A revenue model is a framework for generating revenues. It identifies which revenue source to pursue, what value to offer, how to price the value, and who pays for the value. It is a key component of a company’s business model. It primarily identifies what product or service will be created in order to generate revenues and the ways in which the product or service will be sold. By having a clear revenue model, a business can focus on a target audience, and establish marketing plans.
The type of revenue model that is available to a firm depends, in large part, on the activities the firm performs, and how it charges for those. Some of the models to generate revenue include:
Production model
In the production model, the business that creates the product or service sells it to customers who value and thus pay for it. An example would be a company that produces paper, who then sells it to costumer, who pay for the paper, thus generating revenue for the paper company.
Advertising model
The advertising model is often used by Media businesses which use their platforms where content is provided to the customer as an advertising space. Possible examples are newspapers and magazines. Internet businesses which often provide services will also have advertising spaces on their platforms.
Commission model
The commission model is used when a business charges a fee for a transaction that it mediates between two parties. Brokerage companies or auction companies often use it as they provide a service as intermediaries and generate revenue through commissions on the sales of either stock or products.
Fee-for-service model
In the fee-for-service model, unlike in the subscription model, the business only charges customers for the amount of service or product they use. Many phone companies provide pay as you go services whereby the customer only pays for the amount of minutes he actually uses.
Donation ware
Donation ware is a licensing model that supplies fully operational unrestricted software to the user and requests an optional donation be paid. The amount of the donation may be pre-set, or it may be left to the discretion of the user, based on individual perceptions of the software’s value.
Freemium model
Freemium works by offering a product or service free of charge (typically digital offerings such as software, content, games, web services or other) while charging a premium for advanced features, functionality, or related products and services. For example, a fully functional feature-limited version may be given away for free, with advanced features disabled until a license fee is paid.
Subscription model
In the subscription model, the business provides a product or service to a customer who in return pays a pre-determined fee at contracted periods of time to the business. The customer will be required to pay the fee until the contract with the business is terminated or expires, even if he is not utilising the product or service but is still adhering to the contract.
With the rise of Information Technology, a new era of IT business giants have evolved who use complex revenue models to earn profits. In this project we will analyse revenue models of some major technology companies:
ABOUT
Google is an American multinational technology company that provides services and products that include online advertising technologies, search, cloud-computing, software services and hardware.
Founded in 1998 by Larry Page and Sergey Brin, Google is a multinational internet service corporation headquartered in California, United States. Initially conceptualized as a web search engine based on a PageRank algorithm, Google now offers a multitude of desktop, mobile and online products. Google Search remains the company’s core web-based product along with advertising services, communication and publishing tools, development and statistical tools as well as map-related products.
Google is also the producer of the mobile operating system Android, Chrome OS, Google TV as well as desktop and mobile applications such as the internet browser Google Chrome or mobile web applications based on pre-existing Google products. Recently, Google has also been developing selected pieces of hardware which ranges from the Pixel series of mobile devices to wearable computer Google Glass and driverless cars. Video content sharing site YouTube was one of Google’s most prolific and expensive acquisitions and has been heavily integrated into Google’s online presence, its worldwide ubiquity changing the dynamics of user generated content and online video curation.
REVENUE MODEL: ADVERTISING
Despite the vast scope of Google products, the company still collects the majority of its revenue through online advertising on Google Site and Google network websites. In 2011, 96% of Google’s revenue was derived from its advertising programs.
Google uses algorithms to understand search requests, project user interest and target advertising to the search context and the user history which it collects from its services.
Google Site Advertising
Google provides various services free of cost but bundles them with advertisements. Some of the products that provide ads are YouTube, Gmail, Search, etc.
An Advertisement (marked in yellow) presented by Google in the search results in the picture above.
Google Network Website advertising
Google advertisements can be placed on third-party websites in a two-part program. Google’s AdWords allows advertisers to display their advertisements in the Google content network, through either a cost-per-click or cost-per-view scheme. The sister service, Google AdSense, allows website owners to display these advertisements on their website and earn money every time ads are clicked. Google Analytics allows website owners to track where and how people use their website, for example by examining click rates for all the links on a page. In 2012, more than two thirds of Google’s revenue originated from Google Site advertising.
An Advertisement (marked in yellow) has been placed by Google on third-party website in the picture above.
Apart from online search, advertising and online video, Google has branched out into further content, most notably the Android mobile operating system which as of the third quarter of 2015, accounted for 84.7 per cent of the global smartphone operating system market. Content for Android devices can be purchased via the Google Play Store, a digital application distribution platform through which more than 1.5 million apps were made available as of November 2015.
Other revenues are generated via product licensing, services for businesses and most recently, digital content and mobile apps.
ABOUT
Facebook is a social networking service that was created by Harvard student Mark Zuckerberg in 2004. As of January 2015, Facebook had more than 1.59 billion global monthly active users.
Facebook allows its users to create their own Facebook profile, add friends and share personal updates and photos. Facebook enables brands to address their fans directly, which is why marketers put a lot of effort into generating Facebook fans.
