The ultimate goal of any business is, of course, to make money. If a company doesn’t have a sustainable revenue model, it simply cannot sustain and succeed. But with an increased ability to serve more customers, you have better cash flow and higher profitability.
This post won’t cover things like allocating capital in equity or investing in real estate for passive income. We’re talking about adding new ways to:
a) make customers spend more by upselling; and
b) find a new customer segment to target with your new product/service, then cross-sell your core offer.
The whole idea is to increase customer lifetime value, which effectively increases profitability per customer.
Revenue models that drive business growth
First, let’s differentiate business models vs revenue models.
The business model describes how a company generates value. The Revenue Model describes how a company generates revenue from the value it has generated for customers.
A revenue model is the means by which a business plans to make money. Depending on the revenue model, which can be pretty standard or fairly complex, a company may take into consideration manufacturing, purchasing, opening new distribution channels, and increasing service offerings, until the business arrives at a profit.
We’ll go through 3 layers of revenue diversification for your ecommerce brand.
- Level 1: Operating with multiple ecommerce revenue streams
- Level 2: Operating using various ecommerce business models
- Level 3: Operating in a different ecommerce space
Level 1: Operating with multiple ecommerce revenue streams
Considering the rising cost of acquisition, adding one or multiple new revenue streams on top of the sale of the classic physical product makes sense.
The smartest way of revenue diversification is to increase your service offering while operationally remaining the same. Easier said that done, right?
Let’s look at some typical revenue models and how you can implement them.
1. Sales revenue model
The most common of all ecommerce revenue models, profits are achieved by selling products or providing services online versus, or in addition to, brick-and-mortar stores.
Any business selling items through the internet, regardless of their business model, is following the sales revenue model. While they may have other revenue streams, this tends to be their bread-and-butter.
If your business is currently operating in this space, you have lots of room for growth by bolting on the next few models.
2. Affiliate revenue model
With this model, businesses earn revenue just by promoting and selling another person’s (or company’s) product on their site.
This is as opposed to the advertising revenue model, which doesn’t allow for purchase on the host’s site (we’ll cover the advertising revenue model in just a bit).
The concept of affiliate marketing is based on revenue sharing.
If your business has a product and you want to earn more, you can promote complementary products or services of another company that will, in turn, pay you for your referrals. It’s a win-win for both parties; the affiliate gains a new, passive revenue stream, and you, the merchant, gains new customers!
A great example of this is Petco. They were originally a direct-to-consumer (DTC) site that sells pet supplies – food, treats, accessories, supplements. But they bolted on veterinary services, insurance, pet training and pharmacy services.
You might be thinking “but I don’t want to dilute my branding and confuse customers”.
First off, you won’t confuse your customers as long as the add-on services are in line with your current offering.
As for branding, it’s up to you to arrange how the partnership will work (ie. vets wearing petco tshirts vs dog trainers using their own brand)
But here’s the beauty of this affiliate revenue model.
These additions have zero additional load on your existing manpower. All you need is to create an automated sales process and outsource the fulfilment to partners. It’s that simple.
Don’t know how to do it? We know. We can help 😉
Sephora is another example. Super well known for their beauty products, they started to offer:
- Online beauty and cosmetics classes
- In-store makeup and brow consultation
- Lip wax and dry styling hair services
Again, they partnered up with specialists to render the service but used their products. This way, they can stay focused on what they do best, while still adding value to customers with services they probably need.
2. Subscription revenue model
When it comes to the subscription revenue model, most people think of Spotify or Netflix. However, there are many subscription boxes like Barkbox, Hellofresh and Saloonbox too, that have thousands signed up and excited for their next box arrival.
Read more about creating your own subscription box here.
Regardless of the product offering, with this model, users are charged a recurring fee (monthly or annual) for using services or having existing products replenished and delivered regularly.
This means predictable recurring revenue for you and regular cash flow to make your accountants smile. Your logistics team is happy too because inventory is moving.
Best of all, customers are consuming your products regularly! The more they consume, the more they receive value from you and that makes them more “sticky”.
So consider adding a subscription offer, especially for your flagship product. We’ve seen it work particularly well as an upsell opportunity after someone has bought your product for the first time and has used it for a while.
