# Revenue models: 11 types and how to pick the right one Finding the right revenue model for your company and products is an incredibly important part of starting and expanding your business. It's a key part of building a brand. Explore popular revenue models and how to choose the right one. - [What is a revenue model?](/content/resources/popular-revenue-models#what-is-a-revenue-model/index.html) - [11 different types of revenue models](/content/resources/popular-revenue-models#types/index.html) - [Costs associated with revenue models](/content/resources/popular-revenue-models#costs/index.html) - [How to choose your revenue model](/content/resources/popular-revenue-models#revenue-model/index.html) In one of the most [famous lines from the 1941 classic _Citizen Kane_](https://www.youtube.com/watch?v=87indycxudo), Mr. Bernstein proclaims: “ _It's no trick to make an awful lot of money... if what you want is to do is make a lot of money_.” If only that statement were as true as it seemed. It's probably more accurate to say, “There are a _lot of ways_ to make a lot of money.” That’s particularly true for software businesses, with the rise of the mobile internet stimulating an explosion in the number of viable revenue models. Choosing which revenue model works best for your SaaS business, though, is not easy. Your choice will help determine your [sales strategy](https://blog.chorus.ai/the-5-stages-of-developing-and-launching-a-new-sales-strategy), and from there the growth rates, the amount of money you’ll need to invest initially, and the kind of relationship you’re likely to build with your customers. More than that — the choice determines the future of your business. Let’s take a look at some of the most popular revenue models used today — why they’re popular, why they work, and why they will (or won’t) work for you. ## **What is a revenue model?** A revenue model is the income generating framework that is part of a company’s business model. Common revenue models include subscription, licensing and markup. The revenue model helps businesses determine their revenue generation strategies such as: which revenue source to prioritize, understanding target customers, and how to price their products. Revenue models often get conflated with revenue streams, probably because each is a single revenue generation source. They are also confused with business models, of which revenue models are a part. Revenue models help business owners determine how to manage their revenue streams and are required to complete a business model. Without a considered revenue model, your business will incur costs it cannot sustain. With a revenue model, you can set, track, and forecast business growth based on specific customer segments. ## **11 different types of revenue models** There is no such thing as a perfect revenue model, but the popularity of some of the methods below suggests that many of them are well-tailored for the current state of the market. Here we’ll walk through each type of revenue model and when they may be most beneficial and applicable. ### 1. Subscription The [subscription model](/content/resources/subscription-business-model/index.html) is the “vanilla” SaaS revenue model. Businesses charge a customer every month or year for use of a product or service. All revenue is deferred and then fulfilled in installments. The subscription model is perhaps the most popular among SaaS companies because of its versatility, promise of [recurring revenue](/content/resources/recurring-revenue/index.html), and high value:customer lifetime balance. _Companies working with recurring revenue models, such as [subscription or licensing](/content/resources/subscription-vs-license/index.html), see more value from a customer across a given customer lifetime._ Being able to offer a variety of value options means your company can respond to more than one set of customer needs, expanding your appeal. ### 2. Markup Markup is a very common revenue model for buyer companies. It’s as simple as can be: Take the cost of goods you just bought, mark it up X%, and make a profit margin on the original purchase. There are various subgenres of the markup model, including the following: - Wholesale: Sale of goods or merchandise to retailers, business users, or other wholesalers - Retail: Identification of demand, and satisfaction of it through a supply chain via a number of possible outlets, including physical and ecommercial ones ### 3. Pay-Per-User One of the most enduring legacies of SaaS in the world of business is the introduction of pay-per-user (PPU). It involves giving a customer potentially unlimited access to a range of features while charging them only for the services they use. However, ascribing value to your product is one of the key considerations of your revenue model, and that includes demonstrating why it’s worth your target customers’ valuable dollars. ### 4. Donation As evidenced by the rise and rise of [Kickstarter](https://www.kickstarter.com/) and [Patreon](https://www.patreon.com/)-based ventures, altruism is a pretty effective revenue model. Relying on the donations of regular users is a common revenue model for nonprofits, online media and independent news outlets. ### 5. Affiliate What is [affiliate marketing](https://seranking.com/blog/affiliate-marketing)? This model works by promoting referral links to relevant products and collecting commission on any subsequent sales. ### 6. Arbitrage The arbitrage revenue model uses the price difference in two different markets of the same good/service to make a profit. You buy in one market and simultaneously sell in another market at a higher price, pocketing the temporary price difference. ### 7. Commission This transactional revenue model involves charging commission for each transaction it handles between two parties. It’s particularly popular with online marketplaces and aggregators. ### 8. Data Sales In the data sale revenue model, this data is sold directly to a consumer or business customer. This model should be handled with care in the event you decide to go with it as your revenue model. ### 9. Web/Direct Sales Web sales involve a customer finding your product via outbound marketing and can be used for software, hardware, and subscription-based offerings. Direct sales revolve around inbound marketing. ## **Costs associated with revenue models** A good revenue model is also about balancing your ambitions in the market with your resourcing requirements. When choosing your model, factoring in costs is paramount to ensure profitability. ### Cost of revenue The first cost you’ll be likely to factor in is your cost of goods — how much it costs to produce the goods or service that you then sell. ### Prototyping costs Prototyping is a fundamental aspect of any production cycle and is one of the most expensive. ### Equipment costs One of the beautiful things about being a SaaS company is that there are no production lines to run. Nevertheless, equipment costs still factor into the bottom line. ### Labor costs Wage costs come out of your bottom line. Your advertising and marketing costs will be determined by several factors. ## **How to choose your revenue model** With all of those options, how could you possibly be expected to choose? The answer is in your product itself. ### Know your market Where are your customers? How are they accessible to you? Knowing your market also means knowing your competitors. ### Know your product Knowing your product is every bit as important as knowing your market. Sometimes, the nature of a product dictates the best revenue model for it by itself. ### Expect the unexpected As your product line changes and as your company grows, your initial revenue model may change. The important thing is to be willing to shift your revenue model or bring in additional models to complement what you already use, if the situation calls for it. ## **Your revenue model is unique** There are some fundamental differences between revenue models. The choice of a main revenue model out of the batch that do work for your product, and how you then combine them with appropriate aspects of other models, is yours, and yours only.