Revenue model

Key takeaways

Revenue model belongs to science; place it in that map before memorising details.
Learn the definition first, then one example that makes the definition concrete.
Connect Revenue model to a quantity you can measure, compute or draw — that is where exam questions come from.
Reproduce the core statement of Revenue model from memory before moving on to harder problems.

Reference excerpt

A revenue model is a framework for generating financial income. There can be a variety of ways for revenue generation such as the production model, manufacturing model, as well as the construction model. A revenue model identifies which revenue source to pursue, what value to offer, how to price the value, and who pays for the value. It is a key component of a company's business model. A revenue model primarily identifies what product or service will be created and sold in order to generate revenues. Without a clear and well-defined revenue model new businesses will be more likely to struggle. By having a clear revenue model, a business can focus on a target audience, fund development plans for a product or service, establish marketing plans, open a line of credit and raise capital.

Types The type of revenue model that is available to a firm depends, in large part, on the activities the firm performs, and how it charges for those. Various models by which to generate revenue include the following.

Production model

In the production model, the business that creates the product or service sells it to customers who value and thus pay for it. An example would be a company that produces paper, who then sells it to either the direct public or to other businesses, thus generating revenue for the paper company.

Manufacturing model

Manufacturing is the production of merchandise using labour, materials, and equipment, resulting in finished goods. Revenue is generated by selling the finished goods. They may be sold to other manufacturers for the production of more complex products (such as aircraft, household appliances or automobiles), or sold to wholesalers, who in turn sell them to retailers, who then sell them to end users and consumers. Manufacturers may market directly to consumers, but generally do not, for the benefits of specialization.

Construction model

Construction is the process of constructing a building or infrastructure. Construction differs from manufacturing in that manufacturing typically involves mass production of similar items without a designated purchaser, while construction typically takes place on location for a known client, but may be done speculatively for sale on the real estate market.

Rental or leasing model

Renting is an agreement where a payment is made for the temporary use of a good, service or property owned by another. A gross lease is when the tenant pays a flat rental amount and the landlord pays for all property charges regularly incurred by the ownership. Things that can be rented or leased include land, buildings, vehicles, tools, equipment, furniture, etc.

Advertising model

The advertising model is often used by Media businesses which use their platforms where content is provided to the customer as an advertising space. Possible examples are newspapers and magazines which generate revenue through the various adverts encountered in their issues. Internet businesses which often provide services will also have advertising spaces on their platforms. Examples include Google and Taobao. Mobile applications also use this specific revenue model to generate revenues. By incorporating some ad space, many popular apps such as Twitter and Instagram have strengthened their mobile revenue potential after previously having no real revenue stream.

Sponsored ranking model

The sponsored ranking model is a variant of the Advertising model. The sponsored ranking model is mainly used by search engine platforms like Google and specialized products- and IT-services- platforms where users are offered free search functionality in return for sponsored results in front of other search results. The sponsor is often paying per click, per view or as a Subscription model

Commission model

The commission model is similar to the markup model as it is used when a business charges a fee for a transaction that it mediates between two parties. Brokerage companies or auction companies often use it as they provide a service as intermediaries and generate revenue through commissions on the sales of either stock or products.

E-commerce model

This revenue model is the implementation of any of the other revenue models online

Fee-for-service model

In the fee-for-service model, unlike in the subscription model, the business only charges customers for the amount of service or product they use. Many phone companies provide pay-as-you-go services whereby the customer only pays for the number of minutes he actually uses.

Licensing model

With the licensing model, the business that owns a particular content retains copyright while selling licenses to third parties. Software publishers sell licenses to use their programs rather than straight-out sell copies of the program. Media companies also obtain their revenues in this manner, as do patent holders of particular technologies.

Software licensing model

Rather than selling units of software, software publishers generally sell the right to use their software through a limited license which defines what the purchaser can and cannot do with it.

Shareware model

In the shareware model, users are encouraged to make and share copies of a software product, which helps distribute it. Payment may be left entirely up to the goodwill of the customer (donationware), or be optional with an occasional reminder (nagware), or the software may be designed to stop working after a trial period unless the user pays a license fee (trialware or demoware), or be crippled so that key features don't work. Or it may be a free feature-limited "lite" version (freemium), with a more advanced version available for a fee.

Donationware

Donationware is a licensing model that supplies fully operational unrestricted software to the user and requests an optional donation be paid to the programmer or a third-party beneficiary (usually a non-profit). The amount of the donation may also be stipulated by the author, or it may be left to the discretion of the user, based on individual perceptions of the software's value. Since donationware comes fully operational (i.e. not crippleware) with payment optional, it is a type of freeware.

Nagware

… excerpt ends here. Continue reading the full article.

Worked examples

Example 1 — a first encounter with Revenue model

Start with the simplest possible case. Write down what Revenue model claims or describes in one sentence, then invent the smallest concrete situation in which that sentence is true. In science, the smallest case is usually a single object, a single equation or a single measurement. Check that every symbol or term in your sentence has a meaning in that case.

Example 2 — changing one variable

Take the situation from Example 1 and change exactly one quantity: double it, halve it, or set it to zero. Predict what should happen to Revenue model before you calculate. Comparing your prediction with the result is the fastest way to find out whether you understand the idea or only the words.

Example 3 — an exam-style question

Typical questions about Revenue model ask you to (a) state it precisely, (b) apply it to given data, and (c) explain a limitation. Practise writing all three answers in under five minutes; the third part is what separates a full-mark answer from an average one.

Applications of Revenue model

In research: Revenue model appears in science research whenever the underlying quantities have to be modelled precisely. Papers usually cite it as a starting assumption and then explore where it breaks down.
In technology and industry: Engineering practice reuses Revenue model in design rules, simulations and safety margins. Knowing the idea lets you read a specification sheet and understand why the numbers look the way they do.
In the classroom: Revenue model is common in secondary-school and first-year university syllabi. It links to neighbouring topics Business models, Revenue, Revenue models, so understanding it makes those chapters shorter.
In everyday life: Look for Revenue model outside the textbook — in sport, cooking, traffic, electronics or the sky above you. An example you found yourself is remembered far longer than one you were given.

How to study Revenue model in 20 minutes

Read the reference excerpt below once, without taking notes.
Close the page and write down what Revenue model means in your own words.
Compare your version with the excerpt and mark what you missed.
Work through the three examples above with pen and paper.
Explain Revenue model out loud to somebody else — or to Teacher Smith in the lgStudy chat.

Frequently asked questions

What is Revenue model in simple terms?

A revenue model is a framework for generating financial income. There can be a variety of ways for revenue generation such as the production model, manufacturing model, as well as the construction model.

Why does Revenue model matter?

Because it connects several science ideas at once: it gives you a definition you can apply, a quantity you can calculate, and a way to check whether a result is plausible.

How should I study Revenue model?

Read the excerpt, restate it from memory, then work through the examples and applications listed on this page. The five-step study plan above takes about twenty minutes.

What does this page cover?

It gives you a compact reference excerpt plus original lgStudy explanations, examples, applications and study material on Revenue model.