What are the Revenue Models that Startups can Adopt? – Part 2

n Part 1 of this article, we looked at four revenue models that startups can adopt – The Subscription Model…

June 9, 2023

In Part 1 of this article, we looked at four revenue models that startups can adopt – The Subscription Model, the Transactional Model, the Advertising Model, and the Freemium Model. In Part 2, we will look at three more popular revenue models in detail.

Licensing Model

The licensing model is a revenue model in which a startup generates income by granting the right to use its intellectual property (IP) to other individuals or organisations in exchange for a licensing fee. Intellectual property can include patents, trademarks, copyrights, trade secrets, or any other form of proprietary knowledge or creations.

Here’s how the licensing model typically works:

  1. Intellectual Property (IP): The startup develops or owns a valuable intellectual property asset, such as a patented technology, a copyrighted software, a trademarked brand, or any other protectable IP.
  2. Licensing Terms: The startup defines the terms and conditions under which it grants licences to other parties. This includes specifying the scope of the licence, the duration of the licence agreement, geographical restrictions, and any limitations or usage guidelines.
  3. Licence Types: The startup can offer different types of licences depending on the nature of its IP and the market demand. These may include exclusive licences (granting sole rights to a licensee), non-exclusive licences (allowing multiple licensees), or sublicenses (granting the right to further licence the IP).
  4. Licence Fees: The startup charges a licensing fee, which can be a one-time payment, recurring payments, or a combination of both. The fee structure may vary depending on factors such as the type of IP, the market value, the exclusivity of the licence, and the anticipated revenue potential for the licensee.
  5. Licence Agreements: The startup and the licensee enter into a legal agreement that outlines the rights and responsibilities of both parties. The agreement specifies the terms of use, payment details, confidentiality provisions, dispute resolution mechanisms, and any other relevant clauses to protect the interests of both parties.
  6. Monitoring and Enforcement: The startup monitors the usage of its IP by the licensee to ensure compliance with the terms of the licence agreement. This may involve regular audits, reporting requirements, or technical measures to track usage. If there are violations or breaches, the startup can take legal action to protect its IP rights.
  7. Support and Updates: Depending on the licensing agreement, the startup may provide support, updates, or maintenance services to the licensee to ensure the proper use and performance of the licensed IP. This can contribute to customer satisfaction and long-term relationships with licensees.

Benefits of the licensing model include:

  • Revenue Generation: The startup can generate revenue by monetizing its intellectual property without having to directly produce and sell products or services.
  • Market Expansion: Licensing allows the startup to reach new markets or industries by partnering with other companies that have the necessary distribution channels or expertise.
  • Brand Exposure: Licensing can increase brand visibility and recognition as the startup’s IP is used or associated with other products or services.
  • Risk Mitigation: By licensing its IP, the startup can share the risk and costs of production, marketing, and distribution with licensees.

However, implementing the licensing model requires careful IP management, legal expertise, and monitoring mechanisms to ensure compliance and protect the value of the IP. Startups should conduct thorough due diligence when selecting licensees and negotiate licensing agreements that align with their business objectives and revenue goals.

Commission-based Model

The commission-based model is a revenue model in which a startup earns income by taking a percentage or a fixed commission on each transaction facilitated through its platform or services. This model is commonly used in online marketplaces, booking platforms, affiliate marketing, and other intermediaries that connect buyers and sellers or facilitate transactions between parties.

Here’s how the commission-based model typically works:

  1. Platform or Service: The startup operates a platform or provides a service that connects buyers and sellers, facilitates transactions, or enables other types of interactions between parties. This could be an e-commerce marketplace, a booking platform, a delivery service, or any other platform that brings together buyers and sellers.
  2. Transaction Facilitation: The startup’s platform or service facilitates transactions between the parties involved. It could be connecting buyers with sellers, enabling service providers to offer their services to customers, or assisting in financial transactions.
  3. Commission Percentage: The startup charges a percentage of the transaction value as a commission fee for its services. The commission percentage may vary depending on factors such as the transaction type, industry, volume, or the value-added by the startup.
  4. Fee Collection: When a transaction occurs, the startup collects the payment from the buyer and deducts its commission from the transaction amount. The remaining amount is then passed on to the seller or service provider.
  5. Revenue Generation: The commission-based revenue model generates income based on the volume and value of transactions processed through the platform or service. As the number of transactions increases, the startup’s revenue also increases.
  6. Value-added Services: In addition to transaction facilitation, startups may offer value-added services to enhance the user experience or increase transaction value. These services could include advertising options, premium placement, customer support, or additional tools and features for buyers and sellers, which can be monetized separately.
  7. User Acquisition and Retention: Startups focus on attracting users, both buyers and sellers, to their platform or service. They employ various marketing and user acquisition strategies to build a critical mass of participants, and also work on retaining them by providing a seamless and valuable transaction experience.