In September 2012, Facebook purchased photo-sharing app Instagram for 1 billion U.S. dollars. Other notable acquisitions include VR gaming headset Oculus Rift and mobile messaging app WhatsApp, which was purchased for 19 billion U.S. dollars in February 2014.
REVENUE MODEL: PROMOTION
Promotion is a subset of Advertising. Facebook, instead of selling space to advertiser, sells interactions like likes and views. Promoting a page or post is a way to create ads that will show in News Feed of Facebook. Advertisers can promote Pages, Posts etc. for a wider reach.
The amount of data the company collects from its users enables it to sell well-targeted
advertising space. Entire revenue line depends
on ads being circulated within the timelines of users in the form of posts through the infinite vertical scroll.
A Promoted Post (marked in yellow) has been placed by Facebook in the News Feed of the user in the picture above. (A screenshot of mobile and desktop screen respectively.)
Facebook also acts as a middle man. It provides payment capability (and thus the payment gateway business model relates here) to user playing a game on Facebook) and in turn takes 30% of the sale generated.
Facebook also makes money by VR because it sells Oculus Rift (Virtual Reality Based Device) which also contributes a very insignificant amount to the total advertising revenue mammoth.
ABOUT
Twitter is an online social networking service that enables users to send short 140-character messages called tweets. According to recent social media industry figures, Twitter currently ranks as one of the leading social networks worldwide based on active users.
Twitter has consistently been named as one of the most popular social networks of teenagers. Recent social media data also proves that Twitter usage is becoming increasingly prominent during events. Live-tweeting cultural happenings such as sporting events or television airings has become a popular way for consumers to engage online with others while sharing their thoughts on current experiences.
REVENUE MODEL: DATA SELLING
Twitter makes money from following revenue lines:
By Selling Data
The majority of company revenues are generated via advertising but Twitter also makes money through selling data and calls it data licensing. Twitter’s data licensing revenue is $32.2 million as of 2015. Twitter has four “official data resellers” including Gnip and these companies have direct access to all tweets (deleted and otherwise) and its individual twitter users’ personal data.
This is like a company selling its data to understand viewers’ choice and preferences. Resellers have developed algorithms for data mining that measure consumer response to everything from brands to movies. Major buyers of these data enabled services are television shows and on TV movies that often promote live tweeting as a means to gauge interest and response during broadcasts so that they can sell air time to potential advertisers at higher rates. Such kind of revenue as a major source is unique to Twitter.
From Advertising
Twitter makes 85% of its total revenue from advertising through promoted content.
Twitter has options of promoted tweets (direct from advertisers into the news feed of twitter users, this is primarily done to get more eyeballs to the ad campaign of the marketer) – The company ensures promoted tweets make it to the users’ timelines irrespective of whether or not that user is following the marketer.
Promoted accounts (to gain more followers for important twitter users and accounts by way of promoted accounts and who to follow) and promoted trends (the trends not trending organically). Promoted trends are trends that a user can click and that trend search result list includes a promoted tweet as the first result position.
Wikipedia
ABOUT
Wikipedia is a free, collaborative, multilingual Internet encyclopedia. Wikipedia is the largest and most popular general reference work on the Internet and is ranked among the ten most popular websites. Wikipedia is owned by the non-profit Wikimedia Foundation.
Wikipedia was launched on January 15, 2001, by Jimmy Wales and Larry Sanger. In 2005, Nature published a peer review comparing 42 science articles from Encyclopedia Britannica and Wikipedia, and found that Wikipedia’s level of accuracy approached Encyclopedia Britannica’s. Criticism of Wikipedia includes claims that it exhibits systemic bias, presents a mixture of “truths, half-truths, and some falsehoods”, and that, in controversial topics, it is subject to manipulation and spin.
REVENUE MODEL: DONATIONS
Wikipedia runs ad-free. For the past couple of years, the Wikimedia Foundation, the non-profit organization behind Wikipedia, has staged a big fundraising campaign toward the end of the year in order to cover the costs associated with maintaining a website of Wikipedia’s scale. And with considerable success: Between July 1, 2015 and June 30, 2016, Wikipedia received $77.8 million in donations and contributions, up from just $2.2 million in 2007. In the past fiscal year, Wikimedia spent a total of $65.9 million, roughly half of which was for salaries and wages.
A screenshot of the webpage “Donate to the Wikimedia foundation.”
Uber
ABOUT
Uber is a privately-held online transportation network company headquartered in San Francisco, California. It develops, markets and operates the Uber app, which allows consumers with smartphones to submit a trip request, which the software program then automatically sends to the Uber driver nearest to the consumer, alerting the driver to the location of the customer. Uber drivers use their own personal cars. The Uber app automatically calculates the fare and transfers the payment to the driver.
