in investors and other stakeholders, proving that your business has the leadership and talent necessary to achieve its objectives and manage growth effectively.

Example: EcoTech’s organizational structure comprises the following key roles: CEO, CTO, CFO, Sales Director, Marketing Director, and R&D Manager. Our management team has extensive experience in technology, sustainability, and business development, ensuring that we are well-equipped to execute our business plan successfully.

Products and Services Offered

Describe the products or services your business offers, focusing on their unique features and benefits. Explain how your offerings solve customer pain points and why they will choose your products or services over the competition.

This section should emphasize the value you provide to customers, demonstrating that your business has a deep understanding of customer needs and is well-positioned to deliver innovative solutions that address those needs and set your company apart from competitors.

Example: EcoTech offers a range of eco-friendly technology products, including energy-efficient lighting solutions, solar chargers, and smart home devices that optimize energy usage. Our products are designed to help customers reduce energy consumption, minimize waste, and contribute to a cleaner environment.

Marketing and Sales Strategy

In this section, articulate your comprehensive strategy for reaching your target market and driving sales. Detail the specific marketing channels you plan to use, such as social media, email marketing, SEO, or traditional advertising.

Describe the nature of your advertising campaigns and promotional activities, explaining how they will capture the attention of your target audience and convey the value of your products or services. Outline your sales strategy, including your sales process, team structure, and sales targets.

Discuss how these marketing and sales efforts will work together to attract and retain customers, generate leads, and ultimately contribute to achieving your business’s revenue goals.

This section is critical to convey to investors and stakeholders that you have a well-thought-out approach to market your business effectively and drive sales growth.

Example: Our marketing strategy includes digital advertising, content marketing, social media promotion, and influencer partnerships. We will also attend trade shows and conferences to showcase our products and connect with potential clients. Our sales strategy involves both direct sales and partnerships with retail stores, as well as online sales through our website and e-commerce platforms.

Logistics and Operations Plan

The Logistics and Operations Plan is a critical component that outlines the inner workings of your business. It encompasses the management of your supply chain, detailing how you acquire raw materials and manage vendor relationships.

Inventory control is another crucial aspect, where you explain strategies for inventory management to ensure efficiency and reduce wastage. The section should also describe your production processes, emphasizing scalability and adaptability to meet changing market demands.

Quality control measures are essential to maintain product standards and customer satisfaction. This plan assures investors and stakeholders of your operational competency and readiness to meet business demands.

Highlighting your commitment to operational efficiency and customer satisfaction underlines your business’s capability to maintain smooth, effective operations even as it scales.

Example: EcoTech partners with reliable third-party manufacturers to produce our eco-friendly technology products. Our operations involve maintaining strong relationships with suppliers, ensuring quality control, and managing inventory.

We also prioritize efficient distribution through various channels, including online platforms and retail partners, to deliver products to our customers in a timely manner.

Financial Projections Plan

In the Financial Projections Plan, lay out a clear and realistic financial future for your business. This should include detailed projections for revenue, costs, and profitability over the next three to five years.

Ground these projections in solid assumptions based on your market analysis, industry benchmarks, and realistic growth scenarios. Break down revenue streams and include an analysis of the cost of goods sold, operating expenses, and potential investments.

This section should also discuss your break-even analysis, cash flow projections, and any assumptions about external funding requirements.

By presenting a thorough and data-backed financial forecast, you instill confidence in potential investors and lenders, showcasing your business’s potential for profitability and financial stability.

This forward-looking financial plan is crucial for demonstrating that you have a firm grasp of the financial nuances of your business and are prepared to manage its financial health effectively.

Example: Over the next three years, we expect to see significant growth in revenue, driven by new product launches and market expansion. Our financial projections include:

• Year 1: $1.5 million in revenue, with a net profit of $200,000.
• Year 2: $3 million in revenue, with a net profit of $500,000.
• Year 3: $4.5 million in revenue, with a net profit of $1 million.

These projections are based on realistic market analysis, growth rates, and product pricing.

Income Statement

The income statement , also known as the profit and loss statement, provides a summary of your company’s revenues and expenses over a specified period. It helps you track your business’s financial performance and identify trends, ensuring you stay on track to achieve your financial goals.

Regularly reviewing and analyzing your income statement allows you to monitor the health of your business, evaluate the effectiveness of your strategies, and make data-driven decisions to optimize profitability and growth.

