Business model and revenue model
What are the main differences?
Social entrepreneurs put a lot of effort in designing sustainable business models (BM) for their social enterprises. Throughout the design process, they indeed have to focus on several components of a BM. Value proposition, key activities, channels.. just to name a few. But is there any relationship between a business model and a revenue model? And precisely, what does “revenue model” even mean? In this article, we dig into the main differences between these two concepts.
Business model and revenue model: main differences
Let’s start with a definition of the topics at hand. First, what is a business model (BM)? According to literature, there are several ways to describe it. For instance, Alex Osterwalder defines a business model as “the rationale of how an organization creates, delivers, and captures value“. In general, BM is a description of (1) how the company creates value for its customers, (2) the key processes and resources needed to deliver this value and (3) the ways in which the company wants to make a profit.
Now it’s time to tackle “revenue model“, which is a subset component of a BM. As a matter of fact, the revenue model describes how the company earns money in order to capture value for itself. A revenue model basically answers to the following questions: “Through which mechanisms does the company bill its customers and generate revenues? How does it generate income?“. Depending on the industry and the customer segments, revenue models can radically change from time to time.
Implications for social enterprises
Although they might sound similar, business models and revenue models do not mean the same thing. On one hand, a business model describes indeed how an organization creates value (for both audience and itself). On the other hand, a revenue model describes instead how the money flows from the customer to the firm. This distinction applies to social enterprises too.
Coming up with solid revenue models is often a struggle, especially for social businesses. As a matter of fact, such entities primarily exist to serve unprivileged communities or vulnerable individuals. Because of that, often times they cannot rely on revenue streams coming directly from beneficiaries. Instead, they must get creative in order to find viable alternatives.
Take Aravind Eye Care Hospital, for instance. This company performs eye surgeries to cure preventable eye diseases and eradicate needless blindness in India. That’s the value proposition provided. But what about its revenue model? Well, the firm decided to charge paying customers the price of each surgery performed, whereas beneficiaries receive treatments for free.
Another interesting case study is StartSomeGood, an Australian social enterprise connecting donors and social entrepreneurs. Thanks to its crowdfunding platform, the company helps changemakers get their projects/initiatives funded from the crowd. To remain financially sustainable, StartSomeGood keeps a 5% fee each time a crowdfunding campaign reaches its goal.
Direct payments and intermediary fees as such are just couple examples of revenue models social enterprises may choose from. But the list goes on and on. The point we want to make here is that the revenue model is no standalone entity. Quite the opposite: it‘s just a part of the business model, thus it must be coherent with the value proposition provided and the overall structure of a BM.
As discussed in this article, there is a clear distinction between business model and revenue model. In a nutshell, the first concept relates to “value” generation (what value is created for beneficiaries, customers as well as for the firm), while the second one focuses on “income” generation (how the money flows from customers to the firm). The two terms shouldn’t be confused nor used as synonyms, as the first includes the latter.
In conclusion, we believe every aspiring social entrepreneur should determine first the value proposition that he/she intends to provide to the audience (beneficiaries and customers) and only then evaluate/choose the most suitable revenue model option for his/her social enterprise.
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