A revenue model plays a crucial role in every business — including startups and conglomerates. It reflects on the business viability of the company.
A company with a sound revenue strategy will find more investors, customers, and a bigger space in media. Everyone wants to associate with a company that is growing with leaps and bounds, right?
But developing a solid revenue strategy requires a lot of brainstorming and work. It requires one to study the markets deeply — understand which sectors are booming, what investors are looking for, monitor the changing needs and wants of customers, identifying appropriate market segments, etc.
Once you have looked upon these factors, it is time to put a viable revenue model on paper. You must understand that there are two types of revenue models — the top-down approach and the bottom-up approach.
In the top-down approach, you will analyze your respective market in its entirety and narrow down your findings until you reach an acceptable figure.
Although this is a very crude way of estimating the ROI of a particular market segment you want to focus on and forecast your earnings at the end of the financial year, it still forms an essential document if you are searching for investors.
On the other end of the string is the bottom-up approach that allows you to focus on specific indicators and factors that form the core of your selected market segment.
You don’t look at the entire market. Instead, you only concentrate on how many customers you expect to rake in within a specified deadline.
Now, you know the two types of revenue models that businesses have at their disposal. Let us now focus on the critical things you have to keep in mind while developing a sound revenue model.
1. Select an appropriate market segment
First and foremost, you should select an appropriate market segment. This step is essential because you can only develop a sound business model for a market segment you understand well.
For example, you operate in the hotel industry. There are different kinds of hotels for different types of target segments.
If your target segment includes young adults aged 25-35, you will have to make the hotel accordingly. It should look alive and hot and happening. The ambiance should be that of a rushing river.
On the other hand, if you want to serve grown adults — above the age of 35 — the ambiance will be totally different. The hotel should look calm and serene. It should be like a still pond. Your customers should experience bliss.
Your expenses, investments, and expected revenue will be different for the two examples mentioned above. So, the foundation of a sound revenue model depends on how you define your target segment. It doesn’t matter if your revenue model expects a lot of investment from the investor’s side.
There are plenty of investors who will be ready to invest in your idea, given that it is sound, logical, rational, and delivers what it intends to.
2. Search for the right investor
Once you are ready with your revenue model, you need investment. You need money to execute your plan.
For this, you will have to hold plenty of meetings with numerous investors. There is no shortage of investors in the market, but you need to take the pain for finding the right investor.
What does the right investor mean?
The right investor is the investor who understands and accepts your revenue model, prepares a list of pros and cons, suggests changes, and, most importantly, shares similar goals. Even if everything falls in place, but the investor doesn’t share the same goals or doesn’t have the same vision as you, you will be screwed in the long run.
Remember that there are two sides to any deal. On the left end are the logical parameters — charts, graphs, analytics, technology, and money. These things tell the rational side of the story. They define the deal in numbers.
Technical analysis plays a strong role here. These parameters allow stakeholders to make predictions, estimates, and forecasts and see how beneficial is the deal.
On the right end are intangible things such as feelings, emotions, suggestions, and ideas. These things cannot be measured, forecasted, or estimated. It’s a matter of belief, of faith, of determination.
Investors don’t just consider the financial perspective of the deal. They also see whether your company has something other than numbers. They check whether the company has a solid foundation that will help it sail through the market’s unpredictabilities.
They inspect whether it can survive through the ups and downs, the crests and troughs that every business faces. Today’s investors observe these factors keenly because if these things aren’t taken seriously, they can turn into a thorn later.
There is also a third thing that you need to consider while preparing your revenue model. It should touch on topics related to environment and social well-being. Today, numerous national and international organizations raise their voice against environmental degradation.
Also, if your actions cause damage to animals or humans living in a specific location, you will come into the radar of the government and will face strict action.
Keep all these factors while preparing your revenue model. The investors will look at each one of them with open eyes.
3. Manage your expenses well
Expenses form a significant part of your revenue model. Every company needs to buy, rent, and make sufficient expenses to keep the business running.
Let’s consider that you run a hotel. You will have to manage a lot of things, such as:
- Look, feel, and vibe of the hotel
- Decoration and arrangement
- Behavior and attitude of bellboys and chambermaids
- Food quality
- Room quality
- Service quality
- The ambiance of the hallways, ballrooms, and dining area
- Support service
All the points mentioned above require enormous investments. It is essential for the management team to layout the expenses corresponding to each of these, how effective they are in grabbing the customers’ attention, and state reasons why they are beneficial in the long run.
The investors are keen at looking and noting the expenses before caring to invest in the project. Unless your expenses are well managed and promise a sound return, investors won’t be willing to invest.
There are star category hotels — 1 star, 2 stars, 3 stars, 4 stars, 5 stars, 5 star-deluxe — and heritage category hotels — heritage basic, heritage classic, and heritage grand — in India.
So the amount of expenses doesn’t matter at all. But it would help if you had a sound revenue model that puts the expenses into perspective. If your expenses are justified and project a fair idea to the investor, then the amount of the expense doesn’t matter.
4. Prepare a sound subscription model
The times are changing, and with it, the business models too. Gone are the days when customers used to pay the full fees before joining the Gym. Today, they will pay for the first month, try the service, and continue paying if they benefit.
The subscription model allows everyone — from low-income to high-income groups — to use the service without any financial worries. It also enables the business to expand its customer base. This is a revolutionary feature that almost all companies are using in one way or another.
While creating the revenue model, you need to give enough weight to this feature. You can play around it, mold it according to your business needs, and expand your customer base instantly.
5. Create a single attribute or multi-attribute model
Creating a single-attribute or multi-attribute model is necessary for companies, especially startups struggling to find a Point Of Differentiation (POD).
POD helps young businesses to find a place for themselves and begin their journey. It allows them to create a niche market and slowly expand their market place.
So what is a single-attribute and multi-attribute model?
In a single attribute-model, companies focus on only one feature. They get ahead of their competitors by providing top-notch services in that particular feature.
They develop expertise in it and become national/global leaders. They focus all their resources — employees, money, machines, web application, technology, logistics partners, media management — in improving only that attribute and develop a name for themselves.
Some companies, especially the big conglomerates, work on multiple attributes. They focus their resources on developing expertise on numerous qualities and provide a collective package to their users.
This strategy allows them to service their clients on multiple fronts. Therefore, they can charge more fees and emerge as a world leader.
Your revenue model should shed light on this point if you are thinking to scale your business to newer heights. It will help investors to forecast how the company will perform a few years down the line.
Conclusion: Ways to develop and scale your revenue model
Developing and scaling revenue model is of immense importance for any business.
It plays an integral part in deciding the company’s future, brainstorming marketing strategies, developing good relationships with vendors, suppliers, and distributors. It also draws investors’ attention and helps them decide whether they will invest in your idea or not.
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Nishant likes to read and write on technologies that form the bedrock of modern-day and age like Web Apps, machine learning, data science, AI, and robotics. His expertise in content marketing has helped grow countless business opportunities. Nishant works for Sage Software Solutions Pvt. Ltd., a leading provider of CRM and ERP solutions to small and mid-sized businesses in India.