5 Value capture and revenue models
So far, you have looked at how firms or any other type of organisation create a product or a service by using a business model (recipe) to combine resources (ingredients) through a range of activities and practices (mixing ingredients, simmering, boiling, grilling!). These firms need to create something unique and valuable so that consumers or other businesses want to pay money for it. If not, the firm will be unable to recover the money it paid to get access to the resources and to conduct its activities (its costs).
In this section you will look at how firms can capture value from the products or services they create. Revenue models capture the specific ways firms are able to capture value and generate income. Some organisations create broader value than what they can capture back with the sales of their products or services. For example, by using renewable energy and embedding product re-use and re-cycling in their manufacturing practices, firms may reduce air pollution. However, although we all benefit from cleaner air and lower waste, firms cannot monetise ‘clean air’ and so cannot monetise all of the value they generate.
The concept of ‘monetising’ or putting a price to a product or a service, lies at the heart of revenue models. That is why, in their simplest form, revenue models are what are widely known as pricing models, such as listed / posted price, auction and give-away.
Revenue models can include a combination of sources of revenue, which may be prioritised. For example, eBay generates revenue using several sources: advertising fees, subscription fees to sellers, and fees from transactions. There are various revenue models, such as ‘razor and blade’, ‘freemium’, ‘subscription’, ‘cash and carry’ and ‘leasing’. In the sections that follow you will look at the razor and blade, and freemium models in more detail.