MBA Mondays: Revenue Models

A revenue model is "the system design by which a business monetizes its services". That comes from Wikipedia. I like that definition. Short, sweet, and to the point.

I am going to spend the next couple months talking about revenue models for online businesses. We've started off this series by crowdsourcing a list of the various business models that online businesses use. I will use that list as an outline for this series:

Here is the outline:

– Advertising – the service is free to use, marketers pay to reach your users via advertising

– Commerce – sell something to your users, keep some or all of the proceeds

– Subscription – charge your users monhtly or annually for the opportunity to use your service

– Peer to Peer – connect people together in a network, take a small piece of the activity that ensues

– Transaction Processing – settle transactions and take a small piece of the transaction for doing so

– Licensing – charge users once upfront for the opportunity to use your technology

– Data – sell the data your service generates

– Mobile – Mobile is not a revenue model, but we will discuss how mobile presents some unique challenges and opportunities for monetization

– Gaming – Gaming is not a revenue model, but we will discuss how gaming presents some unique challenges and opportunities for monetization

Of course these categories are not mutually exclusive. Many web/mobile services will use multiple revenue models. Freemium, for example is a combination of advertising and subscription.

I will kick off this series by making an important point about focus. I strongly believe that entrepreneurs should pick one revenue model to start with and focus 100% on making that work before rolling out another one. It is very hard to execute two or more revenue models at the same time. Better to nail the first one before rolling out the second.

I am a fan of starting with the most native and easiest to execute revenue model first. Ideally it will be one that improves the user experience or at least in no way harms it.

I am looking forward to writing this series. We'll start next week with advertising.

#MBA Mondays

Comments (Archived):

  1. youflavio

    Wikipedia: donation as a revenue model?

    1. jason wright

      will it scale?

      1. JimHirshfield

        It works for NPR and PBS.

        1. Bob Allure

          Correction – those are government subsidized. They would not work if they actually had to support themselves in the free market

          1. JimHirshfield

            They are indeed Gov’t subsidized, which in my view is a form of donation. That aside, I pretty sure I’ve heard that they _would_ survive. Am I wrong that only 10% of their revenue comes from the Gov’t? It would hurt, and require downsizing and more aggressive fundraising, but it would still work, IMHO.

          2. Luke Chamberlin

            You are correct. They might shrink a bit, but the model would certainly still work.

          3. FAKE GRIMLOCK

            MAIN EFFECT OF GOVERNMENT NOT FUND PBS, NPR?THEM GET TO DUMP “PRODUCE CONTENT FOR PUBLIC GOOD” RULE, DO WHATEVER DONORS WANT.THAT PROBABLY NET LOSS FOR COUNTRY IF HAPPEN.

          4. Aaron Klein

            I have a feeling that Sesame Street would look identical if funded by advertisers instead of government.

          5. Luke Chamberlin

            The most popular show on PBS is Dowton Abbey…

          6. Elia Freedman

            I believe it is closer to 2%. Edit: Oops. I’m wrong. Looks like about 12%: http://www.theblaze.com/sto

          7. JimHirshfield

            Thanks for the link attribution.

          8. Elia Freedman

            I thought about being a journalist at one point in my life, but wanted to make money. So I started a company. Still trying to make money. πŸ™‚

          9. Wavelengths

            The problem with working for yourself is that it’s hard to ask your boss for a raise. You already know all the excuses he’ll give. And forget about asking for time off. πŸ™‚

          10. Elia Freedman

            That’s why it is good to be married. There’s always a “boss” somewhere!

          11. Wavelengths

            Good to have someone in your corner at the end of the day.

      2. kidmercury

        doubt it scales well…..but i don’t think most stuff does

    2. William Mougayar

      Well, the Red Cross does it.And if you broker it & keep a transaction %, that’s a revenue model.

      1. fredwilson

        That’s donorschoose.org

        1. William Mougayar

          Speaking of which,- are you planning a DC campaign/event this year?

          1. Aaron Klein

            Yes…missing the chance for an AVC meetup in NYC this year. Hoping we’ll do something early next year.

          2. fredwilson

            no

      2. Teren Botham

        Sorry,,that will be the business model.. Fred will make it clear next week

    3. fredwilson

      Great point. I think it works for them but I am not sure it is a model others should adopt

    4. Aaron Klein

      No, that’s not a revenue model. It’s laziness.

      1. Luke Chamberlin

        If you had any idea of the amount of work that goes into raising money you would not call it laziness.

        1. Aaron Klein

          I’m in the middle of raising $300,000 for our school project in Ethiopia, so I’m well acquainted with how hard it is to raise money.My issue is that Wikipedia could raise their annual budget in a few weeks by running algo-generated ads that wouldn’t challenge their editorial independence one bit.It is laziness to rely on donations when self sufficiency is at your fingertips.

          1. ShanaC

            they want to remain ad free though

          2. Luke Chamberlin

            More importantly, their donors want them to remain ad-free, which is why it works.

          3. Aaron Klein

            They are running ads begging you for money right now. So there will never be a version of Wikipedia that is ad-free.They currently raise their budget from donations in 30-45 days. They could probably do the same with ads and affiliate links, and then take them down for the rest of the year.Or leave the affiliate links up, and donate the surplus to serious journalism.

          4. Techman

            I don’t think the begging is an advertisement They are not really promoting anything but keeping the site online. And you click the box once to get rid of it and it’s done.

          5. Aaron Klein

            You could do the same with an algo-generated ad. Run them for a few weeks to raise the budget, then stop.Or keep running them and donate the surplus to long form journalism. I don’t care if I can click the “X.”It’s just silly that they pretend that capitalism could spoil their objectivity while they raise money from secret corporate donors.

          6. Aaron Klein

            They are running ads begging you for money. (And keeping the identity of many big corporate donors a secret.)

          7. Luke Chamberlin

            So slapping some ads on the site and raising their budget “in a few weeks” isn’t lazy but spending all year fundraising is? Maybe laziness isn’t the word you’re looking for.

          8. jason wright

            the slippery slope, the thin end of the wedge, the beginning of the end – it all leads to one outcome, being captured by corporate interests, a very bad thing for editorial independence.

