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Software Revenue and Monetization Models

Introduction

What are you getting yourself into?

Businessmen have long made money selling goods and services. In the past, pricing was easy. A physical good was carved, assembled or constructed and a simple markup was added. Now, the world’s economies are much more complex, and many products (such as software) can be copied for free at any time. New and exciting revenue models have been developed, and it is vital for business owners to select the most appropriate one.

This page will examine the most common revenue models used by startups and online businesses. After reading it, you will have a strong understanding of the options available to you, the product and service characteristics that lend themselves to specific models and an awareness of the pitfalls to avoid.

What is a revenue model?

Revenue is the lifeblood of any business. It represents the money coming in from a firm’s customers. A revenue model is a description of how a business will structure the pricing of its products and services. The selection of the correct model can determine whether a business survives or joins the many that fail each year.

It is important to note that a revenue model is not the same as a business model, but merely an important part of one. Whereas a business model is concerned with the creation of value, a revenue model focuses solely on the aspect relating to billing methodology.

What if you need more help?

As a specialist in product pricing, I’m more than happy to consult on your latest business venture. Contact me via the contact form on the website.

  1. The San Francisco Hipster
  2. The Sellout
  3. The Barker
  4. The Blood Donor
  5. The Man Behind the Curtain
  6. The Leasing Agent
  7. The Day Laborer
  8. The Expert
  9. The Godfather
  10. The Beggar
  11. The Handyman
  12. The NSA
  13. The Priest

The San Francisco Hipster

Profile:

Each year many promising software engineers leave the safe confines of the corporate world in order to follow their dreams of becoming dot com billionaires. They believe that a person can create a "cool" web application and then flip it for millions - or even billions of dollars.

What is being sold:

Many of those who select this business model share a critical misunderstanding. They think that the product being sold is their software. There are some acquisitions where this is the case, but many applications are relatively simple - any halfway decent team of software engineers could clone their application.

Much more common are acquisitions for an application's user base. An application with a cult-like following of engaged users is, quite literally, worth its weight in gold. Each dedicated user represents not only a future income stream for the existing product, but also a channel for marketing other products. The brand loyalty and connections can be exploited, when such actions are conducted by a marketing team with greater leverage than the original development team.

A recent trend is the "acqui-hire," in which a larger company purchases the smaller firm, not for the product, but for the team. An already-formed team with a history of impressive work is worth quite a bit. The team may have proven that it can deliver excellent products or has established an expertise that is worth significantly more than individuals who may (or may not) be able to work well together.

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The Sellout

Profile:

Many companies were funded through the sale of advertisements. Whether the older-style banner ads, or the more modern contextual-selected text ads, companies can, and do, make fortunes from advertisements.

What is being sold:

Many make the fundamental mistake that this revenue model involves the sale of an audience's attention. Those who think this way will likely find themselves out of business. Adherents to this revenue model are actually selling their customer's ability to spend. This is because most companies are willing to pay a significant premium on ads that generate purchases, rather than ads that simply generate brand awareness. A firm's ability to monetize via this method will be directly related to two characteristics of its users:

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The Barker

Profile:

Many firms create virtual storefronts to generate sales. A website can act as an excellent means of selling products such as downloadable software, textbooks or even tangible goods like toys. As the oldest revenue method, it is also probably the best understood.

What is being sold:

You are selling products to customers.

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The Blood Donor

Profile:

In many ways, the blood donor is similar to the barker. The key difference is that (rather than selling products to end users), a blood donor sells components to other businesses. Typically, this method is utilized by firms selling software libraries.

What is being sold:

Products to be used to create other products

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The Man Behind the Curtain

Profile:

In this revenue model a product or service is sold to an intermediary who then brands it as his own.

Many generalists will purchase specialized solutions or additional inputs and then rebrand the solution in its entirety. The buyer benefits in this case by the enhancement of its brand. Armed with a breadth and depth of skills from men behind the curtain, a frontman will be able to market to many types of customers that would have been unserviceable by any of his individual constituents.

Although similar to the blood donor model, there are two significant differences.

