Comparing Startup Revenue Models - Launch vs. Scale
All startups share a common problem at launch - they are "under-everything" not enough staff, not enough capital, not enough time and definitely not enough customers or revenue! These limitations mean that you need to choose a revenue model that will help you grow and scale as the product scales as the appeal to a broader customer base scales in reach.
At launch, you have an opportunity to pick one (maybe two) of the revenue models from the list here. Services, Commerce, Subscription, and Lead Generation tend to early favorites.
- Services are getting customers to pay you to build features you'd like have built anyway. Your product may require a "setup" or integration that customers would otherwise expect to pay if they had a consulting firm, agency or contractor do the work. If the customer is willing to pay, take the cash. Revenue is your cheapest investment and you don't have to give up equity!
- Commerce implies you can acquire the customer, pay for the item and still make a profit
- Subscription can be a challenge in the early stage - if you're not shipping a
- Lead Generation implies that you can sell a lead for a higher price than the cost to generate the lead. These businesses tend to be very competitive and are good candidates for bootstrapping
"Combination" revenue models are good. In fact, they mature at a faster rate (as determined in the time between Seed round(s) and A and B rounds of funding. However, the combinations
Here are two models that intrinsically bad at launch:
- "Big Data" requires that you have a significant amount of data to sell. If you are building your data set, you'll need to find a way to monetize your product prior to being "big". If you're bringing a dataset with you into the startup, congrats! That's not normally the case.
- Advertising/Search - if you don't have 1MM unique users a month it's going to be difficult for you to monetize your traffic in a meaningful way. Do you know how much it costs you to acquire a new customer (CAC)? If it's $10 and they make a $1 in revenue per month, you need to make sure your lifetime value is >10 months. If you don't know the cost side of acquiring traffic, it will be difficult to figure out how to make money with only the CPM numbers
Steve Blank said, “a startup is an organization formed to search for a repeatable and scalable business." First Principles. At launch, you are looking for the repeatable process. At scale, with revenue and profit, you can have multiple revenue models.
Early revenue is proof that customers actually care about what you are building.