          9. Aaron Klein

            Wikipedia has secret corporate donors right now. Using sustainable capitalism with totally transparent, algo-generated ads is the best way to preserve their mission.I wrote about this extensively last year: http://www.aaronklein.com/2

          10. Techman

            The comment for that page is closed .___.

          11. Aaron Klein

            Well, I wrote the post a year ago during the last “advertising for donations drive.” πŸ˜‰

      2. Techman

        I disagree. There are sites such as Wikipedia that serve millions of people every day and do not rely on advertising to keep the bills paid. Wikipedia is really a site powered by its users, both with the information and the money pumped into it.Have you ever thought about a Wikipedia with ads? I’m not sure it would look so great but it would be sad to see Wikipedia submit to having to run ads.

        1. Aaron Klein

          You mean like the ads they run right now begging for donations?

    5. John

      Interesting point… who besides Wikipedia has made a donation model work at scale?

      1. Taylor Brooks

        Every church in the world.

        1. Wavelengths

          Tithe: 10%. The most faithful — often the least able — tithe on their gross income.

  2. Carl Rahn Griffith

    Should be very interesting. One initial revenue model/focus is a great thing to emphasise.

    1. JimHirshfield

      Focus is key.

    2. FAKE GRIMLOCK

      ONE INITIAL EVERYTHING VITAL FOR STARTUP.

      1. fredwilson

        Including one boss

        1. Carl Rahn Griffith

          And preferably the right one!

        2. FAKE GRIMLOCK

          EVERY VOLTRON NEED EXACTLY ONE BLACK LION.

      2. Carl Rahn Griffith

        Indeed. From kettle to Mac.

  3. William Mougayar

    I like this approach of diving deeper into each one of them. The list you’ve settled on clears the fog on the temporary mess created by the crowdsourcing exercise.Β The trick with picking 1 revenue model & sticking with it initially is in picking that one. Β How do you choose it is the challenging part. And when do you add a 2nd one.Β 

    1. awaldstein

      I sound like a broken record on this already…but the challenging part is discovering the monetizable value, not the monetization model.Sure the model ain’t easy but unless you sell chairs or smoothies, you need to determine what has enough pull (or the pull is increased ) by the model.Charging is the fun part as long as you have something of value to charge for.

      1. William Mougayar

        I’m with you. The best case scenario is when your “Atomic unit” is very monetizable and valuable at the same time. The tweet is twitter’s unit & they can monetize the heck out of it, in more than one way. Comments are Disqus’ unit. Etc.

        1. awaldstein

          Since i’m deep into this for three projects, one mine, two clients, I’m going to refuse to listen easily on this ;)Hard goods or services are one thing. You sell something. Marketplaces bring the customers to you and their atomic unit is that transaction.Twitter/Facebook…media models. It’s clear but still not simple to find a smooth way. Most people either ignore or dislike sponsored adds. Media models are based on tolerance and work when the population is huge.Understanding the atomic unit is one thing, making a transaction a natural part of the process is not always clear especially in early stages.And sometimes the atomic unit is the razor not the blade!

          1. William Mougayar

            Marketplaces are more complicated for sure. You need committed buyers and sellers, but there is 2 sides to everything, isn’t there? When I write a comment here, I’m committed. When I’m tweeting, I’m committed. Twitter and Disqus got me. I can’t escape them.

          2. awaldstein

            Yes and no.Twitter/Facebook and Disqus are dramatically different.Two are places, destinations, the other is well….bigger discussion. And differences will roll down to how they are monetized.Fun discussion. Looking forward to Mondays!

      2. fredwilson

        Keep being a broken record on this one Arnold

    2. fredwilson

      When you’ve nailed the first and its all execution at this point

  4. Robert Hacker

    Another way to look at revenue models. See attached image. May be a few more to discuss.

  5. takingpitches

    It’s the Hippocratic Oath of revenue models:First do no harm.Respect the Atomic Unit.

    1. JimHirshfield

      Although with many nascent companies, their expenses outweigh their (new) revenue model. Is that harm?

      1. takingpitches

        By harm, referring to Fred’s thought here and elsewhere as to the revenue models being in accord with and not harming the user experience.Monetization unit=atomic unit

        1. JimHirshfield

          Sure. No argument here. I was just trying to spur a thought, a conversation. πŸ˜‰

          1. takingpitches

            πŸ™‚

        2. William Mougayar

          Bingo. I said it elsewhere too. The trick is in finding that Atomic Unit. In other words, Cherchez la femme.

          1. JimHirshfield

            Cherchez la femme? Huh? You’re stretching my command of the French language and spurring this retort:Fetchez la vache.http://www.youtube.com/watc

          2. William Mougayar

            Funny monty python. That’s an aphorism meaning – find the root cause πŸ™‚ http://voices.yahoo.com/phr

          3. JimHirshfield

            Oh, so it’s sexist? Find the women and you find the cause? (just asking)

          4. William Mougayar

            Not sexist the least bit. That isn’t my style. If you refer to its history from the 19th century Alexandre Dumas novel,- they were looking for a woman who was involved in a murder. Later, that phrase took another interpretation. It’s a fascinating little story: http://www.phrases.org.uk/m

          5. JimHirshfield

            Of course I wasn’t implying YOU are sexist, just sounded like the origin of the phrase was.

          6. Wavelengths

            Sort of like “follow the money” when you are looking for the culprits in white collar crime.

          7. Dale Allyn

            Or politics.

          8. William Mougayar

            Yes. That’s a good analogy.

          9. ShanaC

            cool!

          10. Abdallah Al-Hakim

            It is amazing how a post about revenue models turns in some conversations about an Alexander Dumas novel! The serendipity of conversations is incredible

          11. Wavelengths

            And of course, this is why we show up here. :-)Some while ago I read a book that demonstrated something about how different people think. The book showed that at least 90% of people, when working out a problem, would create a list, with indents and subindents, etc. This was true even if the native language was Arabic or some other non-English alphabet.. Same format.A much smaller group created notesheets that wandered in circles, included pictures and arrows, and generally looked like total disarray. Michaelangelo was among that group.I see that real network thinking is a process of bringing in information from apparently random sources to re-organize it in a new way to create a new entity — solution, poetry, piece of art, invention, whatever. Not all people think in this way.But I believe that this thought process can end up looking like genius when it has access to enough dots to connect that finally the connected dots make sense.So, if this site attracts the entrepreneurial creative, then perhaps a higher percentage have more trouble creating the ABC,123 list.And of course we come back here! Because who knows when we’ll see the one piece that fills in the puzzle, that’s even backed by an intelligent someone who can help us make the magic happen.:-)

          12. Carl Rahn Griffith

            That reminds me so much of the stage adaptation, in the form of Spamalot – wonderfully absurd and funny evening. Years later, we still talk about it – tears of laughter.

