Revenue Model Types in Software Business: Examples and Model Choice

Revenue model basics

  • What value will we create?
  • How will we deliver it?
  • How will we bring in revenue?
  • How will we earn profit?
A business model canvas. Source: cnvs.com

Revenue model vs revenue stream

Revenue model types

Transaction-based model

  1. Licensing/one-time purchase. This entails selling a software product by license that can be used by a single user or a group of users. The general idea is to offer a product that requires making only one payment for it, e.g. Microsoft Windows, Apache Server, a majority of video games.
  2. Subscription/recurring payment. Unlike licensing, a user receives access to the software by paying a subscription fee on a monthly/annual basis, e.g. Netflix, Spotify, Adobe products.
  3. Pay-per-use. This pricing tactic is mostly used by different cloud-based products and services that charge you for the computing powers/memory/resources/time used. Examples are Amazon Web Services, and Google Cloud Platform.
  4. Freemium/upselling. Freemium is a type of app monetization in which a user may access the main product for free, but will be charged for additional functions, services, bonuses, plugins, or extensions, e.g. Skype, Evernote, some video games.
  5. Hybrid pricing. Sometimes pricing plans are a mixture of more than one. So that freemium plan might morph into some form of pay-per-use tiered plan. After passing some limit in computation or resources, a user can be forced or offered to use another type of pricing, for example Mailchimp, Amazon Web Services, and SalesForce.

Advertisement-based model

Commission-based models

  • flat rate, a fixed sum of money for any type of transaction, e.g. a $450/300/1500 transaction is charged with a $20 commission;
  • percent of transaction size, e.g. a $100 transaction is charged with a 10 percent commission — $10; or
  • tiered commission, a percent or flat rate that grows based on the transaction volume, e.g. 50,000 transactions are charged with a 4 percent commission, 150,000 transactions with a 7 percent commission.

Affiliate model

Interest revenue model

Donation-based or pay-what-you-want models

How to choose a revenue model for your business?

How to choose revenue model framework
  1. Paid value proposition: In most cases, your value proposition costs money to use. Whether it’s a service or a software product, a customer will need to pay in some form to gain access to your value. Our revenue model in this case will be based around transactions. So, develop pricing tactics that will depend on the nature of the product, and the type of audience you’re trying to reach, type of deployment, specifics of product usage, etc.
  2. Free-to-use value proposition: If the value proposition doesn’t require money to use or we choose it to be free, then we need a third-party to generate revenue for us. This could be anything based on the previously mentioned types, whether it’s ad space, donations, affiliate programs, or reselling.

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