Whether you’re a mom and pop shop that sells on Shopify or a SaaS founder who sells subscriptions using Stripe, building a business model that helps you generate as much revenue as possible is critically important.
You might assume there is only one way to sell your product. In this article, we’re going to list different ideas for generating new revenue streams along with examples for each.
Remember that the most successful companies usually take advantage of multiple revenue sources.
10 Types of Revenue Models You Might Be Ignoring
Many founders stick to the same pricing model for many years without stepping back to consider if they’re leaving money on the table. Here are some additional revenue models you should consider to increase cash in your bank account.
1. Recurring Subscription Model
This works for physical products like Harry Razors and digital software products like Slack. When thinking about a subscription model, consider making your cheapest plan one that is easy for new users to get started on. Your middle plan and most expensive plan should have obvious additional features, or usage based milestones (6 razors per month instead of 3) that drive customer to upgrade to the higher price.
Many analysts would say this is the best revenue model because they customer pays every month and keeps paying for a very long time as long as you’re delivering value. Many SaaS companies have customers who have paid every month for 3+ years. You can also layer on subscription services which we’ll talk about later.
SEMRush broke $100m in revenues in 2019 selling subscription plans to 47,000 customers who pay on average $130+/mo. Customers use them do search engine marketing and optimization research.
Wistia hit $40m in revenues in 2019 and almost $6m in free cash flow by helping over 50,000 customers host and manage video content. They build their plans around number of videos, channels, and certain features.
Jivochat hit $8m in revenues without raising money by selling customers a live chat solution for their websites. Over 37,000 customers pay $18/mo to use the tool.
2. Transactional (take a %) Type of Revenue Model
If you’re processing payments for your subscribers or helping them manage money in any way, consider the transactional revenue model.
BackOffice helps businesses manage their finances and payroll. They started by selling a recurring subscription model and hit $80,000 per month in revenue in under 18 months. They then realized they were helping customers bill their customers millions of dollars each month. Now using this transaction model, BackOffice takes a small percentage (<3%) of each sale to help its customers with payment processing. If BackOffice hits $10m/mo in processing, they’d be making an additional $300k/mo if they charged a 3% transaction fee.
Printful was founded in 2014 and has helped creators sell over $540m in gross merchandise volume (GMV) through its platform in total. In 2019 the company made $100m in revenues on about $300m in total GMV. The company takes an average of 30% on each order
Argentina based PopMyAds makes money by charging 8% of total ads placed through its system. This transaction fee, sometimes called the “ad tax” in the advertising world, is very popular among SaaS companies that help brands place ad spend. 3. Usage based Revenue Streams
Many founders mess up their business plan because they think customers use them for one thing, when really customers value something totally different. When you charge based off usage, make sure you are tracking real usage metrics from your tool and price against the usage metric customers value most. Update the business model if you have to.
For example, if you sell a CRM you might price against number of contacts. If you help customers write proposals, your usage based metric might be number of proposals sent each month.
Proposify charges based off # of contracts per month
CloudCheckr charges based off % of cloud spend
SEMRush charges based off how many keyword searches you do per month
These are all examples of usage based pricing models.
4. Pay Per Seat
When a customer recommends your product to one of their co-workers, it means you’re doing a great job delivering value. When you see this sort of pattern, consider a pay per seat model. Customers pay you based off how many seats their using. This is most common for founders that sell to other companies.
If you have 3 people from a company using your product, use linkedin to see how many total employees they have to see if its worth it to try and get their entire team signed up.
Ad based revenue models are becoming less popular as users can easily spot ads and find them annoying. That being said, if you’ve built a blog, podcast, or email list and attracted a large following, monetizing with ads is a great idea.
The best ads are the ones which don’t look like ads at all.
Email newsletters like Morning Brew generate over $18m/year by sending 1 email per day and selling ads in that email. They’ve been at it for many years and now have over 1,600,000 readers of their Morning Brew newsletter.
Podcast hosts like Tim Ferriss are able to charge $40,000 for a 60 second message at the beginning of their podcast because they’ve built a massive audience of listeners.
Web properties like Forbes and Entrepreneur sell ads on their websites using Google Adsense and other marketplaces which bring in $10m+ in revenue annually.
If you’re build a large audience and can’t seem to attract advertisers, one model you should consider is the affiliate model. Go see if the products you already use and love have an affiliate program where they’d pay you to mention their goods or services.