          13. JimHirshfield

            Nod.

          14. Wavelengths

            Monty Python used in a comment to Fred Wilson’s blog.And people wonder why we come here?

          15. JimHirshfield

            πŸ™‚

          16. ShanaC

            the inquisition?

          17. Wavelengths

            Watch Carl’s version. Dare I suggest something about “great minds”? Or is it more like idle hands …

          18. Techman

            I wonder how you would define the atomic unit of journalism…

      2. William Mougayar

        No, that’s called VC funding πŸ™‚ They make up the difference until you’re cash flow positive (or get acquired).

        1. JimHirshfield

          Oh, those are the only outcomes you can think of? :-p

        2. Techman

          So this all makes sense now. Fred invests in companies heading for the toilet in terms of making a profit?

      3. fredwilson

        That’s what VC is for

        1. JimHirshfield

          I’ve heard that. I think you’re on to something there.

    2. Luke Chamberlin

      One of the challenges for journalism – they’ve practically taken an oath not to monetize their atomic unit.

    3. fredwilson

      Damn. That’s good.

      1. markslater

        there goes advertizing. It harms users.

        1. Elia Freedman

          Completely disagree. It depends how it is done. Evernote’s ads are very useful. Google’s ads in search are often very useful. Completely depends how it is done and how relevant the promoted items are to what you are currently doing.

          1. markslater

            but it begins with me not asking for them. i dont want ads. i can’t stand commercials. there is nothing about an ad that a user either explicitely wants or has asked for – you are trying to get my attention when i did not want to be bothered. Force behaviour (in this case HAVING to see an ad) is absolutely against the mantra – First DO NOT HARM USERS.

          2. K_Berger

            Not harmful if done right. Again using Google as an example, the ads are along the side or marked in a different color. I can easily ignore them and there is no attempt to make me think they are organic results. Contrast that with some other search sites (that usually trick people into making them their site of choice). Those paid results are deceitful and harmful.

          3. markslater

            Again – by taking away the choice to the user – you are doing the user harm. Google is the ad model that does the least harm – but its still harm.

          4. Jim Ritchie

            Don’t use the service if you think it harms you. I prefer to put up with ads in exchange for a great free search tool. If there was enough demand I’m sure Google, or another competitor, would offer a paid search tool without ads. Always free choice in our society, at least for now…

          5. awaldstein

            My question with your logic is that you are calling for economies that are tolerable because they are not harmful.Seems like a long way from being useful.

          6. Wavelengths

            E.g. “news articles” that are simply ads.

          7. Techman

            Most advertisements are so transparent that you should be able to ignore them. It’s the intrusive ads that get all of my nerves.

        2. takingpitches

          Why?Don’t think necessarily so.Good advertising models can be neutral to enhancing of my experience. Thinking about paid search on Google or when foursquare alerts me to offers on places that I check-in to.

          1. markslater

            anything that you do not eplicitely ask for is doing you harm – the fact that “after the fact” the ad might be of use is secondary.you are being harmed by not being given the choice in the first place.

          2. takingpitches

            Agree to disagree. I think there are advertising models that you can implement without ruining the user experience (i.e., running into the Geocities or MySpace mess) for most people and continue to grow or settle into a size that is sustainable.For the truly “eggshell user” who is harmed by any advertising, they always can decide to leave the service.

          3. ShanaC

            why? There are many things I don’t explicitly ask for that happen to me that makes me happy. EG: Random Hugs from friends. Why can’t ads be like hugs?

          4. falicon

            They are…the problem is they are always like hugs from the creepy/smelly ‘friends’ that you would prefer to avoid if you could without hurting their feelings… πŸ™‚

          5. ShanaC

            and ads fall into both categories

          6. Techman

            There is a way to get rid of them, but I tend to let Google text ads go though.

          7. Wavelengths

            As a consumer, I don’t always know what I want until I’m presented with new information. Maybe I’m looking for a mousetrap and I didn’t know there were newer, better ones that made my user experience less, uh …But I get very tired of the same ugly, offensive ads that purport to be about some woman in my town who is infuriating doctors with her discovery of how to … etc., etc. My town isn’t big enough to have that woman in it without everyone knowing her!

          8. markslater

            good user story!i think about it like this.Watching TV ads during a football game is like takin a syringe and plunging in to my eye – i despise the old world TV ads.The internet has add a layer of intelligence and in some instances has made advertizing more tolerable by an order of magnitude.but i’d just as soon cast out my intent – explicitely telling an audience of sellers that i am interested in a mouse trap – and then have them tell me about theirs – than be forced or subjected to a tax on my attention. Serendipidy be damned on the new world – let me cast my intent and control the conversation.

          9. Wavelengths

            I take it you don’t have tattoos either. πŸ™‚

          10. Shyam Subramanyan

            Unfortunately there are very few good advertising models. Most online advertising is harmful today – not because of what we see on the page (user experience), but what happens under the cover with tracking cookies and such.

        3. PhilipSugar

          I look at it as value exchange.So all things equal yes I’d rather not see that ad on GasBuddy. However, given the fact I don’t have to pay for the very valuable service, and I save a ton of money, it seems like a very fair value exchange.So some exchanges of value are one sided that’s for sure. Me giving you my email address for a low value transaction so you can flood me with spam bad. Long live mailinator.com flicking a boogger at spam!Some are fraudulent you taking my entire address book and mining it for data: really badBut I think the trend swung out of balance with emails and tracking cookies, but it seems to be swinging back on mobile. That’s why I think people have had a hard time monetizing mobile.

          1. Techman

            Funny you mention mailinator….most of my spam comes from that site. It does the exact opposite of what it wants to do.

