The revenue model is an important part of your business model because everything that you create in your business model will need to be evaluated through revenue model.
The success of your business model and success of your small business often will be based on the success of your revenue model. If your revenue model works, it will generate you enough income to cover all the costs that your small business will make, but also will enable you enough profit with which you can finance the future development of your company.
But, in my experience, many entrepreneurs make mistakes when it comes to revenue model even they have created really respectful other elements of their business model.
Here, I would like to show you how you can build your revenue model using the answers to six important questions.
1. What type of value my company is selling to my customers?
All businesses sell something in the form of products or services regardless if they are physical or virtual. But, more important all that products and services contain some type of value for your customers. They will buy them from you and will use them to solve a problem or satisfy the need that they have.
You need to think about the value that your products and services will enable your customers. What your products or services will do for them? Are they saving them money? Or did they are saving them time? Or maybe your products and services eliminate some type of pain that your customers have?
2. Where is my value compared to competitor’s value?
The next question you will need to answer is where is your value compared to the value that your competitors offer to your customers. Because you already know what the real value of your products and services are, you can start comparing your value with the competitor’s value.
For example, how much time your products and services will save to your customers compared with the time that they will save with competitor’s products and services. You are free to use the graphical presentation of this comparing and everything that you think will help you to better understand the difference between your value and competitor’s value.
3. What do my customers think about the value that I will give him?
It is not enough to make a comparing only with the competitor’s value. You will need to test and then learn about what your customers really think about the value that you are shipping to them. Sometimes they can have more different understandings about the value that you think.
When you answer this question, you will need to talk with your current and potential customers, see their reactions, and build a useful knowledge about them and what they value the most when it comes to your products and services. For example, if your products and services save them money and time, after interviewing several customers you can see that some of them value more timesaving and others more money saving. You need as a first to collect that type of knowledge and make decisions about your revenue model.
4. How many products and services you will sell with your revenue model?
Building your small business revenue model will need some assumptions and hypothesis about the market, targets market and a possible number of customers that you will have in the future. I have seen many entrepreneurs when they are creating their revenue model, they are using prices related to their competitors or related to the costs that they will make producing their products and services.
This is wrong way in creating revenue model because in both ways they are excluding the most important person in the whole revenue model process – customers. Because of that, it is better to start with the market and number of potential customers that you will have as a part of your target market and a market share that you are estimating you will have on that market. When you know the number of potential customers, you can easily make a calculation of the number of products and services that you will sell.
5. How will you charge for your value?
The next thing that you will need to decide is about the heart of your revenue model, or how you will charge for the value that you will ship to your customers. Answering this question you will need to choose the right revenue stream for your small business. There are many types of revenue streams, but most used streams can be following:
- Asset sale. With this type of revenue stream, you are selling ownership rights to a physical product.
- Usage fees. If you don’t want to sell ownership rights you can use this type of revenue stream where customers will pay you when they are using your products and services. When they are using more your services, they will pay you more.
- Renting fees. When you have some type of physical asset with much higher prices, this option in revenue model looks logical. You simply give rights for the fixed period of time to use the particular asset, and in return, you get recurring revenue.
- Subscription fees. If your value is based on service that can be used continually, you can use this type of revenue stream ensuring to your customer’s continuous access to your service for which they will pay specific subscription fees.
There are also more revenue streams as advertising fees for the media company, or licensing fees for companies that sell intellectual property rights and so on. You will need to choose what will be most suitable for your small business, and again to test what you have chosen to see whether it is also suitable for your customers.
6. How much will you charge for your value?
Now, when you already know how much revenue you will need to generate in order to cover your small business costs, how much you will want to earn, how much your competitors charge for their products and services, how much products, and services you will sell and what type of revenue stream you will use you can easily calculate what you need to charge if you want to achieve your goals about covering costs and generating profit.
For example, if your value is better from competitor’s value, and your customers really appreciate what they will receive with your value you can charge more than your competitors.
Question: What type of revenue model you are using in your small business?