The Three Revenue Vectors in any Business Model — where does Freemium belong?

As I am analyzing various business models for my book Strategydex |: The Anatomy of a Business Model, I have become obsessed with figuring out various ways any business model generates revenues. From a visualization perspective, I am working on setting up the components of a business model using a Lego-like modeling approach to make it easier for entrepreneurs to combine, mutate and re-combine their own business models. In some respect, I am copying nature's DNA structure as an analogous modeling approach.

At the end of any entrepreneur day, if your startup or business doesn't have a business model road map of how you're going to make money, the only hope you have is to gather enough eyeballs and flip your venture to another sucker who wants to reach those people. Whether you intent to flip your business or grow it to make money, the road map is critical because it forces you to answer the one big question I ask entrepreneurs before investing: How do you make money in your business?

When I look at the current state of business models in the social media sector, it reminds me of the first Internet revolution where acquiring the eyeballs was of critical importance to any startup. The theory was that if you get enough eyeballs, sooner or later the revenues would kick in after you've figured out the business model. Ten years later, the market conditions are different, but I am astounded at how many entrepreneurs do not spend enough time figuring out their business model and how they are going to make money. There are many components to the business model and thus, the basis for me writing the book Strategydex this year, but one of the most critical dimensions of any business model is the revenue building blocks.

Three Revenue Vectors

There are three revenue vectors in any business model for any company in any sector:

1. Advertising
2. Subscriptions
3. Transactions

As an investor, I have seen entrepreneurs try to make rocket science out of business modeling, but the basic components are actually very simple — especially in the revenue vector equation. I carefully considered all the other possible combinations and additional vectors that could come about but no matter how you slice it, these three vectors are the basic Lego-like components of any business model. The art and science of business modeling using these vectors is figuring out how to make them work in combination, which one of them should be used to spearhead the revenue stream and how they should evolve, and in what combination and re-combination.

Evolution of the revenue vectors

When entrepreneurs pitch me for money, I enjoy going through their business model to see how they see these three revenue vectors play out in the startup phase and during its growth stages. I pray that they don't tell me all three come into play at once because business models focused on all three revenue vectors simultaneously don’t play out easily in the marketplace. MORE

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