Unless you're running your small business solely as a hobby, then it will need to generate revenue in order to stay afloat. But how exactly will you acquire that revenue?
That's what your business' revenue model will determine. Here's everything you need to know about each type of revenue model and how to choose the right one for you.
What Is a Revenue Model?
Unfamiliar with revenue models entirely? Don't sweat it, it's simpler than you think.
In short, a revenue model is the method in which companies charge customers for products or services in order to earn money. This is true whether you're starting a business through a gargantuan service like Amazon or opening a small local coffee shop.
Note that a revenue model has nothing to do with the price of an item. Rather, it concerns how customers pay that price.
For instance, you might decide it makes more sense for customers to pay a monthly fee for your service, or you might prefer that they pay one lump sum. Whatever the case, your revenue model will determine how, where and when your customers pay.
Types of Revenue Models for Small Businesses
At this point, you may be asking yourself, "How many types of revenue models are there?" To answer your question, let's take a look at some of the most essential revenue model examples:
It's hard to say when the first subscription-based revenue model came to be, but it's clear that this particular model has exploded in popularity in recent decades.
Perhaps we can thank Netflix for that — since introducing its subscription-based DVD rental service in 1999, countless other companies have followed suit.
Whoever is responsible, it's now possible to get a subscription for software, cosmetics, pet toys, digital media and even pre-cooked meals. According to data from McKinsey, 46 percent of consumers have a media subscription and 15 percent have a box subscription:
If you choose to use a subscription revenue model, your customers will pay on a recurring basis in order to receive your products or services.
If you've ever visited a blog post or news article that's surrounded by third-party ads, then you already have first-hand experience with an ad-based revenue model.
With this revenue model, companies don't make money by selling anything directly to consumers. Rather, they generate revenue by selling ad space on their website.
This is typically done through a service such as Google AdSense. With AdSense, you only have to add one snippet of code to your site and Google takes care of the rest. The more visitors your site gets, the more money you make.
If you follow any social media influencers, then you may have seen them offer their own discount codes for certain products — "Use the code YouTuber10 for 10 percent off!"
Those influencers are using an affiliate revenue model by participating in an affiliate program (we even have one of our own). They give their followers a discount code or special link to use, and whenever one of them makes a purchase, the influencer gets a cut of the profits.
It's not just influencers who can benefit from affiliate revenue models, though. Many types of websites, from recipe blogs to news publications, earn money through affiliate links and ads.
If there was ever a tried-and-true revenue model, it's that of retail sales. You likely already know all about how this one works: enter a store, choose an item you want to purchase, pay at the cash register and leave with the item.
From groceries to power tools to luxury handbags, companies use retail sales-based revenue models to sell a vast range of products. They can do so with the help of intuitive point of sale systems such as Square, PayPal Zettle and ShopKeep, all of which can be used to process payments, organize documents and gather useful data.
Traditional retail isn't projected to decline, either. While online shopping is certainly thriving, brick-and-mortar retail sales are still projected to increase through 2025:
Amazon, eBay, small Etsy shops — all are examples of businesses that depend on web sales to generate profits.
Those sales take place entirely online. Customers enter their payment information and order the items or services they want, and the retailer delivers it as promptly as possible.
If your small business uses a revenue model based on web sales, then your customers will pay for your products or services online instead of in person. You can facilitate those online transactions by setting up shop on a third-party website like Etsy, or you can enable digital purchases on your own website using a tool like Shopify, PayPal Checkout or WooCommerce.
How to Choose the Right Revenue Model for Your Small Business
No revenue model is inherently superior to another. Some models, however, may be better suited to your small business than others.
If you sell products or services that customers can use on an ongoing basis, then a subscription revenue model may be best.
If you have a well-trafficked website, then an advertising revenue model may be what you're looking for.
If you sell your products or services in person, then a retail revenue model will likely be your ideal choice.
If you sell your products or services online, then a web sales revenue model is right up your alley.
If you sell your products or services both in-person and online, then a hybrid retail and web sales revenue model will meet your needs.
If you have an online audience that turns to you for product recommendations, then an affiliate revenue model could help maximize your profits.
No matter which revenue model you choose, what's important is to evaluate both you and your customers' wants and needs. If you do, you'll be able to pick an option that provides you with more revenue and your customers with more convenience.
As you're growing your business, Incfile can help you along the way. We can help you stay on top of your reoccurring filing requirements, get tax assistance and even learn everything from revenue models to accounting on our blog.
Carrie Buchholz-Powers is a Colorado-based writer who’s been creating content since 2013. From digital marketing to ecommerce to land conservation, she has experience in a wide range of fields and loves learning about them all. Carrie is fond of history, animals and beauty in equal measure. In her free time, she enjoys knitting, playing video games and exploring Colorado's prairies and mountains with her husband.