To achieve your full potential as a business, you need to work on your pricing. There are multiple ways to do this, with different pricing strategies, from Cost Plus, to Competitor Based, to Value Based, but often the focus is on price point at the expense of the wider considerations that may impact your growth.
In this article we look at the Revenue Model Framework developed by Ron Meyer, Professor of Strategic Leadership. It’s designed to help you innovate around your price points and challenge your standard approach to making money.
Let’s take a look in more detail…
The Revenue Model Framework is a 5-part tool designed to help a company understand all aspects of their pricing in a market. It focuses not just on the price point, but also on other factors such as how payment is made or what is used as a currency.
The different questions are:
As you can see this model has 5 parts all of which have equal importance in how you monetise your business. Price point being just one part of it.
Who Pays? This is the first question in the Revenue Model Framework. It may sound a simple question, as normally the answer is the end client, but it isn’t always the case. There may be other parties who would pay for the service. For example:
There are many successful businesses where the end user doesn’t pay a penny. Facebook or Freeview TV being great examples. So, in your business, who is best to pay?
In many cases the answer to “What is paid?” will be money, but this isn’t exclusively the case. It could be other value generating assets such as:
It is often the case that these payments are used in a second step to ultimately receive money. For example, with Facebook users ‘pay’ with their data, which is monetised via an advertiser platform.
Every day we encounter many different ways businesses monetise their products and services.
For example, you may go to the shop and a buy a Twix chocolate bar. That’s a simple per item transaction where you exchange money for your Twix.
Too many Twixs and you’ll sign up for the gym, which is a per user access or usage model. If you’re in the gym you’ll be offered classes or a Personal Trainer, both examples of Add-On pricing.
Finally, if you injure yourself, you’ll be approached by many lawyers offering no-win, no-fee models, otherwise known as Results Based.
This part of the Revenue Model Framework looks at what approach you’re using with your clients. Is it the best one for your business?
This question looks at how you are paid. Is it a lease? A one-off? A subscription? Credit?
An important consideration here is the idea of recurring revenue such as a subscription or monthly fees. This is really important, as it’s significantly easier to grow if you are on recurring revenue rather than one-off revenue.
The benefits include:
Moving to recurring revenues is something many companies are doing. Let’s take Apple as an example. They began with the Mac, but now have numerous products from phones to watches to tablets to headphones, all of which mean there’s less risk than if the company still sold just computers.
In recent years Apple have launched a huge number of services. Music, TV, Arcade, Fitness, a credit card, cloud storage, and more are all seeing users pay on a monthly or annual basis. This recurring revenue is extremely valuable and de-risks the company further as it grows.
Finally, we’re at the price point discussion. This is traditionally where a lot of people gravitate when talking about their pricing strategy.
It covers areas such as:
We have a full Definitive Guide to Pricing Strategy on this very topic!
Every product or service has a model behind it. Let’s take a look at some examples…
AppleCare is an insurance policy Apple provide for their products. The end user pays with money, for protection, via a subscription, at around £99 per year.
A newspaper is purchased by the reader with money for the physical paper as a one-off, at around £2.
With Facebook the advertiser pays money for audience data as a one-off each time they utilise the advert system, at dynamic price points.
Facebook also require a second revenue model, where the end user pays with their own data, to access the social network via a subscription.
Finally, a SaaS (Software as a Service) product is paid for by a company with money, often per user, on a subscription model.
Have a think about the items you pay for and what the models are behind the scenes.
Absolutely! Many businesses have multiple revenue models because it can bring a lot of benefits, including:
There are a lot of advantages to the Revenue Model Framework including:
The Revenue Model Framework was invented by Ron Meyer, Professor of Strategic Leadership at Tilburg University, as part of the Meyer’s Management Models.
Ok, some key takeaways as we wrap this guide up!
Firstly, develop your whole Revenue Model, don’t just focus on one part of it. And even if you have a successful revenue model, challenge it with this framework.
Secondly, the most successful companies have multiple revenue models. They generate value in different ways. Remember the Facebook example, where users essentially give up their data to use the system, whilst advertisers pay for that data, or the Apple example where they have multiple products and services.
Finally, lean towards recurring revenues. If you can find a model that works and is recurring, you’re more likely to grow longer term.
The Revenue Model is a great, innovative way to capture all your thoughts about pricing. Good luck with it!
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