Revenue model
05.

Revenue model

Which resources do you need?

What are the revenue models?

 

Step 5:

  • provides an earnings model for your product/market combination;
  • helps you decide whether or not your ideas are viable;
  • may give you ideas for other ways of earning money;
  • challenges you to think about new revenue models.

Introduction

Once you have determined who you want to approach and how you are going to do that, you need to find out how much people are prepared to pay for your product or service. This is a crucial step, as it is now that you will discover whether your business as you had imagined it is viable. If it is not possible to find a suitable revenue model for your product/market combination you will need to go back to Steps 2 and 3 and redefine your product or service and clients.

In fact, which revenue model you can apply is not really the correct question. The correct question is: why and how much do people want to pay me? You therefore first need to understand why people are going to pay for your product or service.

Determine your value

To determine your revenue model, you first need to discover the value of what you are providing for the client. After all, a logo for a small company has less value than the same logo for a large company. The value that your product represents to the client is subjective and often only possible to estimate once you have experience in this. On the other hand, you also need to consider what the value of a product or service is to you in terms of supplying you with an income, and compare this with the value to the client. Only then can you come to an agreement. A number of tools and methods are given below that may help you determine your price.

Determine price and turnover

To define a minimum pricing level or turnover, you could start by estimating your running costs. You could also look at what you need to live on. This can help you determine a minimum level of turnover that you need to achieve.

It also gives you an idea of your minimum price. Say, for example, that you are given an assignment that you expect to work on for at least one month full-time; this then is the minimum amount that you need. This really is a minimum as you are usually unable to declare 100% of your time as you also spend time on acquisition, social media, administration, and so on.

Once you have determined this minimum, you then need to consider an appropriate turnover and try to estimate the number of hours you can declare. In this way, you can calculate an appropriate hourly rate. You can then research your network and the market to find out what other people charge.

You therefore now have a minimum rate, an optimum or preferred rate and a competitive rate. These three rates form a good basis on which to base your hourly rate and help you understand your limits for negotiation.

Revenue models

A revenue model describes the way in which your business earns money. There are various types of revenue models and you may use more than one earnings model within your business.

Many traditional revenue models are coming under pressure, one reason being that people are searching for different forms of ownership and other capital distribution models. Many of these new revenue models originated in the creative industry. This therefore presents opportunities for creative professionals.

Project startup checklist

  • What are the deliverables?
  • Do you need other people to be able to carry out the project?
  • What is the schedule, the deadline and the timeframe?
  • What will the product be used for (which media, region, period)?
  • What style does the client require, which references?
  • What is the client decision-making pathway; who makes the decisions?
  • Find out more about the client.
  • Check the client’s credit rating (e.g. using Graydon or Google).

1. Setting a price for an assignment

One of the most common methods used in the creative sector is to set a price based on an estimate of the number of hours multiplied by the hourly rate. This method is usually used to come to a fixed price – in other words a price for the project as a whole. In this way, the client tries to ensure that you do not exceed a certain budget.

To be able to make a good estimate of the number of hours you will need, it is best to split the project into phases. After all, it is easier to estimate how much time you need for each phase than for the project as a whole. It is also recommended to include these phases in your budget so that, should a client decide to go back to a previous phase, it is immediately clear what the consequence of this is for the budget.

How to decide on a minimum hourly rate was described above. There are various sources you can consult to do this, including clients or potential clients, colleagues, trade organisations, and so on.

Example: phasing of an illustration project

Phase 1: briefing/debriefing

Phase 2: first draft

Phase 3: rough black and white sketch

Phase 4: full colour sketch / first version of illustration

Phase 5: second version of illustration

Phase 6: final artwork

Phase 7: final delivery

2. Royalties / licenses

Royalties are compensation for the use of intellectual property, which includes text, music, illustrations and images. You have a right to compensation if your intellectual property is used by someone else, regardless of whether you have given permission for its use. It is of course possible to relinquish the right, which would mean that you receive less compensation or none at all. However, you can only do this if an agreement is drawn up to this purpose.

A more correct name for royalties is ‘copyright fees’ or ‘license fees’. These names give a slightly better idea of what it is about – fees that are paid to be able to make use (commercial or otherwise) of work of which another person is the rightful owner.

Royalty fees are often applied to the online sale of products or works of art. Because more and more products can now be manufactured after they have been sold (rise in print-to-order, for example due to digital printing techniques), manufacturers are also starting to pay designers based on the actual number of products sold. This mainly concerns the production of gadgets, T-shirts, bags, prints, wallpaper, posters, and so on. A common rate is 10% of the sale price excluding VAT. However, in some branches – such as interiors – a rate of 5% of the retailer’s cost price is normally paid.