This way, you reduce the chance of people subscribing to take advantage of your lower price and cancelling immediately.
3. Advertising revenue model
The advertising revenue model is when popular platforms allow others to advertise with them for a fee. Media sites, such as magazines, newspapers, and TV channels also frequently use this model.
And this is a huge opportunity for ecommerce brands that are seeing huge organic traffic. Of course, you’ll have to balance your own product conversions with that of your advertisers.
You can even consider running ads to your site and then reselling ads at a slightly higher price, but still have it cheaper than if your advertisers were to do it on your own. This is known as advertising arbitrage.
4. Transaction fee revenue model
This model charges a fee every time a transaction is made through their platform. For example, eBay charges sellers a fee whenever an item is sold; PayPal charges users a fee for transferring money; eTrade gains a transaction fee whenever a stock is sold; and so on. While fees tend to be minimal, if people are making thousands of transactions per day, the revenue can be substantial!
Level 2: Operating using various ecommerce business models
You might already know this. But we’ll explain it anyway.
This is the second layer – vertical integration.
A vertically integrated company will bring in previously outsourced operations in-house. The direction of vertical integration can either be upstream (backward) or downstream (forward).
1. Manufacturer
A manufacturer creates its own product using raw materials or assembles pre-made components in order to create a product. Ecommerce manufacturers may sell their products directly to consumers (B2C ecommerce) or outsource their sales to a distributor (B2B ecommerce).
Some manufacturers also offer private labeling.
They may specialise in a product that a retailer wants to sell but doesn’t want to manufacture themselves. So, they purchase the products from you, the manufacturer and put their label on them. The Great Value brand at Walmart is one example of private labeling.
2. Distributor
A distributor purchases products directly from a manufacturer and sells them to ecommerce wholesalers or directly to customers. A distributor will handle passively received orders and actively promote the products to find new buyers, acting as a sales representative for the manufacturer.
3. Wholesaler
Wholesalers work closely with ecommerce retailers to accommodate their needs, often buying products in bulk at a discount from manufacturers or distributors. A wholesaler’s sole responsibility is to fulfil retail orders to the best of their ability.
Today, dropshipping is a popular form of wholesaling. Ecommerce retailers will sell a product and pass the sales order to a third-party supplier, or dropshipping company, that then fulfills the order, shipping it to the customer.
4. Retailer
A retailer purchases products from a distributor or wholesaler and sells those products to the general public. Some ecommerce retailers are also manufacturers, producing and selling their own products.
White labelling is another way retailers may sell products. You do this by purchasing generic items from a manufacturer and branding them. The Dollar Shave Club is a good example; they bought basic razors from a manufacturer, slapped their name on them, and then used an innovative (at the time) subscription model.
5. Franchise
In the franchise business model, an ecommerce brand pays for the rights to sell a product or service under the franchise’s name. A franchisee adopts the business model of a particular franchise, meaning they can be a manufacturer, distributor, wholesaler, or retailer!
Level 3: Operating in a different ecommerce space
This is the third and highest level of revenue expansion. For example, if you’re currently in the B2C space, you might want to consider builiding a C2C model on top of your exisitng B2C model to make it more robust and create a self-sustaining ecosystem.
- B2C (business to consumer eCommerce company, i.e. a company selling directly to the general public)
- B2B (business to business eCommerce company, such as a parts supplier selling to a manufacturer)
- C2C (consumer to consumer eCommerce company, such as eBay’s peer-to-peer online auctions)
- C2B (consumer to business, such as a freelance writer or photographer selling their services to companies).
Most small and medium businesses under $3M annual revenue shouldn’t be dabbling in this yet. It’s aggressive and a rather large investment with sizeable risk, so you’ve got to do your due diligence and market research first before committing.
Creating efficient revenue generation
While competition is fierce in the online world, there has never been a better time to get in on the action. Ecommerce is on a serious rise and the trajectory shows that it’s not tapering down anytime soon.
What we highlighted in this post is the tip of the iceberg, but something brands should be seriously considering.
Determining which model is right for you is a business decision and takes time to implement. Ultimately, you need to understand your customer and their expectations, assess your current resources to find a realistic revenue model, and identify your budget allocation.
Ready to grow to the next level and break through your revenue ceiling? Let’s talk.