This post is a summary of the keynote presentation Nick De Mey did at the European Innovation Academy.
Since we launched our consultancy years ago, I must have guided close to 1000 corporate start-ups. Of course, I guided some just for a day, while others were for six months or more! One topic that I regularly covered in these consultancy tracks & accelerator programs was business model innovation. Most teams struggle with their revenue models, and I would regularly hear questions like, “What are my options to make money? What do you think?” This is often the starting point for a fruitful conversation. In this article, I’ll share a summarised version of the most common revenue model streams. Note that this is not from an academic point of view, but instead from our hands-on approach.
Although teams ask for business model advice, they often just want feedback on their pricing & revenue strategies. The business model covers much more.
Business model definition: An organisation’s logic of creating, delivering and capturing value.
Take the news industry as an example:
1. Creating: You hire journalists, build networks and channels to collect news, conduct fact-checking, etc. Basically how you make your product or service.
2. Delivering: You print everything on paper, distribute to retail stores, etc. This is how your product gets into your customers’ hands.
3. Capture value: Clients pay a subscription fee. Secondary newspapers earn revenue via advertising. This third component covers your revenue model.
When startup teams ask for feedback on their business models, they want input on the third component. I’ll use the term “business model” in this article, but do note that this often just reflects the revenue model side.
Business model innovation, on the other hand, covers all three. A challenger in the news industry might disrupt all three at the same time. Take Blendle for example. They curate news from other publishers but don’t create news themselves. They distribute via digital channels only. Their most innovative revenue model links to the fact that they’re selling per article (e.g. you pay just 10cent and can even get your money back if you’re not satisfied).
Which business model exists?
Luckily, there are dozens of business model options, depending on how you categorize them. This article is just a guide or source of inspiration. In our business model, consulting services go into much greater depth, linked to the actual context of the client.
Creative business model ideas
What’s the most unusual or crazy revenue model idea that you’ve seen over the recent years? Here are a couple of examples that you wish you had invented. But keep in mind, there seems to be a correlation between the ‘wow-crazy-factor’ and the sustainability of a given model.
- A music band asked fans to “play” silent Spotify albums while they slept so that the band could claim royalties. They had earned $20,000 before Spotify intervened.
- A classic example that was copied over and over again: The $1 million webpage. Sell 1 million pixels at $1 each. The original inventor made a clever copycat of the original idea one year later. Wait for it… The $2 million dollar page. This time it was a $1 million dollar lottery. Each of the 1 million pixels cost $2 dollars, but was a chance to win $1 million.
- Drunk website reviews: a guy offered to share video & screen recordings of him reviewing your site. Starting at $50 but due to overwhelming demand, he quickly raised prices to $300. He even offered an alternative service where his mother would do the review.
- At one time someone decided to sell an empty iOS app for €999. There was no functionality next to a luxuries app icon, so you could brag about being able to afford to spend almost thousand dollars on basically nothing.
But enough of the craziness (feel free to send me more though)! Now it is time to dig into the more serious stuff.
First question: “Should I go for a free business model?”
Do you want or have to monetize your service? Maybe a revenue stream is not your priority. You might want to attract users first by building a community. Maybe in the longterm you can monetize your audience and/or a larger company could buy your business. While this was a popular strategy a couple of years ago, more and more startup founders are ignoring this path. There are good reasons to do so.
- Users including free users, are a cost from day one. They still need support, storage, and more. Some of the expenses could be marginal, but free users will add noise to your strategy. You will have to listen and react to all users, not knowing which ones would eventually be willing to pay. Asking for money from day one will limit your user base, but filter out your potential clients.
- Standard exceptions are social products or services that could benefit from network effects. A service that becomes more valuable as more people become connected probably has greater upside with maintaining free services for all. Still, these startups began to experiment with paid upgrades sooner than a couple of years ago.
Free… but not for everyone…
You can be selective about who should put money on the table. Here are several options to consider:
- A time- or usage-based trial. Free for new users, but everyone else must pay.
- Free for homeowners, students, charity, … but businesses and professionals have passed the toll gate. Some companies optimize this strategy by making ‘normal’ users addicted to their product. Once they move into the business world, they must purchase a license because their employees prefer this particular product. Even Adobe benefitted for years from the pirated Photoshop copies that circulated in student communities. Once these students entered the workforce, they expected Photoshop in their professional toolkit, so IT teams had to buy it.