REVENUE MODEL: COMMISSION
From the amount you pay for an Uber ride, the company tends to collect something from 20 per cent to 30 per cent of the fare. The driver gets the rest. Since Uber is a private company so Uber’s commission percentage has not been disclosed, and it varies by city, competitive pressures and other factors. But that’s a roughly typical share Uber aims to collect.
For its fee, Uber provides mapping software, helps with problems, processes credit-card payments, takes out insurance and performs other valuable chores.
Skype
ABOUT
Skype is a cross platform application that provides video chat and voice call (via VoIP) services. Users can transmit digital documents like images, texts, media and many others. Skype users can also create video conference calls. It was founded by Niklas Zennstrom and Dane Janus Friis. Microsoft bought 100% control of Skype in 2011 for $8.5 billion.
REVENUE MODEL: FREEMIUM
Skype is inherently free for limited use. Skype makes money primarily through Skype credits or monthly subscriptions. While Skype-to-Skype calls, video calls, and group calls are free (as long as both the receiver and dialer are using Skype ID based access), calls and text messages to non-users require Skype credits. These credits allow Skype users to make calls to land lines, send text messages anywhere in the world, or purchase a Skype number so that users can be receive calls from anywhere in the world on their Skype account.
Skype also offers Skype To Go, a service that allows low-cost international calls from mobile phones and land lines. No matter the location, a Skype To Go subscriber can dial a local number (that they purchase) to dial out to international contacts.
The above picture contains the screenshot of the in-app purchase of Skype Credit.
Paytm
ABOUT
Paytm was founded by Vijay Shekhar Sharma in 2010 and is owned and operated by One 97 Communications Limited. It offers a mobile commerce platform that enables the users to do mobile recharge, pay bills and shop at the mobile marketplace. The mobile wallet also allows the users to transfer money, avail deals, pay cab fares and book movie tickets. Funds that have invested in Paytm include those of the Likes of AliBaba of China (via its Ant Financial Holdings Entity).
REVENUE MODEL: FEE-FOR-SERVICE
The various revenue lines that they have can be broadly classified into the following sub-categories:
E-Commerce
Paytm makes money from sale of goods on their platform.
Paytm acts as a Marketplace where Sellers list their products for selling. The users browse through the product categories and buy the desired products. The payment is made through Paytm and delivery is done by the seller. Seller gets his agreed price of
the product minus the commission charged by Paytm for g
enerating the customer. Thus the crux of the Model is “X% commission on the total sale value given to the seller for a particular product”
The percentage of commission that Paytm charges varies on the category of product that Paytm is able to sell. It ranges anywhere between 0% to 20% of the sale value (excluding taxes and discounts).
Bookings and Payments charges
• Paytm provides its users to book tickets for bus, train, flight, movies, and hotel, etc. It charges commission on each of such transaction.
• Paytm allows you to pay all sorts of utility bills including cable, internet, mobile, gas, electricity etc. Paytm does recharges and bill payments for DTH, Internet, Prepaid Phones, Post-paid Phones, Insurance Premium Payments, Loan EMI Payments, Metro Payments and many such more. A charge is collected on such transactions.
• No charge is levied on sending/receiving money by any user but a fees is charged while withdrawing this money to personal bank account.
Also, Sellers are charged listing fee for selling on Paytm and on-boarding fee for doorstep service of explaining everything related to selling online.
Spotify
ABOUT
Spotify is a digital cross-platform music streaming service offering users a variety of record label content from Sony, EMI, Warner Music Group and Universal. Music can be browsed or searched by artist, album, genre or playlist. Whereas the basic, ad-supported service is free, Spotify offers a tiered subscription model allowing paid users to not only listen to Spotify without advertising but also to access tracks on mobile devices and save music and playlists for offline use. Spotify was founded by Daniel Ek, Martin Lorentzon
Spotify’s 2014 revenue amounted to 1.08 billion euros with a net loss of 162 million euros. This result is strongly influenced by the company’s cost of sales which is mostly comprised of licensing expenses towards record labels and artists.
Spotify business model is dependent on buying and curating more and more content, thus as of 2016, Spotify provides access to over 30 million songs, and more music being added approximately every day. There are all types of apps, TV, Desktop, Mobile, Tablets etc.
Every time that you stream a piece of content (via the paid route), three people get paid: The artist, The Publisher (intermediary through whom Spotify accepts artist albums) and Spotify. Spotify benefits the digital content business by migrating “users away from piracy” and “making sure they generate royalties for longer period of time rather than just one time download” by encouraging users to use their premium service.
REVENUE MODEL: SUBSCRIPTION
Spotify makes money from advertising as well as paid subscriptions to hear streams of endless music. Also, new artists can promote their art work on Spotify’s platform from where Spotify also gets a cut on selling rights, streaming their work.
• Subscription: Subscription allows user ad-free, offline and unlimited music streaming.
• Advertisement: Known as “Spotify for Brands“. Spotify collects revenue from the advertisers by providing ads to free streaming users. It does not sell much of ads but the way they can target and re-target the consumer in the forms of mood, genre, location, gender, and App OS in such a way that very less platforms.