Which Revenue Model Should You Use For Your Business?

Posted: 18 Sep 2014 05:30 AM PDT

What revenue model do you use for your business? If you’re a freelancer you likely sell services to clients, but there are additional revenue models you can use in addition to or instead of selling services.

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I think it’s important for freelancers to understand and think about different revenue models so they can move their business toward those they think will work best for them. Today I want to talk about the pros and cons 4 different types of revenue models.

Selling services or products directly
Advertising, affiliate marketing, and lead generation
Selling subscriptions or generating a recurring revenue in some way
The freemium model of giving away a limited version of a product or service or giving away a platform and charging for extras

Services and Products

Again, if you’re a freelancer, your revenue model is selling services. Someone needs or wants something done and they hire you to do the work and to supply your expertise to the project.

One problem with this model that I’m sure you’ve encountered, is your revenue is directly tied to the time you spend working. When you’re not working, you’re not making money.

Some of your time will go into finding new clients, managing the daily operation of your business, and performing tasks that aren’t billable. Your revenue isn’t necessarily consistent from month to month as you go through the ebb and flow of having a project to work on and for which to charge.

To make more money selling services you can

charge more per project
work more hours
reduce your costs

However, you can only raise your rates so much, you can’t create more time in the day or week, and there’s a limit on how low you can reduce your costs. It’s not even realistic you could do all three to their maximum limit.

Making more per client usually comes down to raising your rates and to a less extent cutting costs. I find the amount of work each client sends me tends to remain consistent over the course of a year.

One of the obvious things we can do to begin exploring revenue models is switch to selling products. The easy example for designers and developers is to sell themes and templates or extensions and plugins for content management systems and similar.

Products scale better than services, but it’s not necessarily easy to sell products just because you have them. You also need to reach a certain level of scale in order for the revenue to equal what you’d make selling services.

For example you might charge $5,000 for a custom WordPress theme. That means selling 50 themes at $100 or 100 themes at $50 or some combination of sales and price that totals $5,000 or you might as well have built a custom theme (assuming that option was available to you).

Odds are you’ll make less per sale when selling products so you need more sales. Making more money usually means selling more products. You can attract more traffic and work to increase your conversion rate. You can cut costs to a degree, though with digital goods there’s not much of a production cost associated with each product in the first place.

Making more money per customer probably means creating more products and enticing them to buy.

Advertising, Affiliate Marketing, Lead Generation

Advertising, affiliate marketing, lead generation are really three different revenue models. I’m grouping them together because they all involve you helping to sell someone else’s services or products.

That means this model is reliant on another person or business. Your job is to prep your visitors to buy, but the site you point them to needs to close the deal and that’s out of your control.

This revenue model can raise questions about who’s the customer and what’s the product. There’s nothing specifically wrong with advertising, but it can call into question the integrity of the publisher. Are you recommending a product because you believe in it or because you make more money to recommend it. The truth is money in general does this, but I think advertising helps to make it more obvious.

The revenue model also leads to the page view culture you currently see on the web. More eyeballs means more advertisers competing for ad space and more people to click banners and links. More page views ultimately means more money for the publisher.

That’s why you see click bait style headlines and why a single article gets broken up into page after page or why an image gallery needs to place every image on a unique URL. All those clicks means it takes longer for you to consume the article and images. It requires more work on your part. The system is less usable.

I don’t think a revenue model should lead to less usable websites or products or raise questions about motivation. As you can guess this isn’t my favorite revenue model. Of course, that hasn’t stopped me from using it.

Anither thing to consider is that advertising is always an interruption. You don’t visit a website or tune into a tv or radio program for the ads. The ads interrupt what you came to do. It’s one reason we learn to ignore them and develop ad blindness leading to less effective advertising.

It’s led to the creation of native advertising. Sometimes native advertising is in the form of product placement. A character on a tv show holds up a Coke or Pepsi, which Coke or Pepsi paid to have placed in the scene. More likely it’s referring to promotional content created to appear as though it’s unbiased. Somewhere the content will say sponsored content or sponsored post.

This form of advertising can also be questionable. How obvious is it to the viewer that the conent has been sponsored? The less obvious, the more manipulative the practice will seem.

More money will usually require more traffic and more people to view pages and click things. You could optimize the design so clicks are more likely and you could build an audience with a demographic more valuable to advertisers. Still more money likely comes down to more traffic.

Subscriptions and recurring revenue

The last few years have seen a lot of businesses moving to this model. It’s a better predictor of monthly income and it improves your cash flow. It keeps customers longer and increases revenue per customer because your customers are giving you money more than one time.

