If the Shoe fits…

Pick Your Revenue Model

Are you familiar with the Dutch phrase: ‘if the shoe fits, wear it’? It means that if something has the characteristics of something, it probably is that thing. It’s an approach that fits the Utrecht startup scene perfectly. We like to be at the forefront of innovation, but as opposed to some other Dutch startup cities, we make less fuzz about it. Why come up with a whole new revenue model when there are so many models to choose from? And the fact that many of these models have proven their value over and over again really helps when pleading with investors. I’ll try and provide you with an overview of these revenue models so you can start thinking of building your own startup too.

Off course you’ve all seen the usual suspects. You have your advertising models that thrive on income generated by ads. Personally I think these ads have had their days. Who really clicks on banners anymore? If your revenue has to come from advertising just look for the ads’ more stylish cousin, affiliate marketing. If it’s done right, this type of marketing can be entertaining and engaging rather than just plain annoying. But the line between the two can run thin. So if you go down this road, make sure you integrate affiliate companies that truly support your cause.

Next there is e-commerce. The former buzzword entails all products and services you used to find at the mall. In the nineties, websites like Amazon.com changed the way we handled commodities. By bypassing large overhead costs like large store staff and expensive downtown real estate, they were able to sell their products at competitive prices. Nowadays e-commerce, largely thanks to the startup community, has many different forms. We now have the marketplace, websites like eBay, Marktplaats and Catawiki that serve as platforms for C2C services. And fairly recently, Uber introduced us to privately operated taxi-services, an app that revolutionized the taxi-industry! The marketplace model works because it has the benefits of having zero to very little overhead and next to no inventory. Instead of focusing on costly production it simply facilitates and takes a small portion of the transaction. Your customers will be happy to make a profit and get products at discounted prices.

The reversed auction is basically the opposite of the aforementioned marketplace. Businesses offer their reduced services to customers at discounted prices. It works because price sensitive consumers feel they get a great deal and the sellers sell products they otherwise might not have sold. Groupon is probably the most well-known example of the reverse auction.

And then you have the freemium model. Maybe you already know this one. If you’re anywhere near the startup world, you probably do. The freemium model provides users with basic free services without the ads. Anyone is allowed to use them for an unlimited amount of time. But the user is required to pay for additional ‘premium’ services. This medium, LinkedIn, is a great example for this model. LinkedIn founder Reid Hoffman sports the famous mantra ‘growth- engagement-revenue’, implying you should generate a large user base before implementing paid services. As you may know, many members use LinkedIn for free. But if you want to analyze your page ranking and get access to second or third grade connections directly, you are required to pay a monthly fee. The model works because it is great for generating a user-base without the additional cost of expensive marketing campaigns. It provides for a carefree way of acquainting with your product. Users feel the freedom to decide whether your added services are of true value to them.

The subscription model. This is one of the oldest tricks in the books. However, the subscription model is increasingly popular. Basically it sets a monthly or yearly price that is very competitive. It works because of its convenience and it takes effort out of the buying process. It’s predictable in price and occurrence so the users can stay within their budget and don’t have to think about reordering. For your startup, it means that you can predict revenue based on the sales you make. This transparency is a proven way to get a good valuation and attract potential investors.

If you have ever worked with professional software, you’ve probably dealt with your fair share of licensing. The licensing revenue model is a way to cater for specialist services.

When addressing licensing, I think of packages that companies like Adobe sell. This is the more specific software with high development costs. By providing licenses, Adobe ensures it has control over the amount of software packages and the running time of the licenses. Because these packages tend to be more expensive, it the model is more common in B2B. But I think this is a revenue model that is becoming obsolete rather quickly, as the subscription model is looking to take over.

 And last but certainly not least, is the selling data model. Personally, I find this very interesting. Basically, companies like Google and Facebook provide their services ‘for free’. Because of their massive user-base, these companies are able to provide for large datasets about the people using their networks. These datasets contain valuable information for strategic use. The model, like freemium, works because it provides for free services. Users don’t feel obliged or tricked into paying for it. If you can found a company that generates as much metadata as these moguls do, this is probably the way to go. The downside is that these types of companies are criticized for their disregard towards people’s privacy. I think it is very illustrative that Google chooses its motto to be ‘don’t be evil’. It juxtaposes the image people have of the company. But I do believe big data is going to be an even more important revenue model. As long as it’s about big data and not about selling private information. Think about it! You can’t just use it to sell products, but you can use datasets for everything. Use it to predict economic cycles or just look at the way in which major companies like Facebook, Google and Amazon joined science to fight diseases. Just remember to don’t be evil!