Benefits of the commission-based model include:

  • Revenue Scalability: As the number of transactions facilitated through the platform increases, the startup’s revenue potential grows.
  • Shared Risk: The startup shares the risk with sellers or service providers as it earns revenue only when transactions occur, aligning incentives for all parties.
  • Platform Growth: The more users and transactions on the platform, the more valuable it becomes, attracting even more participants and potentially increasing revenue further.
  • Value-added Services: Startups can offer additional services or features to increase revenue beyond transaction commissions.

However, implementing the commission-based model requires careful management of transaction volume, ensuring a balance between attracting buyers and sellers, and providing a smooth and secure transaction experience. Startups should also be mindful of the competitive landscape and the potential for fee sensitivity among users. Continual innovation and improving the platform’s value proposition are key to sustaining growth and maintaining a competitive advantage.

Affiliate Model

The affiliate model is a revenue model in which a startup earns income by promoting and selling products or services on behalf of other companies or individuals, known as affiliates. The startup acts as an intermediary, connecting potential customers with the affiliate’s offerings and earning a commission for each successful referral or sale made through its affiliate links or promotional efforts.

Here’s how the affiliate model typically works:

  1. Affiliate Program: The startup establishes an affiliate program that allows individuals or companies to sign up as affiliates. This program outlines the terms, commission structure, and guidelines for affiliates to promote the startup’s products or services.
  2. Affiliate Promotion: Affiliates receive unique affiliate links or promotional materials from the startup that they can use to promote the products or services to their own audience or network. These links or materials contain tracking codes that help the startup identify and attribute sales or referrals made by each affiliate.
  3. Promotion Channels: Affiliates use various marketing channels to promote the startup’s offerings, including their websites, blogs, social media accounts, email newsletters, or other online platforms. They leverage their own audience and influence to drive traffic and generate sales or leads.
  4. Referrals and Sales: When a potential customer clicks on an affiliate’s unique link or engages with their promotional content and makes a purchase or completes a desired action (such as signing up for a service or filling out a form), the startup tracks the referral and attributes it to the respective affiliate.
  5. Commission Payments: The startup calculates and pays a commission to the affiliate based on the agreed-upon commission structure. Commissions can be a percentage of the sale value, a fixed amount per referral, or a combination of both. Payment schedules may vary, such as monthly, bi-monthly, or upon reaching a certain threshold.
  6. Performance Tracking and Reporting: The startup tracks and monitors the performance of each affiliate, including the number of referrals, conversions, and the resulting revenue generated. It provides affiliates with reporting tools or dashboards to track their own performance and earnings.

Benefits of the affiliate model include:

  • Revenue Generation: The startup can generate revenue through affiliate partnerships without the need to develop and sell its own products or services.
  • Reach and Exposure: Affiliates help increase the startup’s brand visibility and reach by promoting its offerings to their own audiences or networks.
  • Cost Efficiency: The startup only pays commissions when a sale or desired action occurs, reducing upfront marketing costs and risk.
  • Performance-based Marketing: The affiliate model aligns incentives between the startup and affiliates, as both parties benefit from successful sales or referrals.
  • Scalability: As the affiliate network grows and affiliates promote the startup’s offerings, revenue potential increases.

However, implementing the affiliate model requires careful management of affiliate relationships, including selecting affiliates who align with the startup’s brand and target audience. It also involves providing affiliates with the necessary tools, resources, and support to effectively promote the offerings. Maintaining transparency, ensuring accurate tracking and attribution, and fostering a strong affiliate community are essential for long-term success.

Additionally, startups should regularly evaluate the performance of affiliates, optimise their affiliate program, and nurture relationships to drive mutual growth and profitability.

What model fits your startup?

Choosing the right revenue model depends on the startup’s target market, the nature of its product or service, and its long-term goals. It’s important for startups to experiment with different revenue models and iterate based on customer feedback and market trends.

It is also possible to have hybrid revenue models, where a combination of two or more revenue models or some aspects of two or more revenue models are used. It is important that these considerations are taken carefully, and that the revenue model can be easily understood and explained, especially when you are a startup looking to attract investors for fundraising.

The team at EquityMatch.co is prepared to guide you setting up every aspect of your business. If you have any questions or concerns about which revenue model to use, become a member today and speak to our advisors today!