It's no news that the auto industry has been engaged in a heated race toward electrification: Whose vehicles will be the most functional? Whose batteries can travel the longest distance? Whose price point will attract the biggest crowd? This transition from gas guzzlers to zero-emission transportation is, for the most part, a technical one. It doesn't change the fact that carmakers will continue to profit from what they've always done: make and sell cars.
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While all of this is going on, however, we've started seeing news like these. Toyota to charge $8 a month for a key fob just to start your car. BMW to charge $18 a month for your heated seats. Tesla already charges $9.99 a month for connectivity features like music streaming and internet browsing. GM to aim for $25 billion in annual software and subscription revenue by 2023 On the grand scheme of things. The introduction of these subscription services might not be dominating the headlines right now, but this development could actually become as vital to carmakers' survival as their EV prowess.
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So, why is this important to begin with? In an ever competitive capitalist economy that always looks for growth, growth, and more growth, almost every long-standing company needs to be willing to pivot or at least modify how it conducts business. Or to put it in a more jargonistic term, their business model. While a comprehensive business model considers all aspects from value proposition, to customer relationship, to cost structure, none of these can ultimately make a business successful without a sound Revenue Model and Monetization Strategy.
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In this article, we will go over some popular revenue strategies that companies have resorted to in recent times, some to tremendously lucrative effect, and others not so much. With these examples, you'll be familiarized with their money-making patterns and hopefully also become more discerning consumers, that is, even when a product seems "free" to use.
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Before we get into the array of revenue strategies out there, let's understand the impact that just a simple tweak can lead to. Product features and offerings that are entirely fresh and innovative take time to develop and launch, especially when it involves entirely new technology. They also often require hefty upfront costs, which can delay the sweet gratification that investors seek. So how do businesses prove that they're still worthy of their existence in the marketplace during those periods of research and development? More specifically, when there's truly nothing new that can be sold to customers, how can companies deliver exciting financial reports where there are lots of graphs with upward slopes? Let's take a look at what Patreon tried to do.
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For context, Patreon is an online platform that allows Creators to upload exclusive content to be consumed by their subscribers, or Patrons. Creators get to determine subscription tiers, usually ranging from $1 to $10 per month. Much like other well-known names like Airbnb and Upwork, Patreon is a two-sided marketplace; So while the transactions between Creators and Patrons take place, the company takes a cut.
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In December 2017, Patreon announced a significant change to its fee structure that sent shockwaves through its community. The announcement introduced a new service fee of 2.9% plus 35 cents for each subscription to come out of Patron's pocket, rather than the previous practice of deducting the fee from the Creator's total earnings. Based on this before-after comparison of the fee structure, it appears that the new structure may be advantageous to the Creators. And that was the official reason the company gave to justify the change.
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But Patrons complained that this placed a burden on small pledges. Given the fact that most Patrons pick lower subscription tiers, the fixed 35 cent fee disproportionately affected these tiers. For example, if a patron pledged $1 to a creator, the new fee would increase their charge by 38%. This was a huge concern for creators who relied on a large volume of small pledges. What's more is that for Patrons supporting multiple creators, the new structure meant they'd incur the fee for each separate pledge rather than a one-time collective fee. This could significantly inflate their monthly costs and discourage them from supporting multiple creators.
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As it often happens in business, what's good for the company might not be welcomed by the customers. For Patreon to propose the new fee structure, the company certainly expected attractive upside for its revenue. To understand just how big of a difference a tweak in revenue model can make, get ready to do some simple math with us:
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Let's say a Creator has 1,000 Patrons. And for the sake of simplicity, assume all of these Patrons subscribe to the Creator for $1 per month. This means the Creator makes $1,000 per month before fees. Based on Patreon's old fee structure, the company takes 5% from the Creator's earnings. So in this case, $1,000 times 5% equals $50, and that's the amount Patreon makes from this Creator in a month.
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In the new model, Patreon makes 2.9% plus a 35 cent flat fee on every subscription. So each one of these $1 subscriptions yields $0.379 for Patreon ($1 x 2.9% + $0.35). Multiply that by 1,000 subscriptions, Patreon now gets to make a total of $379 a month instead of the previous $50. That is a 658% increase, which is impressive for investors but depressive for the users who single-handedly financed it in exchange for no additional product value. In a win for the people, Patreon had to immediately stop the rollout of this new fee structure only because it got called out by its users.
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Below are some of the most widely used revenue strategies in today's business world. Keep in mind that just because a revenue model benefited one company, that doesn't mean it will automatically work the same magic on another company, even if it's in the same industry. Remember those other parts of the business canvas we showed earlier? Yea, those are part of the picture too.
