11 revenue models, examples & tips to pick the right one (2024)

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 (even if that's all you want to do is choose a revenue model for your SaaS business).

Your choice will help determine your 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.

Thesubscription modelis the “vanilla” SaaS revenue model, not that there’s anything boring about a well-worked subscription plan. 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 ofrecurring revenue, and high value:customer lifetime balance.Done right it's a one-way-ticket to sustainable growth.

Companies working with recurring revenue models, such assubscription or licensing, 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. Hubstaff’s subscription plan, seen below, is a classic of the genre:

Markup is a very common revenue model for buyer companies (i.e., companies that buy the products they sell). 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:

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 to access to a range of features while charging them only for the services they use. At the dawn of SaaS, as the software required no physical delivery and deployed so quickly and cheaply, PPU appeared to be the most sensible revenue model.

However, as natural as it seemed back in the day,pay-per-user is not popularanymore. 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, not just making everything so cheap and easy that they can’t refuse. The issue with PPU, then, is that it’s rarely where value is ascribed to your product.

Moreover, PPU kills your Monthly Active User metric. The per-user metric is not the most useful to customers in terms of deriving value — its take-it-or-leave-it approach actively works against your Daily Active Users number, and thus contributes to your churn rate.

As evidenced by the rise and rise ofKickstarter- andPatreon-based ventures, altruism is, if unpredictable, a pretty effective revenue model by itself. Relying on the donations of regular users is a common revenue model for nonprofits, online media (i.e., YouTubers) and independent news outlets.

What isaffiliate marketing? This new, popular model works by promoting referral links to relevant products and collecting commission on any subsequent sales of those products. Leverage your product’s synergy with another product in an adjacent space and you both stand to gain.

The affiliate model can be as simple as including in an article an outlink to a book or other product mentioned or offering your customers specialized recommendations relative to purchase history (again, Amazon is a master of this art). Some companies, such as Etsy, even have aspecific programfor their affiliates, where other companies can earn a commission on qualifying sales that result from featuring links to Etsy products and services.

The affiliate revenue model is increasingly popular, owing to the way it dovetails effectively with other revenue models, particularly ad-based models.

Applicable mainly to sellers or marketplace-oriented companies, 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 (a security/currency/commodity) and simultaneously sell in another market, at a higher price, what you just bought, pocketing the temporary price difference.

Arbitrage is popular withaffiliate marketers, as well as with many cryptocurrency firms, SFOX being a prime example.

This transactional revenue model involves a middleman charging commission for each transaction it handles between two parties or for any lead it provides to the other party. It’s particularly popular with online marketplaces and aggregators, as well as businesses like independent music distributors.

It’s particularly easy to get up and running with a commission-based business model because you’re working off of existing products. However, unless your field is well-conditioned for a monopoly, and unless your company is (or can become) that monopoly, you’ll find the commission modelvery tough to scale.

Ever heard the phrase, “If you can’t see how the money’s made, you’re the product”? That’s data-selling in action.

Many companiesselling digital goodsand services could not exist without core underlying data assets. In the data sale revenue model, this data is sold directly to a consumer or business customer. While certain companies will use data sale as their primary revenue model, the use ofdata salesto augment another revenue model is virtually ubiquitous.

While some are using it as anentrepreneurial venture, it is also the subject of considerable justifiedpublic concernand should be handled with care in the event you decide to go with it as your revenue model.

The old-fashioned revenue model made new, web sales and direct sales involve payment for goods or services through a digital medium.

Web sales involve a customer finding your product via outbound marketing (or a web search) and can used for software, hardware, and subscription-based offerings.

Direct sales revolve around inbound marketing and is good for handling multiple buyers and influencers in big-ticket markets.

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. For hardware, this can comprise testing and manufacture; for software, it’ll include the whole development cycle. Regardless of what you produce, administrative overheads will also apply.

You will find cost of goods a considerably less comprehensive metric than cost of revenue, which is the total cost of manufacturing and delivering a product or service to consumers. That includes everything we’ve just covered, plus distribution and marketing costs. Cost of revenue is more often used in SaaS and other service-oriented industries because it makes the many costs incurred outside of production in SaaS easier to track.

Prototyping is a fundamental aspect of any production cycle and, unfortunately, is one of the most expensive. While testing prototypes or beta versions of your new product, even the smallest revisions can necessitate costly changes to your production/development process.

This usually comprises a base-level cost, plus iteration costs on top of that. When forecasting prototyping costs, it’s wise to plan for several iterations; it’s highly unlikely you’ll get everything right the first time around, especially if your product is innovative or is composed of a number of features.

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.

Firmware,app development tools, server rental, plus any other administrative services bought on subscription (e.g. Slack or Hubstaff) will play a part in your equipment costs, but, generally, equipment costs should be the easiest of all to forecast.

An underpaid workforce is an unhappy workforce (if it’s a workforce at all); wage costs come out of your bottom line.

Based on the interaction of salary and commission in yourcompensation plan, as well as the type of commission you offer (entirely open-ended or capped? Will there be accelerators/decelerators involved?), you will have to plan for your expenditure on labor costs differently.

So many revenue sources, so many revenue models, so little time.

There are some fundamental differences between revenue models. For instance, if you’re a SaaS company producing your own software product, you’re unlikely to get all that far with an arbitrage model. Likewise, if your product is a medium or if you’re a seller, a subscription-based revenue model won’t do the trick. A product with a high ceiling for potential revenue is not best served by a donation model.

Nevertheless, 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. Your product and the market should be in mind at all times while you’re settling on, adding to, and refining your model. After that, bringing in the revenue itself should be as easy asCitizen Kanesaid.