Example: The income statement for EcoTech’s first year of operation is as follows:

• Revenue: $1,500,000
• Cost of Goods Sold: $800,000
• Gross Profit: $700,000
• Operating Expenses: $450,000
• Net Income: $250,000

This statement highlights our company’s profitability and overall financial health during the first year of operation.

Cash Flow Statement

A cash flow statement is a crucial part of a financial business plan that shows the inflows and outflows of cash within your business. It helps you monitor your company’s liquidity, ensuring you have enough cash on hand to cover operating expenses, pay debts, and invest in growth opportunities.

By including a cash flow statement in your business plan, you demonstrate your ability to manage your company’s finances effectively.

Example:  The cash flow statement for EcoTech’s first year of operation is as follows:

Operating Activities:

• Depreciation: $10,000
• Changes in Working Capital: -$50,000
• Net Cash from Operating Activities: $210,000

Investing Activities:

•  Capital Expenditures: -$100,000
• Net Cash from Investing Activities: -$100,000

Financing Activities:

• Proceeds from Loans: $150,000
• Loan Repayments: -$50,000
• Net Cash from Financing Activities: $100,000
• Net Increase in Cash: $210,000

This statement demonstrates EcoTech’s ability to generate positive cash flow from operations, maintain sufficient liquidity, and invest in growth opportunities.

Tips on Writing a Business Plan

1. Be clear and concise: Keep your language simple and straightforward. Avoid jargon and overly technical terms. A clear and concise business plan is easier for investors and stakeholders to understand and demonstrates your ability to communicate effectively.

2. Conduct thorough research: Before writing your business plan, gather as much information as possible about your industry, competitors, and target market. Use reliable sources and industry reports to inform your analysis and make data-driven decisions.

3. Set realistic goals: Your business plan should outline achievable objectives that are specific, measurable, attainable, relevant, and time-bound (SMART). Setting realistic goals demonstrates your understanding of the market and increases the likelihood of success.

4. Focus on your unique selling proposition (USP): Clearly articulate what sets your business apart from the competition. Emphasize your USP throughout your business plan to showcase your company’s value and potential for success.

5. Be flexible and adaptable: A business plan is a living document that should evolve as your business grows and changes. Be prepared to update and revise your plan as you gather new information and learn from your experiences.

6. Use visuals to enhance understanding: Include charts, graphs, and other visuals to help convey complex data and ideas. Visuals can make your business plan more engaging and easier to digest, especially for those who prefer visual learning.

7. Seek feedback from trusted sources: Share your business plan with mentors, industry experts, or colleagues and ask for their feedback. Their insights can help you identify areas for improvement and strengthen your plan before presenting it to potential investors or partners.

FREE Business Plan Template

To help you get started on your business plan, we have created a template that includes all the essential components discussed in the “How to Write a Business Plan” section. This easy-to-use template will guide you through each step of the process, ensuring you don’t miss any critical details.

The template is divided into the following sections:

• Mission statement
• Business Overview
• Key products or services
• Target market
• Financial highlights
• Company goals
• Strategies to achieve goals
• Measurable, time-bound objectives
• Company History
• Mission and vision
• Unique selling proposition
• Demographics
• Psychographics
• Pain points
• Industry trends
• Customer needs
• Competitor strengths and weaknesses
• Opportunities
• Competitor products and services
• Market positioning
• Pricing strategies
• Organizational structure
• Key roles and responsibilities
• Management team backgrounds
• Product or service features
• Competitive advantages
• Marketing channels
• Advertising campaigns
• Promotional activities
• Sales strategies
• Supply chain management
• Inventory control
• Production processes
• Quality control measures
• Projected revenue
• Assumptions
• Cash inflows
• Cash outflows
• Net cash flow

What is a Business Plan?

A business plan is a strategic document that outlines an organization’s goals, objectives, and the steps required to achieve them. It serves as a roadmap as you start a business , guiding the company’s direction and growth while identifying potential obstacles and opportunities.

Typically, a business plan covers areas such as market analysis, financial projections, marketing strategies, and organizational structure. It not only helps in securing funding from investors and lenders but also provides clarity and focus to the management team.

A well-crafted business plan is a very important part of your business startup checklist because it fosters informed decision-making and long-term success.