          2. PhilipSugar

            How does it come from that site??? You can’t send email from there

          3. Techman

            Yeah you can. I have black lists and stuff to prove it.

        4. Techman

          Some forms of advertising do not hurt users at all. It also has opinions involved in what you consider what is hurtful and what is not. AdSense is one of the more popular options out there, and it uses data Google collects from it’s users along with keywords for that site’s page to display targeted ads. Generally I can say the text ads are not that much of a risk at all. I don’t know so much about images.

      2. Dave Pinsen

        Fred, as part of this series, maybe you could offer your take on this post by an entrepreneur named Vibhu Norby: http://philosophically.com/…The title of the post refers to his switch to web-first with his current startup from mobile-first at his previous startups, but the body of the post also addresses revenue: why he’s going for a paid service model this time versus the free, ad-supported models he used in the past.He has a pretty cynical take on Google ads, saying, essentially, that smart people don’t click on them, and ad-supported services target lower-income, lower-education audiences.If that’s true, it raises an interesting question: how do you advertise a paid service that would appeal to intelligent users — the sort of users who don’t generally click on ads?

        1. fredwilson

          not as part of this post, but he has put a good thought out there that i have been stewing on for days since he wrote it. i should and will have a response.

          1. Dave Pinsen

            OK, looking forward to reading your take. I emailed a link to the Google Adwords support team as I just ended an unsuccessful Adwords experiment. I mentioned that if Norby is right, Adwords might not make sense for Portfolio Armor, since its current users (judging by the ones whose backgrounds I was able to deduce) tend to skew in the opposite directions.

          2. Techman

            Fred, I also had this question that’s a bit off topic: Where do you find time to write your posts? They have to consume some time because a lot of thought goes into this and thinking takes time :).Looking forward to the advertisement posts. I’m sure you are going to talk about stuff like AdSense (maybe — could use a bit of a tutorial on that), strategies of advertising..and so on. πŸ™‚

          3. fredwilson

            i get up at five in the morning and work for a couple hours without interruption

        2. ShanaC

          better ads.

          1. Dave Pinsen

            Maybe, but sometimes it’s the medium (and the audience it attracts) that’s as important as the message. E.g., banner ads on the Internet, where we’re all used to ignoring them, might be worthless for what I’m selling. But banner ads on a Bloomberg terminal? Maybe not (that’s one way Bloomberg is promoting its new app store, which I’m considering submitting a version of PA to).

        3. falicon

          +1 for inspiration leading to action. πŸ™‚

          1. Dave Pinsen

            Fred’s like a DJ taking requests.

          2. falicon

            blogtable.fm πŸ˜‰

        4. Tyler Hayes

          how do you advertise a paid service that would appeal to intelligent users — the sort of users who don’t generally click on ads?One method I know of: http://decknetwork.net/

          1. Techman

            I wonder if Disqus will look into this…but jeez this service is so restrictive on who gets in.

    4. FAKE GRIMLOCK

      HIPPOCRATIC OATH OF EVERYTHING ANY COMPANY DO.FIRST, DO NOT HARM USERS.IT SURPRISING HOW MANY NOT FOLLOW THAT.

      1. takingpitches

        Man, @Disqus lately seems to be taking some shots in the spam war.

        1. James Curran

          Totally, it’s everywhere lately and not just Disqus. I’ve seen the worst in the email world and I’m afraid that social is doomed.

        2. Techman

          I haven’t known that much, at my website at least. Last spammy comment I got was weeks ago. However high traffic sites like this might have an issue. I wonder what @disqus:twitter is doing, if there is a problem.

      2. Modernist

        “first, do no harm” is a useless aphorism

        1. jason wright

          second only to ‘do no evil’ – trite crap.

        2. ShanaC

          not for medicine

          1. LE

            Much easier to do that in medicine where everybody goes through the same education and brainwashing then in business. Not to mention that “harm” is also more easily defined. And how money factors into things.That said – Just last night on 60 minutes there was a story about hospital ER’s admitting patients that should not be admitted. My wife confirmed that the same happens at her hospital as well and that isn’t part of the same medical chain featured in the story. The reason is that there is musical chairs in medicine going on because of reimbursements being changed. So people will game any system in order to keep up revenues.

          2. ShanaC

            ouch.Well, what should medicine look like then?

          3. Modernist

            shana, read nassim taleb’s book antifragile. in terms of what we should not do, read “white coat black hat” if you haven’t already. the problem with self-evident idealism “do no harm” is it enables an unscientific process. realistically there will always be trade-offs.

        3. LE

          Agree.Useless aphorisms are the equivalent of the perfect 50’s family as represented on TV. Everybody wants to believe it’s like that even though we know it’s not. Just like everyone wants to think that Warren Buffet is the avuncular figure that he is.

        4. Mark Essel

          The failure to meet and exceed idealistic visions, doesn’t negate their value.

      3. ShanaC

        With data sales, are you?

      4. Wavelengths

        Don’t lie, don’t cheat, don’t steal. Don’t take the little kid’s money when you’ve shown a full-sized submarine on the cereal box and you’re delivering a pocket-sized toy.If you’re a CEO of a disk-drive business and you’re trying to get more money from your investors by pumping your numbers, don’t package bricks in the disk drive boxes and ship them, calling them sales.Any more examples needed of what not to do?

        1. RapidCloudSolutions.info

          No, but we could use some examples of how to succeed. Because in case you haven’t been watching the majority of successes today are based on lies, cheating, and stealing.

        2. LE

          “Don’t take the little kid’s money when you’ve shown a full-sized submarine”The problem sometimes is that when attempting to match what the competition is doing it is necessary to bend ethics or you will go out of business. If all the other cereal companies are misrepresenting their product visually (the “serving suggestion”) it is very difficult to not follow the same behavior. As I’ve said before “you can only be as honest as your competition” unless you have some slam dunk big advantage over them or there is some other mitigating factor.The photo below is what I had for lunch today. You can barely find the tofu in the actual meal (really) while in the photo it’s plump and plentiful. And that is always the case. And look how wholesome and “family owned” the company is. This isn’t cargill or anything.