If you’re an E-Commerce company that spends a lot on ads to generate new customers, finding the right outlets that already serve your desired customers can be tricky. Run small tests under $5k then double down when you find an email list, website, podcast, or other property that helps you get customers at a low customer acquisition cost (CAC).
6. Freemium Model Dangers
This model works well in very specific situations. When you’re buying groceries and a server has a “free sample” booth set up in front of a Hamburger brand, they give you a free bite of the hamburger because they know if they do that 10 times, 1 person will buy the $15.99 pack of 12 hamburger patties. The 10 samples they gave out cost them a total of $1 (marketing) and the product cost of goods sold (COGS) is $4 generating a profit of $10.99.
Freemium models can be dangerous if you don’t know how much “free” you have to give out to convert 1 new customer. If you give away product free, or allow users to use your tool for free, and these free ideas cost you a lot of money, freemium models can drive a business bankrupt. You have to know your conversion metrics.
Marketplaces connect buyers and sellers and make money by sitting in the middle. The sales cycle in marketplaces can be tricky because you have to sell 2 people at once: the buyer and the seller. This is called the chicken and egg problem.
Who should you focus on getting on your marketplace first? The buyers or the sellers? You have to go after both target customers at once if you want to start generating cash flow. A key piece of your intellectual property then becomes your network of buyers and sellers.
Google helps publishers connect with brands that want to reach those publisher audiences. With $50b+ in annual revenues, Google is the best model.
Amazon connects the maker of a widget to a buyer who just searched for that widget and takes 30% in between.
Apple’s app store connects gamers with game app developers and takes 30% on each $4.99 sale.
Fiverrr connects a writer in Europe to someone who needs blog content in California and takes a small cut in between.
Other examples of marketplaces include Uber, TopTal, and car buying marketplace Shift.
8. Data Sales
Selling data can be tricky but highly lucrative if done right. Second Measure has built up relationships with many firms that touch transactional credit card data. Those firms anonymize the data and share it back to Second Measure. Second Measure cleans and organizes the data and enables customers to sort, filter, and pull insights from this credit card data.
Other firms that sell data include ZoomInfo, Crunchbase, and Gartner.
9. Markup Model
If you sell a physical product you’re very familiar with how much it costs you to make. You may decide that everytime you sell that product, you want to make a 50% markup. Meaning if it cost you $10 to create, you want to sell it for a minimum of $15 so you pocket $5 per sale in gross profit.
This is the most common business model across companies today. The value proposition is clear: buy my product one time, pay me one fixed price, and then we go our separate ways.
While some small businesses use this markup model and sell via direct sales to customers through social media and search engines, others will use dropshipping or middlemen like eBay, Shopify, or retail stores like Wallmart to sell their products. Regardless of how you sell your product, make sure you’re making enough margin on the sale to make it worth your energy.
Calculating profits is very simple using this markup model which is why its the most common revenue model today.
10. Selling Services
Most of the business models we’ve talked about in this article start from a solo entrepreneur hustling to sell services. When you sell services, you’re selling your time in most cases. A lawyer sells you legal services and charges $400 per hour.
A painter may sell you painting services at a labor cost of $40/hour. We’ve all had our car repaired and been surprised to see the labor fee, a form of a service fee, on our bill.
Most founders that start off selling services realize its very hard to scale past $1m in annual revenue because you only have so much time. They’ll start to build out an agency where they sell other peoples time and then realize that it’s also hard to scale because if you get new customers, you always have to go hire more people to service those customers.
At this point most agencies start to look at more profitable business models like Subscriptions or they invent their own products and use their agencies to sell the product.
This is one of the easiest startup revenue models to begin with so start here to build momentum.
5 Revenue Model Combinations Getting Popular:
1. Markup + Subscription
Many brands that sell to consumers are starting to do this. They used to use just the markup model selling razors to consumers.
It cost them $1 to make the razor and they sold each for $5 for a $4 gross profit. They got sick of paying wallmart for shelf space and of paying amazon a 30% cut so they launched their own website and sold directly to consumers.
They start seeing many customers come back and buy every other month and launch a subscription plan: 3 razors per month for just $12.
This is the path DollarShaveClub took before it sold to Unilver for $1b in cash in July of 2016. I expect you’ll see many more brands go down this path combining the markup revenue model with subscriptions over the next few years.
