Startup Revenue Model is a frame work to generate revenue for startup. While a business model majorly shows the work flow of startup, revenue model gives clear idea about which revenue source to pursue, what value to offer, how to price the value, and who pays for the value. Financial projections are generally based on the two types of approach –
Top-down Forecasting – In this forecasting the market size is first estimated and the targeted market volume is decided based on the anticipated penetration rate. This figure is then frame wired how to reach from zero to the total potential revenue.
Bottom-up Forecasting – In this forecasting, first the achievable market volume is identified and then based on the expected growth, total revenue is decided.
Both of the above mentioned financial forecasting approach needs to be balanced with revenue model to remain realistic as well as aggressive. A lot of startups are found struggling with revenue model out of their business model. Cash burn to attract and acquire consumer might be a need of startup to stand in the market, but unless it is balanced with the cash-in flow, it will lead towards financial failure.
Here are guidelines from FS to develop revenue model based on the type of product/ service involved in it –
Direct Product/ Service Based Business Model
If the startup is based on some salable product or service, basic revenue model involved is quite simple – profit per sale of product or service. A product with high specifications and features will definitely be of high price as compared with the same product of competitor and hence will narrow down the targeted market unless the concept is strong enough to force consumers to pay more. On the other hand, a product on lower side of performance shall not be able to fulfill the need of consumers. Important thing is to estimate the right price for the product / service with an aim of capturing the maximum market volume. So the following factors must be considers while deciding the cost of product –
- Fixed cost associated with the setup of getting product/ service ready for consumer
- Variable expenditure to provide the product / service to consumers
- Competitors’ cost of similar product / service
- Affordability limit of targeted consumers
- Specifications and features desired by consumer in the product / service
Combination of above factors, gives the actual cost per product / service. So based on the right profit margin, selling price of product can easily be decided and also, the minimum volume required to reach the breakeven point (no profit no loss volume).
Following approach can be implemented to develop the revenue model –
- First acquire the easily available consumers to start the cash in-flow without much considering the profit margins
- Then expand the reach of startup to grasp to the required sales volume of breakeven
- Then analyze, implement and validate the other ways to enhance the revenue model
Revenue model of product based startup can be enhanced by finding all other applicable ways to enhance money flow –
- Find all the other possible ways/ portals to sell the product or service. Eg – A product can be sold on all the related famous e-commerce portals, service can be provided to consumers through aggregators
- If the product is being re-used at a certain frequency, it’s good to introduce subscription based model. Eg – Grocery needs per family are generally on monthly basis, so monthly order management system should be incorporated in grocery delivery business
- Check for the other similar products that can be incorporated in the same business model to enhance the product portfolio and become one stop solution for consumers’ need. Eg – spare parts business is a good source of revenue for main product
- Check for the related business verticals that can enhance the business model as well as generate revenue. Eg – Service of the product can be provided through the same player
- Check for the additional innovate ways of making money like advertisement etc.
Indirect Product/ Service Based Business Model
If startup is providing the product or service of some other player, the basic revenue model is commission per sale. Eg – Aggregator model of food delivery. Larger the volume of sale, larger will be the commission in total. Generally the profit margins of aggregator models are quite limited, so the operational excellence plays the major role in reducing the cash burn. Commission per sale can easily be decided based on the combination of following factors –
- Fixed cost for the setup
- Variable/ Operating cost associated per product / service
- Market trend of commission ratio per sale
- Competitor commission of same domain
Also, the minimum volume required for no profit no loss condition can be determined based on the combination of above factors.
The approach to develop such revenue model is tricky as the expectations of service/ product providers as well as consumers need to be balanced –
- First keep the commission to minimal level to acquire product/ service providers
- Then achieve the operational excellence to acquire consumers and reduce the loss if any
- Once the band name is constructed and loyal consumer base is obtained, commission per sale can be increased
Generally the commission based mode alone is not able to survive unless the volume is too large to overcome all of the cash-out flow activities. Few suggestions from FS to enhance the revenue model of such business model –
- Try to find the best practices to optimize the operational cost to enhance the profit margins. Eg- operational cost of delivery aggregator can be optimized by route and number of delivery based on the committed time to consumers
- Try to make the setup attractive for consumers to return again. Eg – Loyalty points per sale
- Introduce self- product or service to enhance the revenue ratio per usage
- Enhancement of product portfolio with other related product/ services and business verticals. Eg – cab service aggregator model can be enhanced by introducing other model of transportation as well
- Solutions for product/service providers. Eg – Inventory management solution for market based e-commerce model
Free Model or Freemium Model
Free model is when consumers don’t pay for the product or service. Eg – Social Networks are free of cost (though few features are paid) to consumers while their revenue come through advertisements. Freemium is “Free + Premium” where some of the features of the product are given to consumers at free of cost while other are based on payment. Eg – Free and paid versions of software.
Since the success of free or freemium model is purely based on the traction that it is able to attract, first step for developing revenue as well as business model is to get the maximum possible traction for the product or service. Once the users become addicted to it, following ways of making revenue can be implemented –
- If the model involves consumers as well as service providers, revenue can be generated through both the stake holders. Service providers can be charged for registration, service management solutions etc while users can be charged for premium features and services.
- If the model involves only consumer, either consumers can be charged for premium services.
Eg – A directory portal of restaurants needs to be made popular among consumers first. Then the revenue can be generated by charging registration fees from restaurants, by providing them CRM and other solutions, by incorporating food delivery chain etc.
So, based on the type of product, single or combination of revenue model can be developed for a business model. Wish you luck for your startup. Stay tuned with FS for more updates.