Why You Should Write a Business Plan

Understanding the importance of a business plan in today’s competitive environment is crucial for entrepreneurs and business owners. Here are five compelling reasons to write a business plan:

• Attract Investors and Secure Funding : A well-written business plan demonstrates your venture’s potential and profitability, making it easier to attract investors and secure the necessary funding for growth and development. It provides a detailed overview of your business model, target market, financial projections, and growth strategies, instilling confidence in potential investors and lenders that your company is a worthy investment.
• Clarify Business Objectives and Strategies : Crafting a business plan forces you to think critically about your goals and the strategies you’ll employ to achieve them, providing a clear roadmap for success. This process helps you refine your vision and prioritize the most critical objectives, ensuring that your efforts are focused on achieving the desired results.
• Identify Potential Risks and Opportunities : Analyzing the market, competition, and industry trends within your business plan helps identify potential risks and uncover untapped opportunities for growth and expansion. This insight enables you to develop proactive strategies to mitigate risks and capitalize on opportunities, positioning your business for long-term success.
• Improve Decision-Making : A business plan serves as a reference point so you can make informed decisions that align with your company’s overall objectives and long-term vision. By consistently referring to your plan and adjusting it as needed, you can ensure that your business remains on track and adapts to changes in the market, industry, or internal operations.
• Foster Team Alignment and Communication : A shared business plan helps ensure that all team members are on the same page, promoting clear communication, collaboration, and a unified approach to achieving the company’s goals. By involving your team in the planning process and regularly reviewing the plan together, you can foster a sense of ownership, commitment, and accountability that drives success.

What are the Different Types of Business Plans?

In today’s fast-paced business world, having a well-structured roadmap is more important than ever. A traditional business plan provides a comprehensive overview of your company’s goals and strategies, helping you make informed decisions and achieve long-term success. There are various types of business plans, each designed to suit different needs and purposes. Let’s explore the main types:

• Startup Business Plan: Tailored for new ventures, a startup business plan outlines the company’s mission, objectives, target market, competition, marketing strategies, and financial projections. It helps entrepreneurs clarify their vision, secure funding from investors, and create a roadmap for their business’s future. Additionally, this plan identifies potential challenges and opportunities, which are crucial for making informed decisions and adapting to changing market conditions.
• Internal Business Plan: This type of plan is intended for internal use, focusing on strategies, milestones, deadlines, and resource allocation. It serves as a management tool for guiding the company’s growth, evaluating its progress, and ensuring that all departments are aligned with the overall vision. The internal business plan also helps identify areas of improvement, fosters collaboration among team members, and provides a reference point for measuring performance.
• Strategic Business Plan: A strategic business plan outlines long-term goals and the steps to achieve them, providing a clear roadmap for the company’s direction. It typically includes a SWOT analysis, market research, and competitive analysis. This plan allows businesses to align their resources with their objectives, anticipate changes in the market, and develop contingency plans. By focusing on the big picture, a strategic business plan fosters long-term success and stability.
• Feasibility Business Plan: This plan is designed to assess the viability of a business idea, examining factors such as market demand, competition, and financial projections. It is often used to decide whether or not to pursue a particular venture. By conducting a thorough feasibility analysis, entrepreneurs can avoid investing time and resources into an unviable business concept. This plan also helps refine the business idea, identify potential obstacles, and determine the necessary resources for success.
• Growth Business Plan: Also known as an expansion plan, a growth business plan focuses on strategies for scaling up an existing business. It includes market analysis, new product or service offerings, and financial projections to support expansion plans. This type of plan is essential for businesses looking to enter new markets, increase their customer base, or launch new products or services. By outlining clear growth strategies, the plan helps ensure that expansion efforts are well-coordinated and sustainable.
• Operational Business Plan: This type of plan outlines the company’s day-to-day operations, detailing the processes, procedures, and organizational structure. It is an essential tool for managing resources, streamlining workflows, and ensuring smooth operations. The operational business plan also helps identify inefficiencies, implement best practices, and establish a strong foundation for future growth. By providing a clear understanding of daily operations, this plan enables businesses to optimize their resources and enhance productivity.
• Lean Business Plan: A lean business plan is a simplified, agile version of a traditional plan, focusing on key elements such as value proposition, customer segments, revenue streams, and cost structure. It is perfect for startups looking for a flexible, adaptable planning approach. The lean business plan allows for rapid iteration and continuous improvement, enabling businesses to pivot and adapt to changing market conditions. This streamlined approach is particularly beneficial for businesses in fast-paced or uncertain industries.
• One-Page Business Plan: As the name suggests, a one-page business plan is a concise summary of your company’s key objectives, strategies, and milestones. It serves as a quick reference guide and is ideal for pitching to potential investors or partners. This plan helps keep teams focused on essential goals and priorities, fosters clear communication, and provides a snapshot of the company’s progress. While not as comprehensive as other plans, a one-page business plan is an effective tool for maintaining clarity and direction.
• Nonprofit Business Plan: Specifically designed for nonprofit organizations, this plan outlines the mission, goals, target audience, fundraising strategies, and budget allocation. It helps secure grants and donations while ensuring the organization stays on track with its objectives. The nonprofit business plan also helps attract volunteers, board members, and community support. By demonstrating the organization’s impact and plans for the future, this plan is essential for maintaining transparency, accountability, and long-term sustainability within the nonprofit sector.
• Franchise Business Plan: For entrepreneurs seeking to open a franchise, this type of plan focuses on the franchisor’s requirements, as well as the franchisee’s goals, strategies, and financial projections. It is crucial for securing a franchise agreement and ensuring the business’s success within the franchise system. This plan outlines the franchisee’s commitment to brand standards, marketing efforts, and operational procedures, while also addressing local market conditions and opportunities. By creating a solid franchise business plan, entrepreneurs can demonstrate their ability to effectively manage and grow their franchise, increasing the likelihood of a successful partnership with the franchisor.

