What is the right revenue model?
Paying is a key point of friction within any model, the flow of money can make or break your solution.
A revenue model is more than just a pricing model, a revenue model looks at the entire flow of money between your customers, your suppliers and yourself.
Quite often it is important to consider how your customers will make money (and thus afford your service).
Default Revenue models that often cause issues.
Many people don’t give much thought to how they will get paid, or what impact paying will have on their customers.
Here are the most common models and pitfalls you should consider before jumping in.
Ongoing subscription based on users. Sometimes users are a good scaling metric but only when the Value you provide is tied down to the individual user. It can limit sharing between companies and limit growth. The constant friction of watching users can drive larger customers away.
For many platforms it doesn’t matter to the customer if they have 20 users or 1 user signed up, they still get the same Value so they create a single account and share it around.
Advertising. If you have failed to find a real business model, use advertising. Its a highly contested market, but if you can position yourself right it can work. However, it can cause a lot of problems like the ones your seeing on social media today.
The key issue is the relationship with the user is not as “a customer”, instead the user is the product, so you are usually forced to manipulate the user in order for your platform to make money, rather than serviced for their best outcome. The choice of “what is the next feature to invest in” often isn’t aligned with “what is the best thing for the user”.
Product sale. Selling a product as a one time transaction. The solution can facilitate the payment but there are typically lots of ongoing costs so there is a constant drive for new customers rather than supporting and earning from existing customers.
For retail solutions this is often what you are stuck with, so the solution should optimise for some other key factor like cost of acquisition of new customers in order to provide you scale.
License and support. This is a traditional model that includes a large upfront payment to “buy” a version of the solution and then charges support to ensure the customer can keep the solution operating.
Cloud systems typically don’t have new and old versions, they are continually upgraded so a single fee for infinite upgrades over the next 20 years is often a loss making model.
Percentage per transaction. This is a great model if you can make it work however, its usually causes a lot of friction for new adaptors because the cost to the customer scales up and they don’t get an economy of scale benefit.
Many customers have come to us to pay for a bespoke solution in order to avoid the transaction costs of their earlier stage solution.
Guidelines for better revenue models
Each platform creates different dynamics between the various stakeholders, choosing the right revenue model is critical.
Find a metric native to the solution. If you can find a metric like active projects, active publications, results delivered etc. Doing this allows you
Make your customers money. If your platform can make your customers money they are usually happier to share some with you. It often has the bigger benefit that your customers become your “sales team” because its in their best interests to bring in others.
Find a point where the Value is inherent, a transaction point where the user can see the finished result and just needs to pay to get it.
Not charging the users directly. If you can provide the Value for free, your users are likely to grow much faster and they find it easier to stay with you.
Using knowledge gained from the use of the platform for consulting or advice to another party. Gartner does this well, they provide magic quadrants to everyone, then charge for specific consulting to government and large organisations.
Selling data/meta data. This can cause a lot of concern but if you are clear about what you are doing and only provide anonomised and aggragate data rather than raw data you are usually able to benefit.
Build up a much larger picture. By using a platform to collect common data like google maps, you can provide a range of different services based on the one large pool of data that helps everyone.