You become less focused on sales and more focused on the size of your customer base, your rates of acquisition, retention, and churn. You become concerned with the lifetime value of customers.

For example themes and plugins might offer subscriptions for support or updates. They might be set up as a subscription that gives you access to everything inside. Adobe recently turned software that had been products into a subscription service with the switch to Creative Cloud.

Many websites are becoming more web app and offering an ongoing service. With some it makes sense, but I’ve seen examples where the subscription seemed artificial and comes across as being there just because it can be.

I think for subscriptions to work long term you have to offer something worth paying for month after month or year after year. That likely means an ongoing service or creating new content or products each month. It could also be something like a maintenance plan for a website.

I think many see this kind of recurring charge as the holy grail. It feels like there’s less need to find new customers each month once a customer base is in place. And again, I’ve seen some charging a recurring fee for things that don’t require recurring working, at least not to an amount equal in value to the recurring charge.

This revenue model can be good for customers and clients. It’s a known quantity for them every month. They can budget for it and then mostly forget about it. That’s part of what makes it good for business as once it’s budgeted it tends to get paid without question each month.

As a customer myself I often prefer paying a single monthly charge for unlimited access to something instead of paying each time I want to use the service, simply because it’s one less thing to think about.

At the same time there’s only so much any of us want to pay even if it probably ends up costing less to subsidize things we don’t want to watch than paying for each thing we do want to watch separately.

This model can also get out of control. $10 here and $20 there doesn’t sound like a lot when you sign up, but before you know it they add up to hundreds or even thousands per month.

Freemium

The last model I want to talk about is the freemium model, the idea of giving away the basic product or service for free or building a platform you give away for free and then charging for extra features and functionality.

You aren’t limited to the sale of a single extra in this model. Your customers will likely buy more than once. An extra could also be subscription based. In a sense it’s like the traditional sales funnel where you give something away for free to get people into your funnel and then move some deeper into the funnel where they’ll buy from your.

You see this in the app store with free apps and in-app purchases that unlock features. You see it in WordPress plugins for shopping carts and event calendars and any other plugin that offers more than a single function or two. For example free shopping cart plugins usually work with PayPal out of the box, but charge to work with other payment gateways. Themes are also sold this way as a framework, with child themes for sale.

I suppose the idea comes from how everyone only uses 10% or 20% of your product, but they all use a different 10% or 20%. You build a minimal viable product and let your customers decide which additional features to purchase.

This is how WordPress is built. The core comes with the things they’ve determined most people actually use and then everyone can add functionality through the plugin architecture. It’s a good system for development. It forces you to be more modular. It leads you to build a minimum viable product for everyone and let some add to your system via modules.

I tend to think this revenue model is a win-win most of the time. It’s good for the customer who can try your product or service for free. Most will be happy with the limited set of free functionality. Still, they’re people in your funnel. They’re people with whom you can connect. It should be easier to convert these people than to convert total strangers into paying customers, at least some of them.

You don’t really lose revenue by giving away a version of the product or service. The people who only use the free version, weren’t likely to buy regardless. However, they might increase support costs so it’s important to find a way for them to get support or understand they need to support themselves.

I think there’s a potential danger with this model where you don’t improve the free platform and only add features as extras so you can charge for them. You should continue to improve the free version in this model and not let it stagnate.

One last thought is this model also gives you the option of creating the platform so others can build the extras. You let them sell these extras in your marketplace where you take a cut in exchange for providing an audience of buyers. It could be a good way to start having others work for you.

Closing Thoughts

I think it’s important for freelance designers, developers, writers, and any other service provider to be aware of and think about different revenue models and business models.

We tend to fall into the one revenue model, which is selling services to clients. Some of us expand into selling products, but it’s really the same model. What we sometimes miss is the other revenue models we might apply to our businesses.

Admittedly it can be hard to find time to move into other models when you sell a service. There never seems to be enough time as it is, so when are you going to find time to build a product or ongoing service

Difficult though it may be, I encourage you to explore other revenue models. If you offer only services, be a customer and think about a product you’d like yourself and set aside time to create it. Take things you do as part of your services work and see if it can be turned into a product. Can the functionality you just added to a WordPress theme become a plugin? Think like that.

Think about the revenue models you don’t use and think about how they might fit with your business. Look to the things you already do and think how you can modify them in a way where they work in a different revenue model.

How can you multipurpose your service so it works as a product, subscription, or freemium product or service? Think and try. The worst case is you’ll try a few things that don’t work. The best case is your business grows healthier by relying less on any one source of revenue for your income.

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