Starting Your Business

Revenue Models vs Business Models

Written by James Garvin for Gaebler Ventures

When it comes to the difference between revenue models and business models, some entrepreneurs get confused yet the subtle difference between the two is what separates the successful companies from the competition.

In short, revenue models are how you plan on making money and business models are how you plan to continue to make money.

Revenue Models vs Business Models

The two coincide, yet are unique and distinctly different. Many entrepreneurs confuse the two and rightfully so, but knowing why they are different and what it means to your business can serve as helpful guides for short and long-term planning.

Business plan or no business plan, you need to have a revenue model. What is your product, how much are you going to charge, who are you going to charge, and why are they going to buy your product? These are just a few key questions to answer.

Competition exists to fight for profits within a given market segment. If one company is making money in a given segment, there will be a lot of competitors soon to follow vying for those profits that are being made. A business model is what differentiates those firms who continue to extract profits from those market segments versus those who try, but cannot sustain their business for the long-term due to an inferior business model.

Using Netflix as an example, we can define Netflix's revenue model as charging subscribers a monthly fee to access an unlimited number of movie rentals per month. They offer various monthly subscription plans with varying monthly prices based on the number of movies a subscriber wants to hold at anytime. Netflix has formidable competitors, most notably Blockbuster and RedBox. Blockbuster has dominated brick and mortar movie rental stores for decades and recently also offered a competing mail order DVD rental service to compete directly with Netflix.

Blockbuster's revenue model is slightly different that Netflix since Blockbuster charges you a fee for each movie you rent. This can be positive since as a renter you are not paying for movies that you don't rent, but can be negative if you rent a lot of movies and have to pay for each one. RedBox has a similar revenue model as Blockbuster where they charge movie rentals $1 to rent a movie from one of their many mini kiosks.

While the revenue models for each of the three firms are similar, their business models are very different. Netflix operates 100% on the internet and has 58 distribution centers around the country to receive and ship DVD's overnight to their subscribers. They use sophisticated technology that helps them maintain a low inventory while successfully fulfilling subscriber requests for specific movie titles. Blockbuster has thousands of retail stores nationwide that offers a minimal selection of movie titles compared to Blockbuster and is dependent on local consumers coming into the store to rent a movie.

These two business models are vastly different and as a result Netflix maintains a large advantage in the movie rental market over Blockbuster. Their cheaper operation set-up combined with convenience for the customer has forced Blockbuster to close underperforming stores and deal with the high costs of running each retail store.

Defining your revenue model is the first step for your business, but eventually you need to defend your profits with a sound business model that makes it difficult for incumbents to replicate and take profits away from the market that you have entered.

James Garvin began his education studying biotechnology. In recent years he has turned his interest in technology to helping two internet startup companies. The first business was an online personal financial network and the second was an e-marketing platform created to help entrepreneurs demo their web sites. Currently a student at University of California Davis, James is spending his summer incubating two new online businesses and writing about his entrepreneur experiences.

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