Business Model and Revenue Model: What is the difference?
1. A business model explains the model-like and holistic way the logical relationships and the manner that a business can create the most value for its customers. The company may operate multiple business models simultaneously.
2. A revenue model is the way in which an organization generates revenue or earns income. Each customer segment may contain at least one revenue stream.
The business model explains how a company creates value. This revenue Model defines how a business earns its earnings through the value it produced for customers.
The Revenue Model is, therefore, an essential part in the model of business.The Revenue Model is, therefore, an essential part in the model of business.
The distinction can be seen through the distinct elements of a business model. In essence, four factors describe a business model:
1. WHO are the target customers (segments and relationships)?
2. What are the benefits that the company can offer its clients and its most significant stakeholders within the value chain (value promise or value proposition)?
3. How does the company provide this profit (partners, activities and resources)?
4. How does the company earn funds (revenue strategy or model)?
Business Model and Revenue Model using Uber as an example
Uber’s business model rests on carpooling opportunities that are not operating a fleet of cars. The people who travel by car or are in search of an Uber ride are paired through an app. Payments are also made through this app. The customer has a payment method stored prior to the trip, and from there the fare will be debited automatically. Drivers must register with Uber and then receives the money every week on his account at the bank. A rating system is a way to ensure safety.
What are the ways to earn money from this model of business How does the company earn money, i.e. the. what do you think this Revenue Model conceived in the framework of this model?
1. The basic fare and extra charges Cost of travel is the basic cost (EUR1-EUR4) plus a sum per mile (EUR0.65 between EUR1.50 and EUR1.50) plus a fee per minute (EUR0.25 between EUR0.25 and EUR0.40).
2. Different pricing model: The price variations in the base price and surcharge are due to various price models. For instance the three variations UberBlack, UberX and UberVan are available for taxi services. Additionally, there are additional services like UberEATS, UberCargo, UberRideshare, Uber for Business, Uber Freight, etc.
3. Pricing for surges: If there is a significant demand for trips and the price dynamics slowly increase the cost of travel.
4. Cost to the use of: 20 percent of the cost is donated to Uber
Uber’s revenue model therefore is dependent on its collection of use charges on the basis of cost of the ride, that varies based on the segment of customers. Additionally Uber is earning additional revenue through demand-based surge pricing.
Business model innovation versus revenue model innovation
As previously mentioned the model of a business is made up of four major elements that are closely linked to one another. Thus, a modification of one component typically causes changes in other components. An innovation or change in the revenue model could affect and alter the overall business model of a firm.
#1 Change Business Model
An excellent illustration of how changes to the earnings model impact the entire business is Hilti’s innovative business model. In lieu of offering expensive machinery the model was built on charging customers for the equipment, which included maintenance, according to usage. The one-off, high-priced payment was replaced with regular, but lower turnovers. This led to an overhaul of Hilti’s business model.
#2 Change Revenue Model
The telecoms industry is an example of an innovative revenue model that has no impact on the other elements in the overall business plan The initial revenue model was built around a fixed amount that was to be paid about one month in advance. The remainder of the amount for a specific period of time was paid through direct debit. Because this was a risky method an extensive system of management of receivables and credits was created to verify the creditworthiness of clients.
But, this also excluded major customer groups like young people. To tap into these groups of customers The earnings model was changed and customers are no longer charged an entry fee, and there’s no need for invoices. The client pays a sum in advance, and can later call and this is how the card is created.
Michael Hitt, author of “Creating Value” states that the revenue model and business model are identical, yet distinct sketches. Hitt clarifies the purpose of a business model is to define the way in which the company generates value, while the revenue model outlines the way the company allocates generated value. Therefore, a business model describes the company’s strategies, operations, and management techniques. The revenue model takes these explanations to define how the business will generate revenue.
The selection of a model is based on the situation. The business model is created by the company and then present the model to banks to receive loans. Venture capitalists usually look at an enterprise model to make investment decisions in the business. On the other hand companies review their revenue models to create financial forecasts. They also review their revenue model to determine whether it’s appropriate in light of any operations changes. For instance the revenue model might require modification if the price of production increases or wages fluctuate.
The Veredict: Business Model versus Revenue Model
The distinction between business model and the revenue model helps to clarify the perspective of the entire venture and permits that earnings to be removed as a subordinate element to the overall business plan.
“A well-crafted combination of a successful Business Model and Revenue Model will result in the Google in the present or the Facebook of the future. However, if you put Your Revenue Model on the throne, and place it in the position of king and it as the king, and your Business Model as its slave and you end in a Myspace from yesterday. .”