3 Common Revenue Models for Tech Companies

No matter you are running an app with millions of users or an online service gaining 100k+ page views everyday, you will face the problem of turning these “intangible assets” into solid tangible revenue. Depends on the nature of the business, a proper revenue model shall be adopted in order to cover the expenditures and fund the growth and expansion as well. For most tech business, there are 3 common types of revenue models: the traditional selling model, subscription-based model and transaction-based model.

The Traditional Selling Model

The most common type of revenue model is “selling”, which refers to exchanging ownership or rights of your goods for monetary returns. The goods can be a hardware, consultation service, license of your software, advertisement space on your website or the data you’ve collected.

Examples: Microsoft sold each version of Office as a package before; Oracle or IBM offered IT solutions to enterprises; iPhones; Google selling rights to display your advertisements on their space;

This traditional model allows you to charge a one-off fee for your products or to tailor-make a price to cater your customer’s needs. In some professional fields such as industrial-level softwares, a high mark-up is usually seen because lack of competition and low sales volumes. However, the drawback is quite obvious: to maintain the revenue stream, you have to keep finding new customers; or, upgrade your software AND persuade your existing customers to buy the new version. For some professional softwares, their targeted market may be limited. Even for general softwares, frequent updates to new version may gain negative feedback from customers.

Subscription-based Model

The subscription model is gaining popularity these days, as the evolvement of Internet makes frequent update or even web-based software possible. In this model, customers pay periodically as long as they continue to use the software of service provided. The fee can be fixed, or can be flexible depending on the usage.

Examples: SAP, Salesforce, Office 365 of Microsoft

The most favourable feature of this model is the recurring revenue. When you successfully acquire customers, it is likely that a predictable portion of them will continue subscribing your service. This gives you a stable revenue stream even when you don’t get new customers. Due to this feature, a software can be offered at a lower monthly rate instead of a high lump-sum payment, which attracts more customers.

Transaction-based Model

Transaction-based model has been existed for a very long period of time. This model generates revenue from the transactions it processes, mainly for payment service, brokerage and marketplaces. It is also used by companies facilitating the gap of the market – that is, to coordinate the buyers and sellers and earn profit from the gap.

Examples: Paypal, Airbnb, Uber

The revenue grows not only as your customer base increases but also as the value of your transaction increases. Depends on your bargaining power on the industry, you may take up to a significant portion of revenue from your transaction processed. Though it does not guarantee recurring revenue stream like subscription-based model, you can still have a predictable revenue stream if your process is necessary for your industry or the transactions themselves are recurring.

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