          1. Wavelengths

            Ah, LE, you cynic, you.Why can’t we all live on a commune, grow and share our organic food, weave sacred mandalas, and everybody just get along?Oh, wait, did your lunch come from one of those communes? πŸ™‚

          2. Kasi Viswanathan Agilandam

            That photo looks so unauthentic …that is ‘undian’ πŸ™‚ … those two curries are never served with rice … they are mostly served with ‘roti’ (wheat bread).You have been cheated on the photo and on the actual meal :-).

        3. Mark Essel

          You sir, Nailed it.

      5. Carl Rahn Griffith

        Most take the Hypocrite Oath.

  6. kidmercury

    not focusing enough on one model is definitely one of the mistakes i made. in fact i might still be making it. even if you have one revenue stream that starts to struggle or decline, i think it is worthwhile to step back and re-focus clearly. when one is stabilized i think it makes sense to add another one, especially if it can reinforce existing streams. in the jobs era apple did this well; they released very polished products with clear revenue/profit models, and then new products had a synergy of sorts — and so the result is a world awash with iSlaves, where they are locked into the ecosystem and thus each apple device becomes more compelling to them compared to alternatives.

    1. fredwilson

      I am creating an underground railroad for iSlaves.

      1. kidmercury

        hahahahahaha!

      2. Aaron Klein

        :)Google needs to build a better set of products to support you on that. I’m wide open to Android but I want 4G on both phone and tablet…and I want software updates without carrier or OEM interference.I want to see Google stand up to the carriers like Apple did. That will be great for consumers and I could see myself lining up to support them when they do that.

      3. Wavelengths

        Does it start in Cupertino?

      4. panterosa,

        L train?

        1. fredwilson

          you take me too literally!

  7. Luke Chamberlin

    I hope we take some time to discuss search-based advertising (Google, Indeed). This seems to be one of the most effective advertising models on the web.Edit: especially when auctions are involved on the advertiser side.

    1. fredwilson

      Request noted.

      1. Techman

        AdSense included?

    2. falicon

      I 2nd this request (for selfish reasons as ‘sponsored results’ that are really just search-based advertising is where my thinking is for the gawk.it revenue model…and so I’ve got the unique perspective of coming at the problem from the initial step [building up a search-audience large enough to start to attract advertisers]).

      1. Luke Chamberlin

        Are you saying that I could pay you to have my comments appear at the top of an AVC site search?

        1. falicon

          Yes (at insanely cheap rates right now too), and not just at AVC but across many of the blogs that have gawk.it powered search (a small but rapidly growing list)…with, of course, a few stipulations:1. it’s an opt-out program for the bloggers (those that do not opt out receive a large rev. share) — right now AVC has not opt’ed out (but it’s not guaranteed that it won’t in the future — and if it does, it would remove any sponsored results from showing up on any AVC initiated searches).2. Only one sponsored result, the most relevant one, will show with a set of results at a given time. The winning sponsored result right now is purely determined by the same algorithm that determines search result relevance (so in order for your ad to show at the top of AVC results, it would have to be highly relevant to a search done on AVC).Actually you can get a few more details on this initial/beta program here -> http://gawk.it/sponsored_re… (and of course I would love feedback/thoughts)

          1. Techman

            Though I’m not sure why someone would want to promote a comment. I think they would be better off promoting a blog post somewhere.Oh, and how nice to take the fun out of the “sponsored results” name πŸ™‚ I might need are refresh on this program. Have you had any success with this right now?

          2. falicon

            It doesn’t have to be a comment or a blog post (I suspect most won’t)…it can purely be an ad…but all the results, including ads, have the same components (avatar, title, link, description, etc)…and the only way to get any result to show is to have it be naturally relevant to the search…

          3. Luke Chamberlin

            Just sent you an email.

    3. ShanaC

      this would work well for display too

  8. John Revay

    “I am a fan of starting with the most native and easiest to execute revenue model first. Ideally it will be one that improves the user experience or at least in no way harms it.”HUMMM – when I think of consumer/social sites driven off of ad sales – I like it, clean simple, generally well accepted if done correctly/non intrusive way. I compare that to revenue models from Enterprise/SAAS companies – may be more time consuming to bill, collect, administer/ SLAs etc.

    1. fredwilson

      Freemium

      1. Carl Rahn Griffith

        And of course with each different revenue stream type there will be very different nuances/implications to revenue/pipeline forecasting, etc – eg, anything with telcos in mobile billing can be a nightmare with reconciliation, time-delays, and chargebacks, etc, etc…

  9. Yalim K. Gerger

    As a Founder who is trying to figure out its revenue model, I am so looking forward to these posts.

  10. janetvp

    Great topic, already enjoying the discussion. I’m teaching a session for early stage founders on revenue and profits in a couple of weeks and am already planning to borrow heavily from the group here. So easy as a entrepreneur to focus on everything you want to do for users/customers at the expense of being disciplined about how you will actually make money over time.

  11. jeypandian

    How does one determine the most native or easiest to execute revenue model if one’s website does not have a strong user base? Would you say that the first order for business is to build a strong user base?I ask because most websites (typically publishers) start with advertising as a revenue model before deciding on other means to generate revenue.

    1. awaldstein

      If you have something to sell and few customers….is that the question?If so, makes me think of an old Bergman movie (can’t think of which one) where a preacher on some lonely island gives a sermon every day and wonders why the church is empty.It the problem the sermon?

      1. jeypandian

        Yes and no. Is the lack of audience responsible for an empty church or lack of promotion?+ How does one determine the easiest / most user friendly revenue generating method with a small user base? Is there a framework for determining such an item?

        1. awaldstein

          Fair enough.You know the answer why you don’t have a larger user base.My point…without customer value talk of a revenue model is academic. Not useless but not the first priority.I am not a fan of monetizing as soon as you know what you are selling and why it has value. Not a moment earlier.

          1. jeypandian

            That’s reasonable enough. Essentially focus on the value first, then monetize as second step. Thank you for your answer Arnold.

          2. karen_e

            Otherwise known as product first, market second.