Using Business Plan Software

Creating a comprehensive business plan can be intimidating, but business plan software can streamline the process and help you produce a professional document. These tools offer a number of benefits, including guided step-by-step instructions, financial projections, and industry-specific templates. Here are the top 5 business plan software options available to help you craft a great business plan.

1. LivePlan

LivePlan is a popular choice for its user-friendly interface and comprehensive features. It offers over 500 sample plans, financial forecasting tools, and the ability to track your progress against key performance indicators. With LivePlan, you can create visually appealing, professional business plans that will impress investors and stakeholders.

2. Upmetrics

Upmetrics provides a simple and intuitive platform for creating a well-structured business plan. It features customizable templates, financial forecasting tools, and collaboration capabilities, allowing you to work with team members and advisors. Upmetrics also offers a library of resources to guide you through the business planning process.

Bizplan is designed to simplify the business planning process with a drag-and-drop builder and modular sections. It offers financial forecasting tools, progress tracking, and a visually appealing interface. With Bizplan, you can create a business plan that is both easy to understand and visually engaging.

Enloop is a robust business plan software that automatically generates a tailored plan based on your inputs. It provides industry-specific templates, financial forecasting, and a unique performance score that updates as you make changes to your plan. Enloop also offers a free version, making it accessible for businesses on a budget.

5. Tarkenton GoSmallBiz

Developed by NFL Hall of Famer Fran Tarkenton, GoSmallBiz is tailored for small businesses and startups. It features a guided business plan builder, customizable templates, and financial projection tools. GoSmallBiz also offers additional resources, such as CRM tools and legal document templates, to support your business beyond the planning stage.

Business Plan FAQs

What is a good business plan.

A good business plan is a well-researched, clear, and concise document that outlines a company’s goals, strategies, target market, competitive advantages, and financial projections. It should be adaptable to change and provide a roadmap for achieving success.

What are the 3 main purposes of a business plan?

The three main purposes of a business plan are to guide the company’s strategy, attract investment, and evaluate performance against objectives. Here’s a closer look at each of these:

• It outlines the company’s purpose and core values to ensure that all activities align with its mission and vision.
• It provides an in-depth analysis of the market, including trends, customer needs, and competition, helping the company tailor its products and services to meet market demands.
• It defines the company’s marketing and sales strategies, guiding how the company will attract and retain customers.
• It describes the company’s organizational structure and management team, outlining roles and responsibilities to ensure effective operation and leadership.
• It sets measurable, time-bound objectives, allowing the company to plan its activities effectively and make strategic decisions to achieve these goals.
• It provides a comprehensive overview of the company and its business model, demonstrating its uniqueness and potential for success.
• It presents the company’s financial projections, showing its potential for profitability and return on investment.
• It demonstrates the company’s understanding of the market, including its target customers and competition, convincing investors that the company is capable of gaining a significant market share.
• It showcases the management team’s expertise and experience, instilling confidence in investors that the team is capable of executing the business plan successfully.
• It establishes clear, measurable objectives that serve as performance benchmarks.
• It provides a basis for regular performance reviews, allowing the company to monitor its progress and identify areas for improvement.
• It enables the company to assess the effectiveness of its strategies and make adjustments as needed to achieve its objectives.
• It helps the company identify potential risks and challenges, enabling it to develop contingency plans and manage risks effectively.
• It provides a mechanism for evaluating the company’s financial performance, including revenue, expenses, profitability, and cash flow.

