Too many entrepreneurs think long and hard about finding the simplest ways to generate money through their product or service. But what they often fail to realise is that the way in which they package their solution will ultimately determine how sticky, profitable and attractive their product/service is to the customer.
And one of the smartest ways to package your product more effectively is through the pricing and revenue model that you choose to offer.
That being said, here are a few of the top revenue models that could transform your business into a gold mine.
Why Your Choice of Revenue Models Is So Important
A revenue model is the approach your business takes to earn revenues. After establishing your value proposition and the set price(s) of your product or service, the next step is to figure out how your client or customer is going to pay for it.
That’s why having a good revenue model ensures that your business is able to make long-term projections based on current and future profit potential. This will aid you in extracting the best possible returns for your company, while retaining clients through the use of subscriptions, contracts and the sunk cost fallacy.
Sunk cost what?
The sunk cost fallacy (or sunk cost bias) refers to the justification we give ourselves when buying an expensive dinner, finishing a movie that we don’t necessarily enjoy, or remaining a loyal customer to a brand that we’ve already been with for years (even if there are better options out there).
Putting money, energy or time into something means that we inherently develop a bias towards it and are willing to ignore any pitfalls or failures that could motivate us to change our minds.
While it might sometimes be unfortunate for us as consumers, clients or customers, it certainly works in the favour of any business owner. Conversion rates can be increased, contractual obligation can maintain profits, upselling can be amplified, and client retention can be improved by simply being aware of this cognitive bias.
So choosing the ideal revenue model for your company will enable more consistent profits and a far more loyal customer base.
And the great part is that there are a number of promising options to choose from.
As a business coach that cares so much about your success, I’ve taken the time to sift through some of the best models out there and rank them from the least beneficial to the most.
Let’s check them out:
The Top 6 Revenue Models
1. Consumables:
These are your typical consumables (whether a product or service) that generally get purchased once, twice or three times a month or even every few months.
Think of products like coffee, milk and bread, or services like electricity, gardening or cleaning; these ‘consumables’ work well once you’ve established customer loyalty, which will ensure that you’re bringing in a recurring revenue.
2. Sunk-Money Consumables:
By making use of the sunk cost fallacy, this model is based on offering a product or service that requires an additional item or clause in order for that product or service to operate or function effectively.
Basically, you offer a base product/service that’s quite affordable (a Gillette razor handle, gaming console, or a dating site) and then provide additional items or functions that the base product needs for it to be of any use (Gillette razor blades, games, or in-app currency for extra purchases).
With this type of model, you ensure recurring revenue based on customers’ reluctance to give up on something that they’ve already invested in. You wouldn’t buy that gaming console without feeling the need to buy games for it; or sign-up for a dating service and be limited to one message per day, when you can pay to receive more messages.
3. Renewable Subscriptions:
One of the most common and effective recurring revenue models would be through the use of renewable subscriptions. By incurring a monthly fee (a subscription), you ensure that the client or customer is bringing in revenue on a monthly basis and has the opportunity to renew their subscription at the end of a certain period.
This model is usually a win-win, as the customer perceivably pays less to own a product or use a service, while the business owner has a more stable and predictable source of revenues (especially when compared to consumables).
A great example could be a cell phone contract or streaming platform like Netflix.
4. Sunk-Money Renewable Subscriptions:
This model has the customer invest in a base product or service that has additional premium features that are offered on a subscription basis.
By taking renewable subscriptions and adding an element of sunk-costing to it, you guarantee more recurring revenue options. When you purchase a device (e.g. an Apple TV) or a service platform (e.g. a Bloomberg terminal), you’ve already sunk money into it, so you’re more likely to purchase exclusive additions for it, such as an Apple One subscription for the TV or a business publication subscription for the Bloomberg terminal.
It takes advantage of the sunk-cost bias and blends it with renewable subscriptions.
5. Automatic-Renewal Subscriptions:
By taking renewals into your own hands and making the process automatic, you allow for a much better recurring revenue.
Instead of letting the customer renew their subscription after a period of time (say, a year), you automatically renew it until they choose to end it. This way, customers are more likely to stay, as they don’t bother looking at competitive prices and you make the renewal process easier for them.
Think about gym memberships or insurance firms that keep renewing your subscription until you’ve made the decision to terminate the agreement.
6. Contracts:
Long-term contracts are highly beneficial for maintaining a recurring revenue that can’t be challenged or disputed. It ensures an ethical agreement between both parties that a certain amount will be paid within a particular period of time in exchange for goods or services.
This model is a great choice, especially if you’re able to get customers to come on board for a long period of time. If you’re planning to sell your business, then ensuring that a survival clause is present will help keep customers from leaving after a change of ownership takes place.
*Bonus Model: “Rundles”
This new approach coined by NYU professor, Scott Galloway, takes a recurring revenue model like renewable subscriptions and blends it together with bundling.
Bundling basically entails putting multiple services or products together and selling them at a ‘better price’. This extends to products/services that might not be very popular and putting them together with more favourable ones, then selling them as a package.
With “rundling”, you take those two concepts and form an approach that has seen huge returns. I’m talking billions of dollars in revenues and millions of customers migrating to platforms that offer recurring revenue bundles or “rundles”.
A great example of this is the way in which Apple has offered services like iCloud and Apple Care, then bundled them with entertainment services (Apple Entertainment and Music) under one affordable subscription model.
Companies like Adobe and Walmart are also jumping on this lucrative bandwagon to bring in the big bucks. It’s most certainly one of the best recurring revenue models taking over many industries and I’d highly recommend looking into it.
If you’re looking at your product or service and thinking, “how do I apply one of these models to best suit my business?”, then I’ll let you in on a little secret:
Taking me on as a business coach means that I can help you identify exactly what will work best for you and your company.
It takes DICE (determination, interest, compassion and experience) to move a company forward, both on a micro- and macro-level.
And I’ve got all the DICE you need!
So do yourself a huge favour and start communicating with me as soon as you’re ready for a better future:
+2783 253 3339
