Defining a Revenue Model for Your Business

A solid revenue model is the foundation for a sustainable business

During the dot-com bubble, newly minted entrepreneurs crashed through the doors of business magazines, showing off their business plans to editors with the zeal of evangelists. The vast majority of those business plans had no — that's right, zero — mechanisms for actually generating revenue. History shows what happened to most of those companies. So defining a revenue model for your new business is a necessity; it's the underpinning of success.

Defining a revenue model for your business will help you:

  1. Stay focused on a niche and a target audience
  2. Give you a foundation for your product or service development plans
  3. Provide a foundation for your marketing plans
  4. Begin a line of credit or get a loan
  5. Raise capital

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?

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.
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).

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.
  • 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.