Revenue Models Explained: How To Choose a Revenue Model (2024)

Remember Blockbuster? Throughout the 1990s, Blockbuster’s iconic blue and yellow stores were a weekend destination for movie fans worldwide. Their model was simple: Pay a fee to rent a VHS tape or a DVD. This low-cost approach led to high profit margins and fueled Blockbuster’s growth.

As consumer preferences shifted to on-demand streaming, however, Netflix adopted a subscription-based revenue model that perfectly aligned with the era of digital convenience. The result? Netflix became the entertainment giant, while Blockbuster crumbled.

Had Blockbuster adapted its revenue model, it might have retained its dominance. It’s a cautionary tale that highlights the critical role of choosing the right revenue model, the blueprint for how your business turns its offerings into cold, hard cash.

Here’s how to find the right revenue model for your business and seven revenue model examples to get you started.

What is a revenue model?

A revenue model is the approach a company takes to make money. It outlines the strategies—including the value proposition, sales channels, and pricing strategy—that turn a business’s products or services into income.

By understanding the different revenue models available and how to choose the right one, you can ensure a steady stream of income for your business and pave the way for long-term success.

Revenue model vs. business model

While the terms “revenue model” and “business model” are related, a revenue model is a subset of a company’s business model. Revenue models focus specifically on how a business generates income and makes money, acting like the engine that fuels the company’s operations. Business models encompass all the moving parts that work together to create, deliver, and capture value for the customer.

Common revenue models for ecommerce

Subscription

With a subscription model, customers pay a recurring fee for access to your product or service, ensuring a steady revenue stream for your business. Recurring revenue models like this are ideal for products or services that offer ongoing value to customers.

Examples of subscription revenue models include software as a service (SaaS), online content streaming services, and membership clubs.

• Upsides. A subscription revenue model provides a steady revenue stream, the subscription model can build long-term customer relationships, and as you acquire more subscribers, it’s easy to scale up your efforts.

• Downsides. High churn (the rate at which customers stop using a product or service) can make revenue unpredictable, and subscription services require substantial upfront setup costs and a continuous investment in content and product updates.

Sales

One of the oldest and most traditional methods, the sales revenue model involves selling physical or digital products to customers for a one-time fee. It’s a straightforward and widely used approach.

The sales revenue model is most commonly used by ecommerce stores selling products like clothing or electronics. It’s also a great fit for creators offering digital products like ebooks and music downloads.

• Upsides. Each sale generates instant revenue, and you can offer a wide range of products and adjust prices as needed.

• Downsides. Revenue streams depend on market demand, which can be inconsistent; effective inventory management is required to avoid overstocking and stockouts; and competitive pressure can lead to pricing and profit margin challenges.

Advertising

If your business has a large audience or user base, you may be able to generate revenue through an advertising revenue model. This model involves displaying other companies’ ads on your website or app and charging for the advertising space.

Social media platforms, search engines, content websites, and mobile apps commonly use an advertising model to generate revenue.

• Upsides. The profit margin can be high because serving ads requires minimal costs. You have a diverse revenue stream that monetizes traffic from various sources like websites and social media, and the model can grow as traffic and audience engagement increase.

• Downsides. The increased use of ad blockers can reduce revenue, you need to cultivate a large and consistent audience to be effective, and excessive ads can negatively impact user experience and engagement.

Affiliate

The affiliate revenue model entails promoting another company’s products or services and earning a commission on each sale generated through your unique referral link.

Examples of affiliate revenue models include fashion bloggers promoting clothing brands, social media influencers endorsing beauty products, and travel websites recommending hotels with affiliate links.

• Upsides. The affiliate model has minimal startup costs and inventory requirements, it can generate passive income through ongoing referrals, and mutual relationships with affiliate partners build trust and loyalty.

• Downsides. Affiliate revenue depends upon the success of affiliate partners, and competition among affiliates for the same products can be high.

Commission

Ecommerce marketplaces that connect buyers and sellers often use commission-based revenue models, earning money from each transaction. This model incentivizes the platforms to provide a good user experience, secure payment processing, and dispute resolution.

Examples of commission-based revenue models include job marketplaces connecting freelancers and clients, travel-booking platforms, and ride-hailing services.

• Upsides. Earnings increase as the number of transactions grows, and there is no need to maintain inventory as revenue is generated from transactions.

• Downsides. Revenue is highly dependent on transaction volume and market conditions, competition can lead to lower commission rates, and adhering to industry-specific regulations can be complex and costly.

Membership

Similar to subscriptions, the membership revenue model involves offering exclusive benefits or access to a community for a recurring fee. However, memberships often focus on a specific niche or interest group.

Examples of this revenue model include online fitness communities with monthly fees for exclusive workout programs and professional organizations with membership benefits.

• Upsides. Membership fees are steady and predictable, and this model builds community and long-term engagement.

• Downsides. You need to retain members and justify the membership fees, put a lot of effort into the initial setup, and continually provide value to your audience.

Freemium

The freemium revenue model is an effective customer acquisition strategy for ecommerce businesses with digital products or services. By offering a free version, you can attract a large audience and convert some into paying customers for access to advanced features.

Examples of the freemium model include photo editing software with free basic tools and premium subscriptions for advanced features. Another example would be music streaming services that provide a free ad-supported tier and premium ad-free plans with offline listening.

• Upsides. You can attract a large number of users relatively cheaply with a free offering and convert free users into paying customers by offering premium features.

• Downsides. Only a small percentage of free users typically convert to paying customers, there are ongoing costs to support free users without direct revenue, and competition is high, as many businesses use the freemium model.

Choosing the right revenue model

The right revenue model for your business depends entirely on your unique offerings and target audience. Consider these factors when making your decision:

• Product and services. Does your product offer ongoing value (subscription), or is it a one-time purchase (sales)?

• Audience. Is your audience budget-conscious, preferring one-time purchases (sales)? Or do they value ongoing access to your service (membership)?

• Resources. Can you manage inventory (sales)? Can you build a platform and handle complex transactions (commission)?

If you’re not sure, consider experimenting or combining models. For instance, if you’re an illustrator, you could offer free digital prints to attract an audience and sell custom works of art to individual buyers for a one-time fee. From there, you might consider offering design classes on a subscription basis, opening up multiple revenue streams.

The key is to find a model that aligns with your business goals and allows for sustainable growth.