          3. falicon

            The only beef I would have with this is that it’s often best for the community if it’s clear what the revenue intent is long term…the reason people are up-in-arms about Twitter is not because of the revenue model they picked, it’s because they picked it after the fact (they are just one example of this).I think, even if you are not ready for some time to focus on the revenue model or turn it on, there is certainly a lot of decisions that should be made on the product (and community building around the service) that need to have the revenue model in mind.The trick is to simply be clear, open, and honest with intentions…and then the earliest and best members of the community will help steer you towards the ‘right’ revenue model…

          4. awaldstein

            We are not disagreeing.I’m all about revenue models. I didn’t mean to imply differently.With communities it is different I agree. But I question whether the real community dynamics comes together before value is self evident.I’m thinking a lot about when the word community has real meaning. Ten people (even 50 possibly) is more a club and Twitter is basically the world, not community at all. Each one of these has different dynamics and tolerances towards monetization.

          5. falicon

            I actually believe both 10 people in a club, as well as all of Twitter are in fact communities…but my definition of community is pretty broad:”two or more people conversing in public, on some regular and open basis, is community”.They are completely different types of community, and both have widely different values and intent. But all have value at all levels.But the true value is entirely in the eye of the beholder — and I think that’s why so many people struggle to understand the true value of community, because it’s different for every single person (in and out of the community).

          6. awaldstein

            Always a pleasure to discuss this with you. And in this case, we will have to disagree.I believe passionately that community is the most aspirational and most practical of all business models.In order for a community to work it must be greater than the sum of its parts and have connecting threads into world outside itself in some fashion.Individuals can commune on ideas. They can form a relationships but that’s a germ of the dynamics of a community. Not community itself.I can’t build a model for two people talking at a game. I can build one for fan base of thousands in the stadium and tens of thousands online.

          7. falicon

            I see where you are coming from on this, and I don’t disagree for hte most part…but…Season ticket holders often form a small community with the other season ticket holders in their row/section…and often those communities turn out to be very powerful (on a transactional basis as well as a life basis).And I can say from personal experience, many many times I’ve overheard a conversation between just two people that has sparked thoughts and actions in my own mind (and again, often lead to transactions).I believe the conversation *is* the model. In fact, I believe it’s the atomic unit of society/community itself. There is nothing stronger to build a model on/around (human history is proof of this).

          8. awaldstein

            I like this a lot….’the conversation is the model”.In abstract though. Do you have an example where the conversation has been monetized. in any piece of it?

          9. falicon

            “When EF Hutton talks, people listen!” :-)…there are millions really…asking a server “what’s good today?”…asking a wine store owner, “what goes with Turkey?”…these are just on the transactional end, if you track it down I think there are plenty on every level of commerce.My kids are almost entirely, and unknowingly, driven to want/purchase/experience the things they hear their friends talking about…it’s a natural driver of our entire society.As a direct model, I think Amazon and any ‘reviews driven’ service is pretty close to this concept…though not as directly obvious, twitter is actually on it’s way down this path too (sponsored tweets are really just paid recommendations for things form ‘real’ conversations)…I will have to think about it more as I’m sure there are many many more direct and obvious examples (that I’m just skipping over/ignoring at the moment)…

          10. Wavelengths

            Two people sharing a couple of Monty Python code words and falling over laughing is a community.”That parrot’s not dead.”

          11. Carl Rahn Griffith

            It’s resting.

          12. Timothy Meade

            Twitter is many different communities all communicating through the same medium. There likely isn’t much in the way of overlap between people planning a weekend party and demonstrations in the middle east.

          13. falicon

            Agree. Just like the real world, it’s really a collection of millions of small communities…

          14. falicon

            Agree…but have to admit, it’s a fun and crazy time to be alive!

          15. awaldstein

            I’m seriously love doing what I do.Agree!

          16. LE

            “they picked it after the fact”The less you say the less anyone can find a reason why it won’t work.”there is certainly a lot of decisions that should be made on the product”People aren’t interested in confronting reality because that would cause anxiety and detract from living the dream or trying to make the dream happen. The same thing happens with people when they get into relationships. They could live in different cities and they could have pretty clear evidence that the other party wouldn’t be able to live in another city and move (family ties, job etc on both sides) but yet they will still go along with the relationship somehow thinking they can figure it out later. But getting out or changing then becomes much more difficult, if not impossible.The entire “figure it out later” is something that has just happened since the internet (in business). I will go out on a limb here and say it is unprecedented in the history of business that anyone has started one and not known how they were going to make money. They may have fooled themselves about the numbers but at least they had something in mind.

          17. Wavelengths

            I suggest that artists are in a group that creates product without knowing how to monetize,As a contrarian example, Garth Brooks was a master at marketing his style as well as his music,

      2. Carl Rahn Griffith

        Very good, Arnold.Somehow reminds me of an old Welsh joke. Bear with me, I will try and precis it. It goes something like this…A Welshman becomes a castaway when his passage ship to America sinks in a storm. He is the only survivor. He awakens on a small island in the middle of nowhere…Many years pass by and he keeps himself sane by building, etc.Years later a ship passes by and sees the island and unexpected signs of life. It drops anchor and the captain goes ashore. The somewhat bedraggled Welshman castaway shakes hands with the captain and they talk…Captain: “You are the only survivor, you live alone on this island yet I can see you have built not one chapel, but two. Why two?”Welsh castaway: “I pray at this one. I don’t go to the other one.”

        1. awaldstein

          Love this Carl. Thanks!

          1. Carl Rahn Griffith

            My family was Welsh and I spent a lot of time there whilst growing up – mainly around the stunning Snowdonia region – as I grew older I began to better understand the philosophy behind the joke. Like all great jokes, it’s not a joke at all πŸ˜‰

  12. Darren Herman

    If I can be of any help with the advertising revenue model, please let me know Fred.

    1. fredwilson

      I may need you to write it! πŸ™‚

      1. Darren Herman

        I’m on a plane tonight and Wednesday with time, so let me know. I can always shoot you some notes either way.

        1. fredwilson

          i would appreciate any notes you want to contribute

  13. rajeshj

    Great series. Looking forward to it.I’d argue that peer-to-peer is not a revenue model either. The revenue model for p2p is usually transaction processing (Zopa, Etsy, AirBnB etc.) and subscription services to a lesser extent (Skype premium services?).

    1. John

      Agree that the line between P2P and transaction processing could blurred. Is Kickstarter a P2P or transaction processing? It fits both descriptions.

