In the retail business, revenue is primarily generated from selling products customers. A potential investor is primarily going to be concerned with one question, where is your company getting its money? What are the means through which you are selling your product to customers and how much revenue is going to be generated?
A strong revenue model will describe how a business will generate revenue by offering value to its customers. Retail revenue models are centered around
- Customer requirements
There is a growing gap between online retail businesses and store based businesses as inventory expenses, overheads (delivery costs), and advertising revenue differ greatly. In this post, we’ll discuss revenue models for both online and store-based businesses. Usually, a business will use a mix of these models to generate revenue.
Transaction revenue model
– one time payment for the product or service
1. Low cost retailers
These are based on the volume of goods sold. Retailers address the mass market and sell large numbers of the product for lower prices than market level. Their focus is on price over quality and they exist solely to sell the product rather than the company. They have a wide range of products and large inventories. eg. Big Bazaar, ShopClues
If a similar business exists in the same marketplace, customers may switch over as there is no customer loyalty built. Inventories are expensive.
2. Premium retailer
Aim to create a brand name, sell high quality products and focus on customer loyalty, making repeat customers. These companies sell only their own brands and can provide after sales services such as hemming (if you’re a clothes shop) or delivery (furniture stores) etc.
Direct retailing online is a good option for businesses who don’t want a store but have a popular, trustworthy brand name. eg. Marks & Spencer, Amazon
Customers tend to trust the store more than an online marketplace (such as ebay, flipkart).
However, these stores will face competition from nearby stores and crowded marketplaces (malls).
3. Cost plus retailers
These companies maintain comfortable margins and usually target a segment of the market. They can either keep a narrow range of products (stationary or electronics), reducing inventory costs and achieve expertise in their product categories or offer a wide range of products while providing a high level of customer service and a comfortable shopping experience. eg. Staples, Croma, Indiatimes Shopping
They can charge higher prices for products as they assure quality, service and selection
May stay on shelves if prices are high.
These stores face high competition from e-commerce retail businesses.
4. Marketplaces/peer to peer platforms
Retail businesses can make use of these to sell their products online and connect to customers. Its less expensive than direct retailing as real estate stores and staff are not required and inventory can be supplied from a number of warehouses. Small companies using a popular site such a Flipkart can connect them to a large number of buyers. eg.Etsy, Ebay, Jabong
Deliveries will be taken care of by a bigger company.
Competition from similar sellers that use the marketplace.
5. Daily deals/ Flash sales
Customers can use coupon codes to buy items at a discount, increasing the number of customers purchasing the product. E-commerce businesses like Myntra or Abof set specific times at which they offer discounts, reducing their inventory costs, and selling large quantities of their products.
You can attract new customers and increase sales.
May give your brand a “cheap” reputation.
6. Recurring revenue
– Customers return to buy the product or add-ons to the product.
7. Subscription model
Customers pay a monthly or yearly amount to keep using the service or receiving the product (magazines). Companies generally start with a free trial and then favour long term subscriptions plans and offer higher discounts on these to customers. Innovative retail businesses sell their products along with an app, which will be paid for on a subscription basis. eg. Fitbits
8. Razor and blade model
Companies sell the basic product at a low cost and then charge different prices to replace part of the product or add-ons, depending on the quality and features of the add-ons.
This allows them to sell to customers of all income levels.
It can lead to losing customers if they feel tricked.
9. Series of products
Companies can sell generations of products (newer versions) or products that are likely to be used together, for example, a dryer will be most likely be purchased with a washing machine.
10. Exchange offers
Customers are more likely to come back and buy newer models or products if old products can be exchanged in to avail a discount. This is particularly successful in the case of electronics and home appliances.
11. Monthly installment payments
Companies encourage customers to buy an expensive product and then pay the amount in installments over time while charging a an extra fee.
– Companies earn from advertising other products.
12. Affiliate/Referral model
Usually used in online businesses, companies sell adspace on their sites to other companies and earn a percentage depending on the number of users who buy the advertised product or selling the email-ids of interested users.
13. Partnership model
The company can join a partnership with another company selling similar products that the customer is likely to purchase (a laptop/electronics store with a backpack/laptop bags store) and advertise each others products.
14. Native advertising
This is aimed at a niche market, where a company can gain credibility, expertise, and reach customers in their segment of the market. It creates a level of trust in customers, and is usually used for expensive, specific, high quality products.
15. Contextual advertising
Advertising promoted content on your website and receiving revenue based on the number of clicks.
A retail business can generate revenue from sales, customer loyalty and advertising, depending on its size and the aim of the company. This overview sums up the most recent successful revenue models being used today. A successful business uses a variety of models, according to the value they’re offering, their target customers and the means they are using to sell the product.