Defining a revenue model for your business will help you:
- Stay focused on a niche and a target audience
- Give you a foundation for your product or service development plans
- Provide a foundation for your marketing plans
- Begin a line of credit or get a loan
- Raise capital
Action Steps
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Compare potential revenue model(s) to your lifestyle and skills
If your model — which of course is tightly integrated with your business plan — demands a full-time commitment to get started, can you afford to quit your day job? Do you have the technical skills, or can you hire them, to support a model that depends upon them? Do you have, or can you get, the funding required to support the model you're considering?I recommend: For help considering these and other fundamental questions, see Choosing the Right Business. To create a revenue model (and a business plan) that's in sync with your ideal life; follow the instructions at StartupNation to create a life plan.
Find out what's worked
If you're just starting your business, you'll want to know what your potential competitors are doing and what revenue models have worked — or failed — for them. To determine a revenue model, you also need to know how many target customers exist for your product or service and whether there are reasonable ways of reaching them. Successful businesses often have more than one revenue stream.I recommend: Do your market research, either on your own using government Web sites like the 2002 Economic Census or with the help of a market research consultant; find one in the American Marketing Association's directory.
Consider a variety of revenue models
You can sell services one project at a time, on retainer (think law or public relations firm) or with a subscription model. The latter two guarantee consistent revenue over a longer term, although you must be careful to charge enough to maintain profitability (generally, you can charge higher rates for one-off projects, but those higher profits are countered by the cost of constantly generating new business).I recommend: Business plan software often provides hundreds of sample plans in which you can study a variety of revenue models; try Business Plan Pro. You can also find sample plans at the Center for Business Planning. Reuters' tutorial about forecasting revenue in a subscription model is based upon its own business. Use one of Entrepreneur.com's financial calculators for forecasting.
Choose a model for your Internet-based business
There are a few fundamental ways to generate revenue from your Web site, which can be used alone or in combination. You can sell products or services (an e-commerce site, either on its own or paired with a real-world store or distribution center), provide attractive content and sell ad space, license or sell content to other sites, or charge a subscription or access fee for high-quality, niche-specific content.I recommend: ContentMart's brief quiz can help you decide which models will work for you. Starting an eBay business? Take eBay's Revenue Model Tutorial, which includes a revenue forecasting tool.
Tips & Tactics
Helpful advice for making the most of this Guide
- Define multiple revenue streams as clearly as you can — by industry, customer segment, geography, etc.
- Try to determine the percentage of revenue that you'd like to generate from each revenue stream.
- Don't bite off more than you can chew: Develop one revenue stream at a time.
- Selling products? Determine whether you're better off as a distributor to other businesses or selling directly to consumers. You can have a physical location, an e-commerce site or both, depending on your product and location. Of course, many businesses built on products can also generate revenue (and often higher profits) by offering services such as installation, maintenance and repair.
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