What is being sold:

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The Leasing Agent

Profile:

Similar to the barker is the leasing agent. Under this model, rather than selling a product outright, firms charge a fee on a recurring basis. Although many measures of increment can be used (such as number of calculations or CPU usage), units of time (monthly) is the most common.

What is being sold:

A solution to a problem that plagues customers

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The Day Laborer

Profile:

This model is often referred to by other names such as "freelancing," but this should not be confused with the expert revenue model (described later in this book). It requires the demonstration of a basic understanding of a skill, technique or capability that is commonly in demand by employers. All effort is made to ensure that the image projected is one of meeting a threshold (or defined minimum) that is required to perform a service. Evidence supplied will likely include relevant certifications, coursework and (possibly) evidence of past successes in a given domain. Supporting materials for a day laborer may include writings that demonstrate a technical proficiency and may delve into obscure topics in the technical space. Work produced under this model is generally focused on the execution phase of a project and involves tactical execution to a much greater extent than strategic vision. Individuals and firms working under the day laborer model will often consider it to be of a transitory nature in an effort to move toward the expert model.

What is being sold:

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The Expert

Profile:

The expert gives away his knowledge and the fruit of his experience for free. As he teaches, he builds both an audience and a reputation. These products are then used to generate a demand for his consulting services. Those following this model focus on selling results (what) rather than effort (how). Because the expert is able to act independently and can frame the problem to be solved, he is traditionally given significant leeway and is afforded a higher compensation than the day laborer. Because of this, it is vital that his reputation is built upon a history and expectation of results rather than a simple listing of skills and technological frameworks. Common methodologies for accomplishing this feat are testimonials, writings and books that link the use of technical concepts to the achievement of business objectives.

What is being sold:

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The Godfather

Profile:

The godfather revenue model is just what it sounds like. The godfather takes a cut out of any transaction that occurs in his territory. Typically this involves the building of a platform upon which other parties sell their products or services. Everyone wants to be a godfather, because it's great to be able to sit back and have people give you money. The main difficulty comes from the fact that one must create a two-sided marketplace (one side represents sellers and one side represents buyers) in order to achieve success. The textbook approach is to provide significant value to one side before attempting to serve the other. This may require that the company temporarily step in as either the buyer or the seller in the marketplace until the platform is able to become self-sustaining.

What is being sold:

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The Beggar

Profile:

Many technologists love to rely on the beggar model. Rather than setting a price for their products or services, they ask for donations. This model is (as a rule) a mistake and should not be selected. If firms are not interested in an upfront exchange of money, it is wise to select another model, such as the expert.

What is being sold:

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The Handyman

Profile:

A close relative of the beggar is the handyman. This is a slight improvement, but is still very difficult to pull off. In this model, a company creates a product and then charges for support and product changes.

What is being sold:

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The NSA

Profile:

Many people hate the NSA approach, but it doesn't have to be nefarious. This model involves selling information about a user or selling information that the user generates. This model will often require large numbers of users, so it tends to work best with products that are popular and grows via network effects.

What is being sold:

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The Priest

Profile:

Often confused with the hipster model, but it's even less likely to succeed. This model represents the complete absence of strategy, yet we must include it as it is so popular with startups.

Paul Graham, co-founder of Y Combinator, famously said "not to sweat the business model too much at first." Many people have taken viewpoint to its extreme, insisting that first should focus solely on the creation of a product, and assume that the revenue model will suddenly appear as manna from heaven before all resources are expended.

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Conclusion

Go forth and earn

Now that you’ve read this page, you know the main revenue models that can be used to make money online. As a quick check, can you tell me under which model I released this document? Are you sure it’s just one?

If you have questions or an idea you’d like to discuss, please feel free to contact me. I’d love to hear your thoughts on this page and to learn how you plan to utilize the information contained herein.

Shameless plug

If you’d like to learn more about establishing specific pricing, don’t forget to take a look at my book on software pricing. You could also just hire me for a consult. And if you haven’t done so already, don’t forget to sign up for my low-volume mailing list for insightful information like the type found in this book.