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Admittedly, that was a laundry list. But we wanted to save some room to explore two other revenue models that are interesting in their own rights: one on a more cultural-specific level, and another on a broad, humanity level.
Let's start with the cultural-specific one: the licensing model. At its core, the licensing model allows a company (the licensor) to grant another company (the licensee) rights to produce and sell goods, apply a brand name or logo, or use patented technology, often in exchange for a fee or royalty. One of the distinct advantages of the licensing model is the ability to monetize intellectual property, be it in the form of patents, trademarks, copyrights, or brands, without the need to actively engage in production or distribution. This not only accelerates market access for innovations but also reduces capital expenditure and risks associated with entering new markets or industries.
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Microsoft's licensing of its Windows OS to PC manufacturers is a classic success story. In more recent times, ARM Holdings, a British semiconductor and software design company, doesn't manufacture its own chips. Instead, it licenses its designs to giants like Qualcomm and Apple. Ok, this all makes sense, so what's specifically "cultural" about it?
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Lockheed Martin is now also a streetwear brand in South Korea. Fashion and apparel licensing has been common practice, but this is quite a crossover between two completely unrelated industries. Upon further digging, it turns out that this kind of industry crossover licensing practice is actually fairly common in South Korea.
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Other instances include Jeep, National Geographic, and even Pan Am. One hypothesis on this licensing trend could be a fascination with western, or more specifically American culture, coined by the internet as "Americancore". What we're even more curious about is how these licensing deals might affect the public perception of the brands in question in the long run, especially for a brand like Lockheed Martin, which doesn't necessarily conjure a positive image to those who live America. Revenue stream, or more like marketing ploy?
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Another revenue model worth discussing is data monetization, and this is a practice with humanity-level impact. In the digital age, where data is often hailed as the "new oil," businesses have sought innovative ways to capitalize on the vast troves of information they gather. Data monetization is a revenue model that turns bytes into bucks. It revolves around extracting value from available data, either by directly selling it or by refining it into actionable insights.
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As the flow of digital information multiplies, so does the potential to monetize it, positioning data monetization as a cornerstone of contemporary business strategies. The suitability of the data monetization model largely hinges on the nature and scale of data available. Digital-first enterprises like social media platforms, search engines, or e-commerce giants, which amass vast user data, are naturally positioned to monetize this asset.
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We already know, for example, that Google stands as a paragon in the realm of data monetization. But the capitalization of data has become more and more personal over the years, down to our biometrics. As one of the pioneers in wearable tech, Fitbit gathers data on steps, sleep patterns, heart rate, and more. Beyond selling devices, Fitbit has partnered with health insurance companies, offering them insights derived from user data. With user permission, the company also offers datasets to clinical researchers aiming to understand health trends or behaviors.
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23andMe, the personal genomics and biotechnology company that offers DNA testing kits, have monetized their vast genetic database by collaborating with pharmaceutical and research companies, providing them with aggregated, anonymized genetic data to fuel research projects.
Needless to say, as more and more data points of our every move and molecule get captured, ethical and privacy concerns loom large. While regulations like the GDPR in Europe and CCPA in California have mandated businesses to ensure data privacy and transparency, rules and disclosures are still seldom presented to consumers in a transparent and straightforward way. For most of us, when we see pages of legalese, we simply give consent. Compounded by advancements in AI and machine learning, the future of data monetization remains a fiery battleground.
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You've probably noticed by now that, in reality, a lot of companies have found success in diversification, even when there is still one prominent revenue source. In an increasingly unpredictable global business landscape, relying solely on a single revenue stream can be akin to placing all of one's eggs in a singular, fragile basket.
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Take Peloton as an example. As the company struggled to keep up with its pandemic-level growth, it's now pivoted to hone in on subscription revenue as its saving grace. When the company first came to be, its main product was a high-end stationary bicycle, equipped with a touchscreen that allowed users to participate in virtual spin classes from the comfort of their homes.
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Fast forward ten years, that fancy bike is old news. As bike sales plummeted after quarantine, the company scrambles to make up for the loss with subscription growth. CEO Barry McCarthy's strategy now emphasizes Peloton's subscription content as it's "real" product and its expensive hardware a mere sideshow. In fact, the company disclosed that "more than half of all classes taken on the app have nothing to do with cycling".
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Having multiple revenue streams is not only a strategic hedge against market volatility, but it's also a pathway to exploring diverse growth opportunities. Diversifying income sources ensures that a downturn in one area doesn't cripple the entire business, offering a safety net during economic downturns or industry-specific challenges. Moreover, it helps to identify new markets, customer segments, or even unanticipated uses for a product or service. After hearing about these revenue model anecdotes, do you now think of any of these companies differently? Or if you're a repeating customer of any business, what's keeping you hooked?
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