Can I write a business plan by myself?

Yes, you can write a business plan by yourself, but it can be helpful to consult with mentors, colleagues, or industry experts to gather feedback and insights. There are also many creative business plan templates and business plan examples available online, including those above.

We also have examples for specific industries, including a using food truck business plan , salon business plan , farm business plan , daycare business plan , and restaurant business plan .

Is it possible to create a one-page business plan?

Yes, a one-page business plan is a condensed version that highlights the most essential elements, including the company’s mission, target market, unique selling proposition, and financial goals.

How long should a business plan be?

A typical business plan ranges from 20 to 50 pages, but the length may vary depending on the complexity and needs of the business.

What is a business plan outline?

A business plan outline is a structured framework that organizes the content of a business plan into sections, such as the executive summary, company description, market analysis, and financial projections.

What are the 5 most common business plan mistakes?

The five most common business plan mistakes include inadequate research, unrealistic financial projections, lack of focus on the unique selling proposition, poor organization and structure, and failure to update the plan as circumstances change.

What questions should be asked in a business plan?

A business plan should address questions such as: What problem does the business solve? Who is the specific target market ? What is the unique selling proposition? What are the company’s objectives? How will it achieve those objectives?

What’s the difference between a business plan and a strategic plan?

A business plan focuses on the overall vision, goals, and tactics of a company, while a strategic plan outlines the specific strategies, action steps, and performance measures necessary to achieve the company’s objectives.

How is business planning for a nonprofit different?

Nonprofit business planning focuses on the organization’s mission, social impact, and resource management, rather than profit generation. The financial section typically includes funding sources, expenses, and projected budgets for programs and operations.

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Developing a Revenue Plan for Your Business

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This post may contain affiliate links. Please read the disclaimer

You’re passionate about your business, and you love serving your customers. 

But at the end of the day, life is a little (or maybe a LOT) sweeter if your business is actually making money .

With countless hours spent collaborating, creating, and toiling, you deserve to have a clear plan in place to reach your revenue goals and experience success in your business. 

A Revenue Plan – Made Easy

Not a numbers person? No worries!

Breaking down your revenue goals into real-life examples can get you out of calculator-mode and help you envision your business’s revenue journey in a new light. 

The following examples are meant to put things into perspective and help you see the possibilities.

Revenue Scenario #1 — How a Product or Service-Based Biz Can Achieve 50k per year

Your Options: 

A business like yours, that offers a product or service, is often trying to crack the code on making consistent revenue.

Many times, a service provider trades hours for dollars and struggles to break free of that limiting cycle. Likewise, a product-based business gets stuck in a launch and relaunch pattern. 

Seeing different pathways to revenue in an easy-to-read list like the one above can help to make wise decisions about the types of products or services you offer. 

• Should you uplevel your signature service so you don’t need to sell as many packages?
• Should your signature product include a bonus to justify a higher price point?

Asking hard questions like these are key to building a business that provides a consistent, thriving income. 

Revenue Scenario #2 — How a Membership Site Structure Can Achieve 50k per year 

Membership programs generate consistent, reliable revenue. This breakdown can help you adjust your products and offerings to achieve even bigger goals. 

Are you feeling a little more confident? Are things looking more feasible when you put them into perspective like this?

Before You Choose Your Revenue Plan – Know the Numbers

Whenever you formulate a plan, whether it’s related to your business or creating a new workout routine, you MUST start by defining your goals. 

Ask yourself:

• What am I ultimately trying to accomplish? 

Whether your goals are to:

• drive traffic to your website
• sell more of your product or offer
• or build your list or audience

..you’ve got to have a firm grasp on the numbers! 

