Revenue modeling is a process of incorporating a sustainable financial model for revenue generation within a business model design. Revenue modeling can help to understand what options make more sense in creating a digital business from scratch; alternatively, it can help in analyzing existing digital businesses and reverse engineer them.
- What is a business model?
- What is a revenue model?
- Symmetrical vs. Asymmetrical business models
- Cash: who pays the bill?
- Information: does the user know how the platform makes money?
- Scale: does the platform retain its margins as it scales?
- Revenue model examples
- Hybrid revenue models
- Other Key Components of a Business Model
- Other Revenue Model Case Studies
For the sake of this guide, we’ll look at a key distinction: symmetrical vs. asymmetrical in several contexts.
Remember that all classification methods have flaws and we can only take them into account as long as they help us better tune an existing business model.
I decided to use this classification, but any alternative classification works as long as we are able to grasp and understand the possibilities we have in terms of business model design.
Symmetrical vs. Asymmetrical business models
Business models can be of various types.
For that matter, there might be as many business models as the companies we have in the marketplace.
In this guide, we’ll use as reference symmetry vs. asymmetry to distinguish across two main business models categories.
In this particular case, we’ll look at revenue modeling by keeping a key distinction between symmetry and asymmetry from three different perspectives.
Cash: who pays the bill?
In many cases, platform business models success depends upon two key players:
- Users: who don’t pay for some or all the services offered by a platform (on the user-side), but they help the platform build it’s a core asset
- Customers: who pay for the services offered (on the customer-side) to take advantage of the core asset of the platform
In such a business model, the platform assembles the anonymized data of its users who get a free service in exchange.
The assembled data gets processed (by the platform AI and algorithms) and it’s used to scale the platform, build a valuable core asset that can be financed by a set of customers willing to pay for it.
Asymmetrical: users ≠ customers
The asymmetry here stands in the fact that users and customers are two separate entities (asymmetrical cash model: users ≠ customers).
Think of how Google sells ads to companies, while its core products are all free to users.
Symmetrical: users = customers
Thus, in a symmetrical revenue model, users and customers are the same entity (symmetrical cash model: users = customers).
Think of how Netflix’s users are also its customers.
However, it’s worth highlighting how Netflix has now launched an ad-supported version, which starts at $6.99 and is an ad-supported tier.
This is an interesting business model transition. Indeed, for all its life, Netflix has relied on a linear and symmetrical revenue model, where users were also customers.
As of now, that is still true. In fact, in the ad-supported tier, users are still paying customers. However, it’s worth emphasizing that users are now advertisers’ target.
Thus, by October 2022, as Netflix started to roll out its ad-supported plan, the company also started to move into an asymmetrical business model type.
Why is Netflix moving toward an asymmetric business model? The answer is simple: Scale!
To reach a subsequent stage of scale, where the company can successfully reach a billion users, an ad-supported business model can help with that.
Information: does the user know how the platform makes money?
If there is information asymmetry, it means there is one of the parties knows more than the other side.
Symmetrical: revealed revenue generation
In a symmetrical model, revenue generation is revealed, thus enabling the customers to know what they get for the service paid.
Scale: does the platform retain its margins as it scales?
Scale is the ability of a company to grow exponentially while keeping its margins growing with the platform’s revenues.
Symmetrical and Linear: margins tighten as the platform scales
In a linear symmetrical revenue model as the platform scales its margins tighten up, thus reducing the profitability of the platform.
Asymmetrical and Non-linear: margins keep growing as the platform scales
Revenue model examples
Razor and blade
Hybrid revenue models
A good example of a business model that has different revenue models is Amazon. Based on each side of its business, Amazon has different revenue streams and models:
Within the Amazon core consumer e-commerce platform, there are two main types of revenue streams:
- Amazon-branded products: on those products which are labeled and sourced by Amazon, the company sells them directly to consumers. Therefore, this is part of the revenue model, where Amazon has the highest margins and more control.
- Amazon’s third-parties products: those are products that Amazon hosts on its own e-commerce platform. Those products benefit from Amazon’s e-commerce visibility and sustained traffic. At the same time, Amazon will have the advantage of increasing the variety of products available in its stores, thus making them more appealing to consumers. However, compared to the branded product, Amazon will have less control and reduced margins. Indeed, Amazon will split the revenues with third-party sellers.
To enable more capabilities to third-party e-commerce stores, and at the same time, guarantee a better experience on its e-commerce (and we can argue also to have more control and margins) Amazon introduced over the years the third-party seller services:
- Amazon third-party seller services: fulfilled by Amazon, perhaps enables sellers to host their inventories, and deliver with Amazon, thus collecting a royalty as a result of the sales made on the platform. Here, the revenue model is flipped. Indeed, Amazon will collect most of the revenues coming from the product sales (remember that Amazon also takes care of storing the inventory and fulfilling it to customers) and the seller will collect a royalty, thus a % of the sale.
Other revenue streams comprise:
- Product advertising: Amazon is the most popular product search engine. Over the years it gave the options to e-commerce built on top of Amazon, to gain more visibility both on an impression or on a click-through rate basis. This means that Amazon sells advertising with a bidding model (similar to Google Ads).
- Amazon Prime: born as an attempt by Amazon to increase the repeat business on the e-commerce platform, Prime turned into a real streaming entertaining business, competing with other companies, like Netflix. This revenue stream follows a subscription-based model.
- Amazon AWS: Amazon AWS turned into a cloud infrastructure able to support many small, medium, and enterprise customers. The revenue model here runs primarily based on a consumption basis. Therefore, with a logic of pay-as-you-go.
Most business people tend to confuse the revenue model with the business model. While the revenue model informs a business model, those are two separate things. The revenue model is one of the building blocks of a business model. Yet a business model comprises many other aspects such as distribution, cost structure, financial structure, and more.
Examples of revenue models that work on the Internet are ad-supported, subscription-based, consumption-based, and SaaS. Those revenue models help web companies to grow and scale their business models.
In the Inernet era, a revenue model that proved quite effective is the ad-supported business model, where companies like Google provide free tools to billions of people across the web. Those free tools are paid for by companies who advertise on Google. Google opened the way for many other companies to use a similar model to finance the web.
Other Key Components of a Business Model
Other Revenue Model Case Studies
Other business resources:
- What Is Business Model Innovation
- What Is a Business Model
- What Is A Heuristic
- What Is Bounded Rationality
- What Is Business Development
- What Is Business Strategy
- What is Blitzscaling
- What Is a Value Proposition
- What Is a Lean Startup Canvas
- What Is Market Segmentation
- What Is a Marketing Strategy
- What is Growth Hacking