      1. Timothy Meade

        What would you call it if you have affiliate-driven, curated service providers on one side and a user community of a freemium product on the other?

    2. fredwilson

      you are right

  14. Elia Freedman

    “Freemium, for example is a combination of advertising and subscription.”Question, then. If we are supposed to focus on one revenue model but are freemium, then isn’t that two revenue models, one the ad side and the other the subscription side?

    1. Kirsten Lambertsen

      That was my question, also.What’s the best path with freemium? 1) Starting with no revenue model, 2) introducing advertising, and 3) then introducing paid subscription? That would be my first inclination.

      1. Elia Freedman

        Here’s what I’ve figure out so far. I’m releasing free without revenue model first because what I’m working on is an unknown entity, never been available before. I need to judge whether anyone will even care first. Then adding subscription because I need to know whether anyone will pay. Ads fill in the gap/provide some money to offset free users, if even doing this. Not a requirement for free portion. (I’m not doing ads — if they don’t fit naturally into your product then I think they are a waste for everyone — but have a different idea how to monetize free with second revenue model. By fit naturally think Twitter, Facebook and Google search. For not, think newspaper websites and almost any other use for banner ads.)I would say if your product is a known entity, though, say 37signals’ Basecamp, then need to move as quickly to subscription as possible. Solution is known to a wide group of people at that point (don’t have to sell them on the value) but still need to see if the target customers will pay.

        1. Kirsten Lambertsen

          That’s great food for thought. We’re more in the unknown entity zone. Right now we’re just giving it away for free with no advertising involved. We want zero friction for our early adopters so we can learn from them as quickly as possible. Putting advertising at #3 (if ever) might make more sense.

      2. fredwilson

        this requires a full blog post. great question

      3. Dale Allyn

        As a user, I want the subscription option on day one. I’ll try your service for a day (or an hour) for free, then I’ll either subscribe immediately or I’ll leave. Granted, some services may take a little longer to determine their value, but most are pretty clear within a short time.Show real value for the subscription level over the free level (without destroying the free level) and I believe users will move up quickly if your service is solving a problem. Of course, if the service/application is just a “fun pastime” the transition is likely to be different.

    2. fredwilson

      ads first, the subscription

    3. ShanaC

      why does freemium have to be a combo of advertising and subscription. Boomrang is freemium, it doesn’t have advertising…

      1. Elia Freedman

        Wondering the same. Don’t plan on using ads.

      2. fredwilson

        it doesn’t have to. dropbox is free without ads. but ads are the best way to monetize the free tier if you need to (because your free tier costs a lot – ie music)

  15. Elia Freedman

    If this post’s conversation is any indication, this series is going to be incredible!

    1. takingpitches

      One of the things that I expect to happen and will be exciting and incredible is community members — in the comments — coming forward with issues they are encountering and the crowdsourced brainstorming that is going to follow, which in some cases, may lead to practical solutions!

  16. Shashi Jain

    Could monetize early vs late be considered as a feature of each model? That is to say, the revenue models have a temporal component compared to the business’s life cycle.

  17. LaVonne Reimer

    I always thought rev model was reasonably straightforward. Now I’m running into a little twist in that I have to account for the need of one side of my two-sided network to dodge regulatory bullets. Rev model plays into that. I.e., they need to not be direct subscribers in the way I’ve always thought of it. Really looking forward to this whole series, especially the discussions of twists others have encountered that I’m confident will play out whether in the main post or always rich comments.

  18. RapidCloudSolutions.info

    Fred! Freddie! Gadget Man!.Now, you’re talking!!! This is something the new USV should include in it’s remake. Pragmatic approaches to achieving success!!!

  19. Richard

    Fred, is there ever a case for testing the renvenue model waters? If not, how long do you stick to a model before moving on? “It is very hard to execute two or more revenue models at the same time”

    1. fredwilson

      i think the only way to test is to try

  20. LE

    I strongly believe that entrepreneurs should pick one revenue model to start with and focus 100% on making that work before rolling out another one. It is very hard to execute two or more revenue models at the same time.I hate to just throw out arbitrary numbers (and the ones that follow are) but I would say that it makes sense to put 80% of your effort into one revenue model but also put some effort (on a parallel basis) into other revenue models. The “canary in the coal mine” 20%-ers provide some info and evidence of a direction to head in in the event that the primary model doesn’t work out. Instead of starting from scratch as a serial 100% model would require.Going along with my theory that the much of business is simply grabbing the low hanging fruit of opportunity, it makes (from my observation and experience) more sense to have a few irons in the fire as opposed to just one. And of course if, at any time, one of those irons appears to take off in a big way you can always cut back or eliminate the ones that don’t appear to be working out.

  21. Shyam Subramanyan

    Look forward to the series. With regards to focusing on one revenue model to start with, is there a case for testing multiple revenue model early on for a very short period of time (1-3 months) and then pick the one revenue model to focus 100%?

    1. fredwilson

      if you think the test will tell you anything

  22. LE

    “- Licensing – charge users once upfront for the opportunity to use your technology”Would add to this that many who offer licenses also charge a yearly fee to maintain the license and receive updates or enhancements.Because of the contrast principle this makes sense.The initial license might be $250 but then every year there could be an additional trivial fee of $25 to maintain the license which seems small and acceptable in comparison.While this seems similar to subscription it allows a company to get a larger upfront payment and actually makes it more likely that someone will continue to pay the small yearly fee (or quarterly or whatever).

    1. Wavelengths

      I have original licensed copies of MS Office for both Mac and PC going back many years.(Plus a bunch of other high-end stuff.) Through various moves and changes, and system upgrades, and new computers, etc, etc, — who only knows where those original licensed floppy discs are!A minimal fee to keep those alive would have been of huge benefit. Maybe add a few days of customer service as well, so it’s a total win-win. Say, for example $25 for one version, $35 for Mac & PC, etc. A no-brainer. Numbers somewhere in that region keep even the impoverished writer on the up-and-up.