Grow Your Revenue By the Numbers

Remember this: reach more of the right people = you’ll reach more of your revenue goals

I talk more in-depth about this here and the 3 things you need to simplify your business growth.

Some questions you might ask yourself are:

• Is my email list large enough to reach the number of potential members or customers I need?
• How can I increase the value of my membership to justify an increase in price?

Remember that the more people (your ideal customer) who visit your website and subscribe to your email list, means the more sales you’ll end up making.

Understanding how many people you really need on your list to hit your sales goal is key to formulating a strong marketing plan. 

The general rule of thumb, to start out with, is that 2% of your email list will end up converting into buyers. Just 2%!

This means marketing and casting your net out WIDE to gain more of the right subscribers is crucial to formulating your revenue roadmap. 

How Smart Marketing Will Help You Reach Your Revenue Goals

• Click here for a free guide to Pinterest Marketing
• Click here to take my free Instagram Marketing workshop
• Click here to grab my free email list growth plan

Now that you have some free marketing tools –  I want your to know that the job of marketing is to get your audience to give you an easy  FULL BODY “YES!” 

One of the best ways to get your audience excited to throw money at you is by offering a transformation! Aim to meet your audience right where they are — in their pain — and promise them your SOLUTION

Show what you have to offer. Show its VALUE , and give PROOF that it actually works. (showing proof is key!)

Your goal in marketing through social media or email is to make the buying decision EASY by making a VERY CLEAR OFFER .

Why does this method work? Because our brains are wired this way! 

• Transformation. The emotional side of our brain responds to the promise that a product will transform our lives in some way. Start with explaining the transformation your product will bring. Acknowledge your audience’s pain. 
• Value. As we prove the value of our product to the customer, they learn how it’s different from the rest and form an even stronger emotional attachment. 
• Proof. After they’re emotionally invested, the reasoning side of their brain decides the product will work when it hears proof. 
• Clarity. Make your HOW TO BUY clear and prominent. Confusion leads to lost opportunities, but a clear pathway to purchasing leads to more sales and more $$$$!

Convert More Sales Using AIDA

Once you’ve developed your reveue plan, it’s time to consider AIDA. This is a marketing framework proven to get results and it stands for:

• Awareness. It’s so important to create a buzz around your brand. How and where can you make people aware of your products? On social media? Ads? Blog posts? How will they begin to trust you as the expert?
• Interest: Beyond just being aware of your product, how are you going to create interest and make people long for what you’re offering? Create urgency by offering limited spots or providing short-term bonuses. 
• Decision: Offer proof and testimonies to convince them. Take their hand and help them make that final decision to purchase.
• Action: Invite your audience to BUY. People will sit on the sidelines until you invite them in a compelling way to take action.  

These steps help you think through the process of taking your offer and creating a sales funnel to meet your revenue goal!

Want a jump start on creating a digital product this year? Click here to download a f ree copy of the digital profits and digital products ebook.

LOOKING FOR MORE WAYS TO INCREASE YOUR REVENUE IN 2020? HERE’S YOUR NEXT STEP:

Grab this 6-workshop series and Creative Boss Method and receive: 

All Creative Boss Method Workshops

• Brand Strategy Workshop
• Pinterest Marketing Workshop
• Instagram Marketing Workshop
• Creative Boss Revenue Workshop
• Systematizing Your Biz Workshop
• Scaling Your Biz Workshop

When you purchase the bundle , you’ll not only get access to the incredible video workshops, but you’ll receive our actionable workbooks.

There are SO MANY goodies in the workbooks to get those revenue goals MET in 2020, including The Revenue Goals Spreadsheet! This tool includes a product pricing calculator where you can enter in how much you WANT to make yearly and see the breakdown of how much that ends up being each month/week/day!. It’s included when you purchase the online workshop.

Click here to grab the Creative Boss Method Workshops (available for a limited time)

Check out these Business and revenue tips:

• 30 Ideas for Instagram posts when you don’t have any ideas
• How to build a passive income sales funnel
• 8 ways to monetize Instagram
• Your top questions answered about Instagram
• Why you should create an Instagram Challenge, and how
• How to hack the Instagram Algorithm

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7 Ways To Blend Your Multiple Passions into Your Business and Content (Guide For the Multi-Passionate Entrepreneur)

4 Ways You Can Increase Your Revenue Without Working More Hours (With Examples)

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