What Is a Revenue Model?

A revenue model is part of the overall business model of an enterprise. The revenue model is concerned with the question of how and where the earnings of the business will rise. Almost every business needs to begin earning money at a relatively early stage in its life if it is to survive, and a clear plan is needed as to where these earnings will begin. For a lasting business, the earnings must be sustainable, and this must be taken into account in the revenue model. Investors looking to put money into a new business will want to know where the earnings will arise to ensure that they receive an adequate return on their investment.

A business may have a number of choices about how it earnings will come from the product or service being offered. For a retail business, the earnings model may relate to the receipt of cash from customers coming through the door. For an online business, the earnings model may involve revenue from direct advertising, affiliate marketing, online sales of a product or income from a premium subscription to a service.

In the years of the dotcom boom, many Internet start-up enterprises did not have a satisfactory revenue model. Many such enterprises were relying on the growth in their share price and the eventual acquisition by an investor without the need to show that earnings had been achieved. Most of these companies did not survive and the experience emphasizes the need for a revenue model that involves sustainable earnings into the future.

A revenue model involves working out a sensible and sustainable pricing policy. Any policy of low prices or discounts must have as its aim the development of a long-term relationship with the customers rather than sales that look impressive in the short term. Discounts or price reductions must be part of a strategy that leads customers to purchase further goods, such as the comparatively low pricing of razors compared to blades or the relatively cheap price of printers compared to the more aggressive pricing of printer ink.

The revenue model must ultimately be linked to the goal of customer service and customer satisfaction. The business enterprise should aim to provide a differentiated service that gives added value to customers based on their needs. The product or service should solve a problem for customers and the price should ideally be based on that value to customers rather than on cost, which does not necessarily bear any relation to the added value created.