- Free version vs. premium version (a typical ‘freemium’ strategy): A free version is available, but with some downsides (e.g. an experience with ads, limited features, or nudging features to ‘annoy’ users to upgrade). A noteworthy example was a Chrome plugin that was only available with Comic Sans as the font unless you became a paid user.
- Get one, give one models are sometimes used in a charity context. One user pays double or more to fund the sale of another person, so that he will get the product for free. This is the principle of suspended coffees, where in some coffee shops, you buy an extra coffee so that a homeless person can receive a free coffee later on.
Free… but a user can pay if they want.
- A donation-based model just asks people to pay something if they are open to it. To make this work, you must understand the emotional triggers. Not everyone is Wikipedia with such a ‘noble’ purpose, so why would people pay for it? In this content, keep an eye on the Patreon.com service. More and more online creators use this donation subscription service to monetize their audiences.
- Pay-what-you-want model. Users or clients are free to give whatever they think the service or product is worth. Often, these models begin at a price of zero, or are very, very cheap. However, in order make this work, you must take a couple of elements into account. A good example of this is HumbleBundle.com, for on a regular basis they offer a collection of digital downloads (e.g. ebooks, games, etc.). (1) They nudge people to pay something by continuously showing the average price. People thus understand what is considered normal or ‘fair.’ The stats even show average per segment (e.g. Windows vs. Mac vs. Linux users). Mac users might relate to other Mac users and follow their average price. (2) They give people control over what happens with their payment. With a couple of sliders, a client can decide what percentage goes to the platform, a charity, and to the actual content creators. (3) A last, smart trick they use: You can unlock extra content if you pay more than the average so far. This gives a clear incentive to raise the average selling price. If you know that ten thousand users start to participate, you’ll realize the average selling price goes up rather quickly. Note: In an offline context, there are also experiments with pay-what-you-want models (e.g. in consultancy, coaching, restaurants, etc.). Here the success often depends on the level of peer pressure (e.g. do other people see how much you pay?). Social norms also help. You wouldn’t pay a waiter and chef 1 euro if they worked the full evening and gave you an amazing restaurant experience. Done well, clients tend to give more than in a normal setting.
Free… but in exchange for something else.
- A barter model could work in specific contexts. Users might swap goods or services without any monetary transaction. One-on-one matchmaking is if often very difficult (e.g. who wants to trade this dress for something else that I care about?). Many platforms introduce points or credits, but very few platforms can develop a sustainable model. This is true even when making a profit is not the purpose.
- People pay with another service. By solving or tackling micro-tasks, a user could offer something valuable (e.g. CAPTCHAs are often used to help the OCR process of scanned documents). Far more controversial models exist as well. One extreme example is how MissTravel started building a dating/travel business where beautiful women could travel for free if they agreed to travel with a stranger. The company obviously had to pivot their activities after a while.
- The most common strategy today? People pay with their data. They get the product in exchange for a part of their privacy.
Can third parties be involved?
Many business models rely on the interaction between different stakeholders, mixing B2B and B2C relations. Although the setup or launch can be a bit more complicated, as a business you have more buttons to play with. Therefore, there are more revenue models to be explored.
Advertising business models are not easy!
This is a double-sided model. On one end, you have an audience (with free or paying users). An advertiser will pay to have their message shared to this audience. Sounds easy, and this model is often the default strategy of many start-up teams. But…
- You either go mass-market (huge volumes) or go uber niche. Let me clarify. If you’re not able to collect detailed profiles of your users, advertisers will not care too much (e.g. you only know usernames, signup locations, and maybe gender, but that’s it more or less). Suddenly you’re competing against radio, TV, and newspapers, all of which have an incredible reach. If your service is not able to reach a huge audience, it will become challenging. Traditional channels that have limited profile data are often most cost effective.
- If you go uber-niche, you might be incredibly relevant for some specific advertisers group. For instance, in my home country of Belgium, there is an online community of bakeries. If advertisers want to communicate to this profession, there is no better-positioned platform out there. The pitfall for many ad-based startups is that they collect specific data-points of their user base, but without a clear link to a particular advertiser in mind. Yes, they have more data, but this data is irrelevant. Facebook ads or Google ads can be targeted to specific user segments. You need to be more relevant (or cheaper) to be competitive. Most start-ups are not able to do so.
- The last remark to keep in mind: Do you expect that advertisers will create custom ads for your service only? This is a huge red flag, because this rarely happens. Even Snapchat, with its default vertical video view, struggles to convince advertisers to make specific commercial messages that fit their vertical screen setup.
