The 6 revenue models in technology.
What is a revenue model?
It’s the way a company extracts value from the consumption of a product or service
It’s how the business generates money.
And there are 6 ways to do that.
But not ALL ways are created equal.
And if you’re in the crypto space, you should know something: The prevailing revenue model in crypto, also happens to be the number one revenue model on earth for creating value.
I want to quickly run through these 6 revenue models, and show why crypto companies are naturally positioned for the best and most valuable revenue model there is.
6.At the bottom of the revenue model stack, is tipping and donations. You can’t create a lot of value with this one. Nothing guaranteed. It’s too difficult to forecast it. You’re a pan-handler.
5.Next is Sponsorship revenue. Hmmmm, nothing much good here either. Long sales-cycle times. Generally not repeatable. You’re basically one step above a charity case.
4. The 4th is the granddaddy of internet company revenue models. I am talking about Advertising. I really hate the advertising revenue model. There are too many reasons to list them all. But I’ll give you my top couple of…. “worst things about the advertising revenue model.” First - you aren’t offering a differentiated product. I mean, there are literally millions of places that advertisers can advertise. AND their two favorite places are google and facebook. Who capture the bulk of North American digital ad dollars.
The other bad thing about the advertising revenue model, is that it has this weird property where you’re charging one group - the companies paying you to advertise on your platform - when an entirely different group is actually using or consuming your product. So who is your real customer? The companies paying you? Or the people using your platform? Now I consider my customers to be, the one who is paying me. See the problem? Who are content sites customers? Well If you define “customer” as the one paying you, then their customers are the advertisers. But the people consuming the content on the site also think of themselves as customers. Non-paying customers. See the tension that creates? It’s why so many content sites feel justified in selling user data.
These 3 revenue models I’ve just mentioned, for the reasons I’ve mentioned, don’t generally create a lot of value.
Now lets move into the top 3 revenue models. And these 3 have something in common, that makes them quite attractive. A direct relationship with the customer.
3. So the 3rd best revenue model is retail and ecommerce. You’ve got that alignment between the customer, and a revenue generation event.
2. The second best revenue model? Subscription. This is like the ecommerce revenue model, with a twist. That twist? Predictability. From customer contracts. Which reduces customer churn. Now when you combine predictable revenue, and low customer churn, you get a very attractive valuation. Now of course in the last 15 years this has become THE popular revenue model for software companies.
1. And finally, the best revenue model on earth. Transaction-based revenue. The gold standard. Google, payment companies like PayPal. These are transaction-based revenue models. Transaction based revenue models are highly valued because they have two very appealing properties. They scale in-line with usage on demand. And they are often perceived as more attractive to customers because they like the pay as you go model. One of the reasons I love the blockchain space is that it fits so well with the most valuable revenue model. A blockchain is designed for transactional based revenues. And this is why, when blockchain-based businesses find their successful niches, they will be valued at very high revenue multiples.
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