Ecommerce businesses have taken the front seat in today�s business world as individuals are willing to buy products and invest in services online. As this is a lucrative market today, wouldn�t you, as an ecommerce business, want to have friction-free revenue flowing in? That�s possible only if you have an unwavering and foolproof revenue model.
There are several revenue models for ecommerce businesses, but not all will fit your business goals and product or service type. So, we have curated this guide, including the four major revenue models that top ecommerce businesses rely on and the steps to choose the best model for your business.
What Is an Ecommerce Revenue Model?
An ecommerce revenue model is a mechanism through which ecommerce businesses charge customers for their products or services. Companies choose a model based on their offer and the kind of customer they want.
Remember, the concepts of revenue and pricing models differ from each other. The pricing model is chosen based on the product�s value and target group to set the most lucrative price, which brings in the highest profits. After fixing the prices, comes the revenue models that establish how customers pay the said price.
What Are the Types of Ecommerce Revenue Models?
Choosing a revenue model from the plethora of types can be challenging. To make it easier for you, we have curated a list of four major revenue models that most ecommerce businesses follow:
1. Advertisement Revenue Model�
In an advertising revenue model, a company earns revenue by selling space for advertisement on its platform or website to businesses or organisations that wish to promote their products or services. The ad space is sold at a price based on ad size, placement, target audience, and goal. After the ad-space purchase is complete, the advertiser can create and submit their ad and wait for approval. Once approved, the ad will be shown to the seller�s audience on the platform.
Here are three common pricing strategies used by businesses:
- Cost-per-impression strategy charges advertisers based on the number of times their ad is shown. The goal is to create brand/product awareness.
- Cost-per-action strategy charges advertisers based on users’ actions after seeing the ad. The goal is to create lead generation/conversion.
- Cost-per-click strategy charges advertisers based on the clicks they receive on their ad. The goal is to increase website/landing page traffic.
This model is a jackpot for companies with high-traffic websites, as they can generate revenue without manufacturing, managing, or selling their own products. However, the revenue is solely dependent on campaign performance. If campaigns are not monitored properly, don�t reach the right audience, or don’t bring in results, you have to bear losses.
Some of the top businesses following advertising revenue models are Google AdSense and Facebook/Twitter/Pinterest Ads.
2. Subscription Revenue Model
The subscription revenue model is a revenue-earning strategy wherein businesses charge specific recurring amounts at regular intervals to customers in exchange for exclusive services/products. With this model, your steady income stream is sorted by loyal and satisfied customers with a high lifetime value. And loyal customers enhance your brand image, attracting more prospects and turning them into customers.
However, this model has the drawback of losing customer interest with time, and customers might turn to competitors. To avoid this, you must constantly innovate. Also, you must check your payment gateway for any issues to prevent involuntary membership cancellations.
The top physical product-based business with a subscription revenue model is Zomato Gold. It is popularly known for providing exclusive benefits like free meals, discounts, and free delivery.
3. Affiliate Revenue Model
This revenue model helps e-commerce businesses earn extra revenue by promoting other businesses� products on their own website and redirecting customers to the original provider�s website. When a customer sees a product, it might make them visit its provider�s platform out of curiosity or encourage them to make a purchase. Now that the buyer has landed on the product through you, the commission on that sale is yours. That�s what a contract between a product or service provider (the other business) and a promoter (you) looks like.
This model lets you capitalise on your website’s or platform’s traffic and earn revenue without additional investment. But sourcing and pitching affiliates that align with your brand values is cumbersome. Also, striking a deal, checking the deal conversion rate, and maintaining that affiliate relationship require quite some effort.
The top affiliate revenue model examples have to be Shopify and eBay.
4. Transaction Revenue Model
The transaction-based revenue model charges a fee (a fixed amount or percentage of a transaction) for each transaction made via their portal. Following this model, your profits are bound to boost as you get paid for each sale you make. In this model, you constantly need to create strategies to enhance the value provided on every purchase and boost customer loyalty. This can be done via discounts on each product or service to encourage customers to buy again.
This model tremendously benefits your business by giving you better pricing control. Customers pay on an individual basis so that you can adjust pricing according to your desired profits or customer attraction strategy. However, a transaction-based revenue model might not be the best choice for ecommerce startups, as finding sellers for your platform is challenging due to cutthroat competition.
A perfect example of this kind of revenue model is Amazon.
How to Select the Right Ecommerce Revenue Model?
There�s no cookie-cutter formula for choosing the right revenue model for your business. However, it solely depends on your business needs and pricing strategy. Here are the steps you must follow to select the right revenue model for your ecommerce business:
- Step 1: The foremost step is identifying and understanding your target audience�s pain points. Based on that, you can brainstorm the relevant revenue model to make customers� lives hassle-free. For instance, if your business sells groceries primarily to middle-aged individuals working 9-5, then it�d be more profitable if you bundle them up and offer recurring weekly or monthly plans. Why? Because this frees them up from the hassle of keeping an account for every purchase.
- Step 2: The next step is to gauge the suitability of your revenue model, considering the product or service you offer. For instance, a subscription model won�t work for your clothing business, but sales revenue will align perfectly with it.
- Step 3: Moving forward, you must assess your business goals. Doing so will help you choose a relevant revenue model. For example, if your goal is to reach a wider audience, you may opt for an advertising revenue model, as ads will attract more visitors, which boosts sales and helps you earn higher revenue.
- Step 4: After passing your revenue model through the three steps mentioned above, it�s time to introduce it into your business and constantly monitor if it successfully stands the test of time while earning you good revenue. Continuous monitoring helps you spot inefficiencies and keeps the possibility of changing or modifying the revenue model open.
Now that you know the whats and hows of ecommerce revenue models, remember that choosing one is pivotal to your business’s success and profitability. So, don�t make hasty decisions; rather, arrive at a model (or a combination of models) that makes your customers’ lives easy while bringing in decent revenue plus profit. To make an informed decision, keep our guide handy!
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