Unfortunately, the answer to “How are we going to generate revenue for our Online Startup?” is about designing the business model, whose importance remains neglected and underestimated when we are taking the first steps.
I fully understand that we must first focus on responding “Are we solving a real and specific problem to customers?” Because without a precise and desired solution for our potential customers, there is no valid business model that may survive over time.
Nevertheless, the sooner we have the ability to define our generating revenue mechanism, the better our results will be from the day one. Our daily actions will embrace this strategy in the short, medium and long term.
If instead, from the beginning we “think” that we are going to live from advertising as very few and giants like Google, Yahoo! and Facebook do, we are in trouble. Also, in every decision we make about our project, we will further contribute towards that wrong decision.
Subscription model.
Let's start by the item that I personally think is nowadays the best business model to implement in an online startup.
The particular advantage of this income mechanism is that we are able to predict to some extent the results of the months to come. This will allows us to plan in the medium and long term rather than in the short term, enabling us to move from a startup to a fully developed company.
The subscription model consists in a monthly charge for the services that our customers use. It may be thought that this alternative can be only implemented in specifics areas; however, we will see below how it can be used in different contexts.
An example might be Mixergy, a venture that generates valuable content for entrepreneurs; in order to access to that content, subscribers have to pay $ 25 every month which grants them free access to all courses, educational videos and guides:
Now, if we go to another area, we can mention an online marketing venture called MOZ. They charge $ 99 per month for individuals and up to $ 599 for enterprises; paying that sum of money users can have access to all its tools:
Finally, Basecamp, with millions of customers worldwide, is an online project management enterprise that works through the subscription model:
Another significant advantage of this model is that it can be predicted what the value of the life of our customers is. In that way we will be able to know in detail how much we can invest per client in online marketing to make our project grow.
As I mention earlier this income-generating strategy is my favorite, particularly because as an entrepreneur I prefer to work with my own resources through “bootstrapping” –without the need to seek investment outside—depending only on my colleagues (co-founders). We can focus on excellently developing our startup without relying on an angel investor or a venture capitalist, while our revenues grow organically.
Of course there is also an advantage for our customer; they DO NOT need to pay $ 500 to use our software but they can have immediate and free access to it with the ability to cancel at any time by just paying $ 19 per month. This also allows us, the entrepreneurs, to manage sales and new customer generation easier because it is simpler for someone to invest $ 19 rather than $500 right out of their pocket.
Freemium model.
This model consists in the possibility of delivering our service for free to everyone; nevertheless, if the client needs or wants some specific and additional features, they have to take out their credit card and pay.
The freemium model is widely used in the online games world, such as Candy Crush, which is free; everyone can play it, but the owners earn revenues of nearly one million dollars per day because their players buy “lives”, and “moves” in order to move ahead and play next level.
In this business model, we also can see other verticals like DropBox, which allow us to use their service 100% free of charge to store our files on their servers up to certain limit and then, obviously, if we want more space we have to pay:
This model can be implemented in many areas, from limiting its free users functionality, time of use, capacity to the type of customer (for individuals, it is free, while companies must pay – commercial use).
It does not seem to me an alternative to discard; however, and by experience earned in these past 6 years of taking on online, I have had the possibility to meet many founders that chose this model and unfortunately it has some drawbacks: turning a free user into a paying one in order to generate revenue is very demotivating.
On average, the 1.2% of users pays; keeping a business running is complex when the 98.8% use it for free.
Without going any further, let’s considers Skype. Most of people I know use it. However, the vast majority does it for free.
Lead Generation model
Finally, another option such as the one we used on our venture MejorTrato is generating leads and after sales prospects to different utility companies.
A particular disadvantage that this model has and one of the reasons why it was relegated to the last part of this article comes from realizing that it is very difficult to define a future strategy as revenues against expenditures are virtually measured once a day.
That today is a good day does not mean that tomorrow will also be the same because we do not keep the customer, but the company to which we sell the prospect. It's great to generate large income quickly, but is not enough if we want to healthy scale in the long-term.
This income generation mechanism is one of the oldest on the Internet and logically the sector competition is becoming more complex to begin today with a startup from scratch.
For example, a startup like “Software Advice” helps users through the Internet to find the best software to handle their finances, programs for human resources, project management (CRM), and many other options. Once they have helped you, if you choose one of the options they give you, they proceed to sell this “lead”, as it is known on the Internet, to the selected software company and charge a fee, as they worked in order to generate a sale for the company.
Ultimately, as can be analyzed under no circumstance must the choice of our business model be relegated to other moment. From day one, we must define how we will generate income to keep us going over time.
Every decision we make daily must be contextualized based on our ultimate goals. I noticed how enterprises were born with a model and then had to change to another, but always through trial and error they advanced to finally find a balance point.
Like everything in life, if we do not define ultimate goals that determine where we want to reach we will hardly arrive somewhere, especially today when generating profits from a startup on the internet is a challenge.
Article written by the CEO of Precio Online, startup characterized by the online simulation of services for all Latin America.