      1. Carl Rahn Griffith

        Heretic! πŸ˜‰

  23. LE

    Here is another revenue model to consider or maybe a revenue enhancement.”Obsolescence”Microsoft and Apple, as only two examples, will sell you a hardware or software product but that software/hardware will not work forever unless you either upgrade the software or the hardware that you are using.An Apple G5 Tower will no longer run the latest operating system. And the latest operating system is sometimes so bloated that it requires you to purchase newer faster hardware. (As @WilliamMougayar has found out.)This is part of the plan and one reason why features are held back in products. You add features at a later date and then require people to buy new hardware or software to access those features. Even if they have a perpetual license to the original product.The auto industry does a variation of this with the now ubiquitous change in model year car features and styles.

    1. Wavelengths

      Some of this is intentional, and some, I really know, is just because everything — hardware, OS, software — is evolving so quickly as well. It’s foolish anymore to think of a computer as an “investment.” It’s more like buying a great tailored suit and having to have it re-fitted and retailored every six months.This is one area where I’ll forgive the rapid changes that make pieces and parts obsolete. Not all the vendors can be in touch with each other to make sure that everything will continue to work in harmony.My policy, when I had a shop with a crew and a bunch of wp and illustration software, was to refuse to upgrade anything as long as everything worked, until there was a leap in computer technology. That meant that about every 18 months we’d get several new computers, upgrade to the latest OS, and do what we could to get the applications functional again.To my mind, in my experience, people who are jumping on the latest OS have nothing to lose by the possibly significant downtime. Compound the downtime by multiple computers, several shifts of crew, and client deadlines, and a new OS can spell death to the small tech-doc shop.

      1. LE

        To my mind, in my experience, people who are jumping on the latest OS have nothing to lose by the possibly significant downtime. Compound the downtime by multiple computers, several shifts of crew, and client deadlines, and a new OS can spell death to the small tech-doc shop.Exactly. People sometimes criticize for not wanting to change as “Luddites” but it totally depends on what you are using the hardware and software for.When used in a production environment special precautions have to be taken. This is something that is learned over the years with actual experience in that type of environment.

        1. Carl Rahn Griffith

          My iPhone advises me I have some 18 apps updates pending. Again.I really can’t be bothered.The fact that adults in bars – who have nothing to do with IT – discuss which OS they are on, is rather sad.

  24. Richard

    Fred Can you drill down into isocket and buysellads next week

  25. Carl Rahn Griffith

    Adverts are the equivalent of dating-sites.

  26. patrickdh

    Crowdfunding actually may not be a perpetual revenue model either but is a way to tap into the community’s interest for future value

  27. awaldstein

    I love case studies. I’ll follow this story Charlie.

  28. JimHirshfield

    How do you keep them honest? IOW, how do you know they won the contract, and hence owe you money?

  29. William Mougayar

    The hurdle I see with your scenario (potentially, and not knowing the rest of the story), is scalability. If you are a utility, you need to scale and have volume.

  30. FAKE GRIMLOCK

    IT GOING TO WORK.THIS SAME MODEL MOST TRANSACTIONAL SITES THAT WIN USE.

  31. fredwilson

    A transactional model is great if it is enforceable

  32. Aaron Klein

    It’s interesting because it depends on the industry. We launched our pro product for investment advisors a few weeks ago and it’s doing great. We’re doing a straight licensing deal for $999/year…and that got way more uptake in our tests than a fee per client.The latter felt like a “tax on success” to them, and they just prefer to have one nice, simple, predictable price.Coulda gone either way…

  33. William Mougayar

    But did they start with one or more? And were they very different or nuances of the same genre? I’m not sure – that’s why I’m asking. I will watch the video.

  34. Tom Labus

    It’s there.

  35. JimHirshfield

    QB integration: Smart.

  36. FAKE GRIMLOCK

    MINT STARTED WITH MARKETING.BUT ORGANIC, NOT FORCED.

  37. fredwilson

    That’s what I mean by enforceable.

  38. fredwilson

    Trans – actionI think anytime you price on an action its transactionalBut so much of this is semantics which is often a waste of time

  39. Aaron Klein

    Annual sub.

  40. William Mougayar

    coffee

  41. Wavelengths

    That’s why the realtor reads the HUD1 carefully and sits at the closing table when papers are signed and the property changes hands.

  42. William Mougayar

    Nonetheless, best of luck with it. If anyone can help them figure it out, it’s you.

  43. LE

    “straight licensing deal for $999/year”That’s great.Wondering if there is a way you could provide even an higher level product that allows an adviser to be featured by link to your site. So if someone is looking for an adviser they can find one on riskalyze.comBy the way as I mentioned the other day (re: yellow pages) make sure to tie people into a long term on any advertising/directory so they evaluate over the cost of the entire year.

  44. Aaron Klein

    As Fred said…one revenue model at a time.We have an interesting network developing. That’s all I can say right now. πŸ˜‰

  45. Aaron Klein

    My email comment never got posted here…didn’t intend to ignore this!As Fred said…one revenue model at a time.We have an interesting network developing. That’s all I can say right now. πŸ˜‰

  46. LE

    I actually saw this through the email. I wonder how often that happens. Sometimes I click through to the posted comment and sometimes I only read the email.This is the link to the first email comments and it actually shows the first comment.http://redirect.disqus.com/…@disqus – might want to check into this. Good thing they aren’t running a financial clearing house or the Saabre system.

  47. LE

    “But we love nonprofits and don’t want to screw them.”I disagree with that characterization that it is “screwing” people (although it could be of course).Businesses have to make money to stay in business. Charity is a separate issue. It is not the responsibility of business (especially a nascent business) to give away or give special treatment to a charity or non-profit “just because”. You have no idea how they are spending their money anyway. They could have lavish offices (ever been to AARP in DC? – I have) or perks (Livestrong) etc. I think lumping all of them into the same class, in my mind at least, can’t be done. Of course if you are profitable and don’t need the money that’s fine. But most business do, even if just to improve the lifestyle of their employees or to provide benefits.On a personal level, from time to time, a non-profit might touch an entrepreneur and that entrepreneur might decide to cut a break to a particular non-profit. Same as they would give a donation. Or same as they might help a for profit business for the same reason.Lastly, there are many non-profits that provide a good lifestyle for the people who work and or run the non-profit. They get salary, benefits and perks just like in any for profit business. They don’t accrue equity of course and can’t sell their interest but many traditional businesses can’t as well. And by being non-profit they are able to raise money and supplement their own lifestyle by making this tradeoff.