“In the absence of revenue, there can be no profit.”
Those wise words from a former co-worker came to mind as I read an interesting post earlier this month on the importance of revenue for startups. At the end of the article, its author, David Shen, says “all this means that we think the importance of revenue at early stage is back – one could argue that it never left, but what I mean is that it has risen to the top of the stack.”
With startups, there is often a lack of planning around pricing strategies, revenue models, and determining who the actual customer – not the end user – is. There are many different types of pricing models that could be used including ‘fremium’, ad supported, SaaS, one-time cost, and many more. They should all be a part of your market analysis as you plan to launch your product. Here are a few tips that could help determine your revenue model.
What revenue model do your competitors use?
Every startup has competitors – if you think you don’t, look harder. How do their revenue models work? Do they have more than one? Have they changes over time? You can learn a lot by thoroughly researching your competitors.
How do your customers like to pay for a solution like yours?
The best example is government. There are many stringent rules for many levels of government on what types of contracts they can have, the buying process, and means. For example, for solutions priced over $5,000, governments may need to go to bid or they may not have a credit card for monthly payments so a more traditional invoice process must be in place. Selling a new solution and a way to buy it may be part of the value proposition, but it also may be part of the reason a hesitant government doesn’t try your solution.
What are your costs?
If you have a lot of customization at the beginning of an engagement, that’s the type of solution that requires upfront outlays from the customer. If you aren’t able to collect these upfront fees, you”ll quickly run out of money.
Model the revenue solution.
I often hear from B2C startups that advertising is the model they will use. Do they understand how advertising works and how much money it will get them? There are websites that get hundreds of thousands of hits and drive a few thousand in revenue a month. Will that sustain your business model?
Most startups never get funded, are bootstrapped, and must become self-sufficient from a revenue perspective right off the bat to survive. Because generating revenue will help the long-term viability of your business, understanding where it fits in at the start of your business is vitally important. For more interesting startup blogs, whitepapers, and event announcements, don’t forget to sign up for our monthly newsletter.
