What is a Revenue Model?
A Revenue model is quite simply a conceptual framework that lays out the revenue earning strategy for your business and forecasts said earnings. It is essetial for outlining your strategy to generate a financial income, understand the cashflow of your day-to-day operations.
Setting the Stage
Before you create the model you need to get your sales data and income statements in order. Once you have all paperwork which lays out the company’s expenditure and earnings (for a start-up this could mean investments), you can prepare a revenue model that will help you in forecasting.
A good revenue model helps forecast unexpected changes which could prove crucial to the survival of your business.
A Step-by-Step Guide: Building a Successful Revenue Model
Step 1: Choose a Model That Supplements Your Company Background
Analyse of the type of company you are running and evaluate which type of model will best facilitate growth while mitigating capital risk. You can strategically choose revenue models such as a markup, commission, subscription, arbitrage, advertising, pay per use, licensing, linear or even exponential models.
Step 2: Convey Value through Your Model
The ideal revenue model should highlight the best parts of the business. This will also act as a point of attraction for investors.
Step 3: Get Investors onboard
Early on it is vital that you identify potential investors who are strategically important in the industry and bring them into the fold. It is essential that you establish every possible means of income in order to maximise revenue.
Step 4: Give Investors a Glimpse of the Future
Investors will only get involved if they know what the end game is. That is to say, when will they see the ROI on their investments? Create a forecast as to when this might be and what the next 12 to 24 months look like. This provides a rough roadmap for your business as well.
Step 5: Adapt and Evolve with the Model
Do not stick to any one model rigidly. Business circumstances, needs and income may change at any moment. Analyse, adjust and even adopt new models as the need may be.
Step 6: Identify and Mitigate Variables
For every business there are countless variables that can and will affect the revenue model. Depending on which stage of the business you are in, you need to predict the risk early on and mitigate it.
What’s in It for Me?
At the end of the day, a business has to be more than a passion, it has to be profitable. This is only possible if there is a strong revenue model in place. Knowing the fundamentals of how to prepare a revenue model will help your business flourish even in unexpected circumstances such as the COVID-19 pandemic that unexpectedly shook most of the world economies.
Having a revenue model is like having a safety need, which every start-up sorely needs in this day and age.