2. Marketplace + % of GMV
You really want to help stay at home moms find flexible work so you launch a site where they can list their talents. In the first year, you sign up 1,000 moms who list things like “I write blog posts”, or “I’ll edit your podcast”. In your second year, you finally see companies hiring these moms to do tasks. You charge companies $50/mo to use your platform to find moms ready to work.
By year 3, you’re processing 10,000 jobs per month equalling over $5m in total jobs completed (gross merchandise volume, GMV). You’re making $50/mo from 2,500 companies paying to get access to your mom network, a total of $125,000 per month.
You start to realize you could charge a small % of each job to keep for yourself. You launch new pricing stating you’ll keep 3% of each job. 3% of $5m/mo is approximately $150k/mo in new revenue. You just doubled your business.
Many marketplaces are going through this change right now. I expect you’ll see this combination of business models continue to be popularized over the next 5 years.
SimpliShip helps freight forwarders sell ocean and air transportation space to brands like Adidas who need to ship product. The company makes money by taking 2% of space booked on ocean side and 5% on air side. In 2019 the company processed $15m in total freight spend (75% ocean, 25% air) making about $1m in revenues. They plan to do $300m in volume in 2020 and make $10m in revenues.
Freightos is another example of this same model in the transportation space. The company passed $18m in revenues in 2019.
New brands like LeafLink help cannabis brands like Dixie in Colorado connect with retailers who can sell their product like Medicine Man in Denver. LeafLink has 1300 brands like Dixie on the platform and 3400 retailers like Medicine Mane. In April of 2019 the platform processed $123m in gross merchandise volume (GMV).
Leaflink has 3 revenue models. They made $6m in 2019. 60% came from charging 1300 brands like Dixie $399-1500/mo subscription plans. 5% came from transaction fees where LeafLink charged 3% on total bought through theirplatform of $2.25m. The last 15% came from letting brands like Dixie buy ad space in their marketplace. This is a great example of using multiple revenue streams to scale.
3. Hardware (IoT) + Software
Many companies build hardware that enables their software to work. They’ve realized that once a customer installs the hardware, the customer is way more likely to keep paying the subscription fee for long periods of time.
SensaNetworks helps companies like Walmart manage their waste. SensaNetworks ships hardware devices to brick and mortar shops to install on their dumpsters. These devices tell trash pickup when the dumpster is full.
It costs SensaNetworks $900 to build each piece of hardware. They sell this to customers for $2400 one time, or $90/mo rental. 60% of customers buy and 40% rent. They then upsell the sofware package for $34/location.
4. Subscription + Services
These are like two twins that can’t seem to get along. Many entrepreneurs start off selling their time by selling services. They get tired of selling their time, morph into an agency, and then that agency develops a subscription software product.
This is where conflict begins. How many of your agency members should you have focus on building the software? When should you shut down the agency and focus only on the higher margin software?
In some cases, the software takes off and the company goes on to raise venture capital. The investors hate the services revenue because it “doesn’t scale” and “has low margins”. Most software margins are above 75% while services margins tend to be around 40%.
After the subscription company reaches $5m or so in revenues and 1,000 customers, the founders start thinking: “Wow, we could upsell services to some of these customers and get them more addicted to our software”. Typically, you see these companies focus on launching a services plan again, back to their roots.
Ultimately, the most success software companies sell software and upsell significant services to get customers onboarded, activated, and sticky. Do both!
Clucth.io started as an agency in 2007 when the founder was 19. The agency grew to 40-50 people in 2019 and revenues hit $5m but the work was exhausting. The founders tried to sell the agency and got an offer for 1x revenues of about $5m.
One of the founders wanted to spin out a valuable piece of code that allowed for companies to drag and drop together applications and websites without having to code. That founder was paid 50% from the sale of the agency, $2.5m, and then used $600k to buy out the code from his old agency. Today, that subscription software company is launching as Clutch.io
5. Subscription + % of GMV
Companies like Workaxle help businesses easily schedule paid meetings. Companies pay a fixed fee of $1000 each month to use the software on a subscription basis and Workaxle takes 1.5% of the total value of appointments booked through their platform. This tool is for industries that charge for appointments (salons, coaches, etc).
You now have 10 different revenue stream ideas and hopefully are ready to add to your business model to increase sales. Keep in mind the easiest path is services or physical products to subscriptions. You have a built in customer base for your subscription plans when you start the relationship selling products or services.