In advertising, the term ‘media tax’ is often applied. If images are used in different media (print, internet, TV, etc.), in different regions (the Netherlands, Germany, worldwide) and for a certain period (one year, five years, unlimited) then an extra fee may be agreed on that increases according to the increase in the media profile. This is one way of offsetting the value to a small advertiser compared with a large advertiser (see ‘Determine your value’). Media taxes are calculated over the production price (number of hours x hourly rate). Tables can often be obtained from branch organisations (BNO, BNA, etc.) on which you can base your calculations. Media taxes have however come under increasing pressure in recent years. In many cases, parties simply agree on a price that they both consider reasonable.

More and more creative professionals are making their work freely available, because they do not believe in limiting exposure of their work. Read about the vision of art director Luis Mendo in this interview. You can also watch a presentation by photographer Sebastiaan ter Burg, who has actually gained exposure and earned money by freely sharing his photographs. He does this through a Creative Commons license. ‘A Creative Commons license allows you to reserve your rights while also enabling other people to disseminate your work, share it with others or, under some licenses, make changes to the work.’

It is important to define your own vision and strategy regarding how you deal with royalties, licenses and media taxes.

3. Fees

You charge a fee as compensation for a service provided. This could be a mediation fee (or acquisition fee): if you are involved in getting a project off the ground but play no further role in the project, you could request a fee for your services. Such fees are usually about 10% of the total quoted project price.  If you do however take part in the project, the communication goes through you and you carry the risk, then you can request a higher fee – in this case a production fee (see below).

You may of course also choose to pass on an assignment to someone else and hope that the service will be returned at some point in the future. Acquisition fees are more common if this happens regularly and if the person you introduce is unable to compensate you in the form of assignments or in any other way.

A production fee is compensation for arranging, planning or managing – in other words for project management. You could try to estimate a fee for project management in advance (also called account management in advertising), but this is not easy. For this reason, a percentage of the project price is often calculated; in many branches 20%. Say, for example, that you come up with an idea and need to get various parties on board; you can calculate this as follows:

art direction: 12 hours @ € 120 = € 1 440

copywriting: 12 hours @ € 120 = € 1 440

project/account management: 20% of € 2 880 = € 576

total project price excl. VAT = € 3 456

You then work out whether this is a reasonable estimate based on your usual hourly rate. Assuming, therefore, that your usual hourly rate for project management is € 75, then you should spend no more than about eight hours on the project management.

4. Shareholder

For larger projects, it may be a good idea to become a partner in the form of shares (or options on shares). The risk is of course greater, but the profit may also be higher. In the case of startups and independent game development studios, it is increasingly common for creative professionals to be invited to take part as shareholders, as creativity and design are an increasingly important part of such companies. However, you should be aware that this can involve complicated constructions and that you cannot leave whenever you want (or get your partner to leave). Always obtain advice from someone with experience in such matters. If you do not know anyone, we may be able to help.

5. Online sales

More and more artists and designers are selling their work or new products online, one reason being that this enables you to reach a global market. Many artists and designers represent a niche market; although this may be very small at the national level, it can be very interesting at the global level, therefore representing a huge opportunity! There are many examples of creative professionals who have attained global recognition through online sales.

One example is Emily the Pemily – an artwork-based label that sells handmade clothing and accessories.

Emilythepemily is an independent British brand run by Illustrator Emily Boyd. After interning for Alexander McQueen and hating every second of being told what to do creatively , Emily decided to set up her very own company, so now she can draw whatever she wants! Her quirky, satirical subjects are inspired by her love of tea drinking, the royal family, tattoos, 70 rock and roll, Britishness and general day-day observations.

— Emily the Pemily

An overview and brief description of some international webshops for creative professionals can be found at explorecreaterepeat.com.

6. Selling concepts

It is becoming increasingly common for people to come up with proactive concepts then attempt to sell them to clients. This is also a good way of making yourself known to potential clients. More and more agencies are working in this way, also because clients expect their suppliers to take a proactive approach.

If you do have an idea, try to make sure that it can be applied to other potential clients, for example by making it relevant to a whole branch or target group.

Ideas may also develop during pitches that can be used (wholly or partly) for other clients.

7. Productizing

Productizing means turning a service into a product.

Very often, services are tailored specifically to a client and the exact parameters of a project and the project price are determined for each project or assignment. Certainly where more complex projects are concerned, this means that you need to put a lot of time into each tender process.

In some cases, however, it may be possible to standardise services to such an extent that they can be sold according to specific conditions and with specific set deliverables for a set price. This makes it immediately clear to a client what he is getting for his money. When you do this, you turn a service into a product – you productize.