Within advertising there are several options to consider: The most basic approach is to offer visibility. If you have a feed somewhere, or a communication channel like a mailing list, you can include ‘sponsored’ messages, banner ads, or something similar. You often get paid based on tracked views (e.g. CPM, cost-per-thousand views, etc.). Other ad-based options:
- Referral or affiliate links: linking to the product pages of your advertisers. They track who buys their products. You will get a percentage or fee based on the sales that you can generate via your links.
- Product placement, often related to influencer marketing campaigns. You agree to include certain products in your communication that blend ‘naturally’ into the context.
- Native advertising: Here you decide to create custom content or co-branded side-projects for an advertiser. The format is similar to the format you use in normal interactions with your clients.
- There are countless variations, of course. There is a whole industry dedicated to experimenting with new advertising business models!
Data-Reselling Business Model
This model is closely related to the advertising business, already built on the exchange of profile data. Data-reselling can go beyond this.
- Sale of insights and custom reports.
- Access to specific real-time data streams (e.g. usage data).
- Sale of raw data in conjunction with a consulting service.
Broker & Matchmaking Business Models
Next to subscription-based models, this must be the most popular model for internet-enabled start-ups. New communication tech suddenly makes it possible to connect groups of people.
But how do you monetize a broker model?
A good starting point is to check if you want to monetize both sides of your business model. Assume you connect sellers and buyers in a particular industry. You could work with a membership fee for the sellers. To activate their services and products on your platform, they pay a monthly fee. Buyers on the other hand pay extra for specific upgrades (e.g. better search and filter, offline access, etc.) Too many platforms leave money on the table because they stick to a monetization model focused on just one side.
A typical pricing model in matchmaking models is a commission fee on successful transactions. The percentage can differ widely depending on the industry (e.g. in real-estate sales, a 6% fee is considered normal). The Airbnb commission is more or less 15% on every transaction. On photo-stock websites, commission fees can be as high as 50%. There is no default to work with, so the best option is to do extensive research on your own to understand the reference points.
A specific kind of matchmaking platform where supply and demand will directly influence the price, often in real time. Just in this category alone, there are dozens of variations.
- English auction (most common): Bidders face each other in direct competition. If no other bidders raise the price within a particular time frame, the auction closes, and the highest bidder ‘wins.’
- Penny auction (related: reversed auction): A product starts at a meager price (e.g. 10€). People have to pay a fee to raise the price with a fixed amount. (e.g. Pay 1€ to raise the bidding price with €5). Too much fraud in variations of this business model pushed this model out of the market.
- Dutch auction: The price starts high but gradually goes down. The first bidder to accept the price wins.
- Closed-bid auction: Bids are placed privately. The highest bidder wins.
Some of the crowdfunding business models are just advanced donation based platforms. Funders try to support a creator; however, they do not expect something tangible in return.
Other crowdfunding platforms are mainly sales channels for (new) products. People do some pre-sales, often at a discount, but expect their products to be delivered a couple of weeks later.
Other crowdfunding models go one step further. There you can become a co-investor in a project. You could even receive shares in the new venture. In that case, people don’t just support the first product, but mainly look at the team and structure behind it. Clients treat these kinds of crowdfunding campaigns as financial investments. Again, they are perceived very differently.
There are more variations in crowdfunding, but the main message here is that you need to spend enough time managing how users see your platform.
Razor-blade model in a digital context?
Traditionally, a client would buy a device for a reasonable price. (e.g. coffee machine). The biggest revenue and profits would then be based on the continued sales of consumables (e.g. coffee pads). This strategy is not so common in a digital context. You could argue that some in-app purchasing models have related principles; you could get an app or software for free or nearly free. But while you use it, you have to buy extra plugins or credits to make the service useful.
Back-up Business Models?
Sometimes you see that one business is not able to generate enough revenue (yet), so the team decides to launch a secondary initiative to fund the first one (e.g. an online shop for event tickets, wine, gifts, etc. to support a news website where not enough money can be made via a paywall model).
Other startup teams tend to pivot to a white-label business model when they lack the network or skills to conduct their own business development (e.g. a software backend and API can be made available to a third party). This player receives certain rights to create branding, and manages own client relationships. In return, this player must pay a specific license fee.
Go try it!
Of course, this overview is not conclusive. Use the information herein as a guide for further, more creative discussions on revenue streams during your next team meeting! Good luck! :)