Business Model vs. Revenue Model

Posted by - raja 2009/02/19 09:45:41

An evolving revenue model seems to work with a lot of companies but it is not easy to present this idea to prospective investors. But a great business model without a clear cut revenue model is choke full of good karma.

Even code geeks know that a company needs a business model to survive. A business model tells you about why the company exists, what does it do and how it makes its money. Traditionally, a business model was combined with the revenue model i.e. it has to talk not only about what the business does but how it makes its money as well. However, I am starting to notice a need for a revenue model which is sometimes distinct from the chief business model. Often, the revenue model survives on its own. The business model might exist without even mentioning revenue - something that would have been inconceivable to me before.  

These ruminations lead me to the whole idea of what is involved in founding and growing a company. This small blog post is the result.   Consider Google for instance. Its chief business model would probably wax eloquent on search whereas its revenue is based on ads. I am sure that they might have "added" the ad thing as part of their business model but that would have been done post facto rather than the business model driving the revenue model. Again all this is my own guess based on reading about the company since I am not privy to their business model in the first place.

The gist is that there have been companies contemplated without a revenue model to begin with. This trend IMO is indicative of a certain amount of  passion on the part of the founders to an idea.  You ruminate over a new algorithm, strategy , product and that is your idea. You want to start a company to further the development of this idea. That is it! Your business model is just that!  The passion for the idea is all encompassing and directs all your company's energies.  You start building it and you believe that if you "build it they will come".  

Depending on the strength of your idea, your company gradually gains traction and then suddenly you realize that for scaling up, you need more money which means you need someone to invest in your company. Why would someone invest in your company if you don"t have a revenue model? Hence the revenue model springs up almost as an after thought.  Sometimes there are some brave souls who would put some money down on your wonderful company despite the absence of a revenue model. But ultimately, when the rubber hits the road, the investor would want to see the money! Where is my RoI, he would ask with a twirl of his moustache (if he has one) and then puts you through an exercise to ferret out the revenue model. 

I do want to point out at this point in time, that there may be ideas which are intrinsically money making. Example is the EZPass in the United States. Someone comes up with the idea of automatically scanning the car for a transponder and debiting a certain amount from the driver's pre-paid account when his car passes through the toll gate.  Here the idea itself shows a way to make revenue. But not all ideas are like that. Some ideas cannot just make any money. Imagine Google charging a person to enable search from his computer. There may be a few people paying for the search but it is not going to be a frightful lot. Selectively suppressing top search results for "premium" searchers would probably not fly either. Or maybe it will. The point I am making is that the revenue model is subsidiary to the main business model of the company and is borne more from experimentation rather than as a direct consequence of the business model.

But is this entire notion of the dichotomy of a business and a revenue model a recent phenomenon? Or does history have evidence of it? I think this concept has been prevalent for much of human history. Anything innovative or revolutionary has always been based on ideas rather than on the instinct to make money or fame. The more selfless a person is , the more obsessed she is with her ideas rather than on her puny ego - the more successful she would be in bringing about a revolution. Money will follow automatically. She does not have to pursue it. This is an echo of the karma injunction that we hear from Hindu and Buddhist philosophies. Do your karma (duty) without any desire (for money, fame etc)  and automatically the results will follow. And when the results do come they come down in torrents rather than as a trickle.

Blog Comments (2)

Tarun Kohli, 2009-03-09 09:30:17

"Raja, IMHO, one really has to think of how a business would make money to even work on the idea. In a perfect/idealistic world, one would want to work on experimenting with the ideas without having any clue about the money making part but the fact of the matter is that most of the businesses come up with a revenue model first to judge the viability of the idea at hand. A business's primary purpose is to create wealth for it's promoters, shareholders and with people who have vested their time and energy in it.Some of the businesses might not even get the funding if they don't have the right revenue/business model to prove the idea can work in the market. BTW, I was talking to Rajul the other day about the same thing and he shared with me the following - http://tarunkohli.blogspot.com/2009/03/why-technology-startups-fail.html -Tarun"

Raja Shankar Kolluru, 2009-03-10 03:33:00

"I agree Tarun. Being oblivious to the revenue model is tantamount to keeping your head buried in the sand and is often a recipe for failed startups. A passionate idea can only take you that far. But my point was that if you have a really great idea and can develop on it with a "deep and well-researched" solution, then you can temporarily sustain on the basis of the solution. Ultimately, you would have to make up for the lacuna of course. I am also aware that this is a geeky view of things.Reality is often much harsher as is evident from all the failed startups."