One example is the social media agency RauwCC. Most agencies produce a Facebook page, for example, as a customised service, but RauwCC have turned this service into a product by setting clear prices and corresponding specifications within which the solution is provided.

Other advantages of productization are that you make a service ‘scalable’, making it easier to expand to other regions.

How can you turn a service into a product?

You can do this by looking at which activities commonly recur as part of the service you provide. When carrying out these activities, you usually take the same approach, the client asks for more or less the same specs and you know how long you need. By describing the procedure you follow in detail and by making the outcome as specific as possible for the client, you take a step towards a standardised service. You then ‘package’ this as a product, and sell it as such.

Another example is the UX Scan from Online Department. Online Department developed the UX Scan to evaluate client’s websites based on a number of set parameters. It is very clear what the client gets for his money, and this usually also results in a new assignment.

8. Exchange, timebanking

Artists often exchange their work with other artists, which is a great way of acquiring the work of artists that they could not normally afford to buy. However, this is also seen more and more between other service providers, often driven by the fact that entrepreneurs who are a bit short of cash look for ways to conduct business through exchange. As a beginning entrepreneur, it can also make sense to exchange services with other starters – for example to exchange a house style for a website, or product photography for an office chair. This is known in the UK and US as timebanking, and there are many time banks that you can use to offer your services.

Timebanking started in about 1998 but has really taken off in the last few years. Even so, it is still in full development. Find out more about timebanking here.

A time bank was also launched recently in the Netherlands.

9. Crowdfunding

Frankwatching provides a good summary of crowdfunding (in Dutch):

Crowdfunding is a way of raising money by placing an appeal either on the internet or the social media. This is an open call, which means that anyone who wishes to may take part. The resulting donations or investments are made to fund a specific target (project or object).

In practise, this means that many people each donate a small amount, raising thousands of euros in total. Social media have an important role to play in this: if the message is to reach enough funders it needs to be spread beyond the immediate group of contacts such as family and friends.

Four types of crowdfunding

Some crowdfunding campaigns provide their crowdfunders with a reward such as a small gift, the right to vote, interest or a share in the profits. The different ways of rewarding crowdfunders has resulted in different types of crowdfunding. The four types are:

1. Donation-based crowdfunding. Crowdfunders donate and receive no form of compensation or reward.

2. Reward-based crowdfunding.  Crowdfunders receive a small reward for their contribution, such as tickets to a show, a CD or a book. What is important is that the value of the reward is much less than the amount of money donated by the crowdfunder.

3. Loan-based crowdfunding. Crowdfunders receive a regular payment in return for their contribution so that eventually they get all their money back (toevoeging, bijvoorbeeld: SoMoLend).

4. Investment-based crowdfunding. Crowdfunders receive financial compensation that is dependent on the turnover or profit achieved (toevoeging: bijvoorbeeld Symbid).

There is also a high level of segmentation in the crowdfunding field, for example Cinecrowd for AV, Oneplanetcrowd for sustainable products, Voordekunst for art projects and Investeer Lokaal for local initiatives.

Read about how to take part in crowdfunding here:

Research into the success factors of Kickstarter projects (in Dutch). And here:

7 Things to Consider BEFORE you Launch your Kickstarter Project

Kickstarter is a great place to get started on your campaign; not only is it one of the top crowdfunding sites available, it is also committed solely to the promotion and realization of creative projects. Kickstarter isn’t the only site dedicated to crowdfunding, however – Indiegogo, RocketHub, and PledgeMusic might be a better fit for your project. The key to crowdfunding success, which Nathaniel Hansen (successful filmmaker and crowdfunder) outlines in further detail on his website, is in putting in a lot of time and effort even before you decide to launch your idea to the world – and having a following willing to do the same.”

Crowdfunding is growing very fast and according to specialists like Douw & Koren, crowdfunding has doubled in 2014.

10. Funds / subsidies

Despite the fact that this is still an important source of income for many artists and designers, it is not the focus of this website, where we concentrate on generating your own, independent, source of income.

11. New revenue models

Several revenue models are described on this website. However, there are opportunities for creative professionals to come up with new revenue models. After all, society and the business community have become very receptive to new forms of ownership and other forms of capital distribution in recent years.

Interested? Take a look at (in Dutch):

Tegenlicht – Gaten in de markt

Tegenlicht – Overvloed

Tegenlicht – De Kapitale Kracht van Geluk – How the Brazilian top entrepreneur Ricardo Semler became super rich by focusing on the question ‘what would really make my employees happy?’

Het Snelle Geld – only a summary of each episode is now available. The most interesting of these is this episode, which includes Spilgames, Kees Zegers and Herman Wijffels.

Have you come across an interesting revenue model, or have you developed your own? Please do not hesitate to share it with us!

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