Being a strategist for a big business or startup is about establishing the purpose, vision, and direction of your company: knowing and being able to communicate what you are and what you aren’t, to your employees, investors, customers, and stakeholders.
Once you have an understanding of who your company is, so to speak, it’s time to think about how your business strategy should fall in line with that persona and vision. One of the ways your strategy will play out will be in terms of how you collect revenue for your startup. Having a long-term vision and strategy will help you prioritize when, where, and how to collect revenue.
For example, if you want to build a startup around Big Data from healthcare, it may make sense to charge lower prices to hospitals or pharmacy chains using your product, so that you get wider adoption. If you’re thinking about revenue without considering long-term strategy, you might make the mistake of charging a high price for your product, limiting your market, and hurting your long-term data strategy.
Your revenue model is how you make money. Contrast this with your business model, which conceptualizes how your overall business functions – that will include R & D, marketing, and other expenses. Your revenue model focuses on the amount of money you make, and where it comes from.
Simply put, it’s important to think about your company’s priorities before crafting its revenue model. Here are a few revenue models to consider for your company – these are popularly used for startups. The list is hardly exhaustive.
E-commerce has grown more sophisticated – startups hoping to compete in the e-commerce space need to either focus on a niche product, bringing it to the market using a sophisticated strategy, or they need to engage in market creation. Obilis is a great example of a startup engaging in market creation – they help connect Thai boutique owners to their customers. Boutique owners in emerging markets face challenges with payment, validation (who knows if they’re buying a quality product?), and distribution/delivery. E-commerce platforms that effectively connect underserved markets to new consumers have the potential to be as disruptive as market players like Amazon. The opportunity is huge.
Another area where E-commerce can still thrive is in selling niche products. If a startup can identify niche consumers, whose needs aren’t being served, they can create a space specifically catered to that type of person. Here’s an example that might make you blush: Lelo is a company building designer sex toys for couples. Because sex is a bit taboo in a lot of cultures, both beautifully designed toys and a curated space to display them has been lacking, so Lelo is able to charge a pretty penny for their products. Maybe it’s a good idea to ask yourself: whose needs aren’t being served?
(2) Software as a Service
Software as a Service (SaaS) models allow people to access software on a subscription basis. Take Adobe Creative Cloud – for a flat monthly rate, Adobe Systems allows customers to access all the latest versions of all of their products. This contrasts with having to buy each Adobe product separately, and upgrade when a new version of the product comes out.
Businesses running a SaaS model generally try to bundle their software into different packages, with different sets of features. Sometimes the cheapest bundle will even be free – designed to hook users on to the product, and encourage them to buy into more expensive feature packages. SaaS models also tend to work well with business clients who rely on a product. Once a cheap version of the product is in place, entrepreneurs can then upsell to gain more revenue from their b2b client.
SaaS products that offer their cheapest ‘bundle’ for free are called freemium products. Freemium products are designed to give consumers a taste, so to speak – they let users experience a free version of their product which is enough to get them hooked. However, to fully enjoy the service or game, it’s necessary buy a paid-version, or make purchases within the game.
For a SaaS model, a freemium strategy would consist of offering a basic version of the product for free, but pushing consumers through a funnel to encourage them to buy the fully loaded product. For a game, freemium models used to largely involve asking consumers to pay for a product that didn’t have advertising, allowing for more game play.
Now more games are being driven by in app purchases – purchases allow you to play more and advance to new levels faster. A great example of an app being driven by in-game purchases is the Kim Kardashian Hollywood app – one Jezebel journalist got so hooked that she spent close to USD $500.00 in 24 hours. She’s not the only one – the iphone version of Kim Kardashian Hollywood is projected to make USD $220 million by the end of the year.
(4) Ad-driven Apps
Content platforms and games also tend to get revenue from advertising, although it’s very tricky to balance out a great user experience with ads. Also, advertising has gotten more sophisticated – those paying to post on product or platform will want to make sure that the right types of people are looking at their ads. They will be likely be paying for conversion.
As a content platform, it’s generally best to build your product for a niche audience –advertisers catering to that demographic will be more convinced to work with you, because you curate a community they care about.
Excuse the pun, but it’s a different game for games. If you can create an addictive and widely used product, then you may be able to engage with advertisers effectively. Take an app like ‘Flappy Bird’ – designed to be played on public transport, it’s wonderfully addictive. Great news for advertisers, because people can’t take their eyes off the game.
However, it’s notoriously difficult to create and market an amazing game. There’s a reason there was only one ‘Flappy Bird’, and all the other copies haven’t been as successful.
(5) Platform Models
Platform models are premised on resolving an inefficiency – they connect two sides of a market together. Some great examples of platform models include Elance and Freelancer, which help freelancers connect with employers.
When building a platform model, it’s important to focus on who’s paying first – whoever has the money will make the market, as sellers are always willing to go where there’s a buyer. If you were to build a platform for freelancers, that would mean focusing on the people finding freelancers first, before finding a lot of freelancers. You can always find someone who’s willing to take somebody else’s money, but it’s a lot harder to find someone who’s willing to part with their hard-earned cash.
This is just an overview of what revenue models are out there – and of course, you’re not limited to one revenue stream over others. However, consider what’s best for your business, as not all revenue will enable your business to grow to its full potential.
A good example of a traditional business refining its strategy comes from the USA. CVS pharmacies recently made the decision to stop selling cigarettes when it chose to serve patients with chronic illness, including cancer, heart disease, and diabetes (all conditions complicated by smoking). Although it lost short-term revenue from cigarettes, CVS is making a bet on long-term revenue from people with chronic disease. The bold choice to discontinue cigarettes and create a safe space for chronic disease patients will likely win them customer loyalty and higher returns in future.
Not all revenue is equal, so think about what you want your business to be before choosing a model.
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