Businesses
How Startups Make Money: Choosing the Right Revenue Model for Sustainable Business Growth
03 Nov 2026
From subscription services and transaction fees to licensing and e-commerce, startups have several ways to generate revenue. Entrepreneur and fundraising advisor Alejandro Cremades examines how founders can choose a business model that meets customer expectations, supports profitability and strengthens their position when seeking investment.
A startup can attract thousands of customers, develop a promising product and secure investor interest, yet still struggle to build a profitable business. Revenue growth alone doesn't guarantee financial stability, and choosing the wrong pricing model can leave founders spending more to acquire and serve customers than they earn from them.
For entrepreneurs preparing to launch a business or raise capital, deciding how customers will pay is one of the most important financial decisions they face. The answer shapes everything from product development and customer acquisition to cash flow and long-term expansion.
In a guide shared through StartupFundraising.com on 31 October 2026, entrepreneur and fundraising advisor Alejandro Cremades examines the different monetisation strategies available to startups. His analysis covers subscription services, freemium products, transaction fees, advertising and licensing, alongside the financial considerations that influence each approach.
The guide also addresses a question many founders encounter during fundraising: how can a business demonstrate that its product has enough commercial value to generate sustainable revenue?
Why Choosing the Right Revenue Model Matters for Startups
A monetisation strategy determines how a business converts the value it provides into income, including who pays, what they purchase and how frequently payments are collected.
For a software company, this might involve charging customers a monthly subscription, while an online marketplace could earn a commission whenever a transaction takes place. A business developing proprietary technology may instead license its intellectual property to other organisations.
Each approach creates different financial obligations, and founders need to understand how those obligations affect growth before committing to a particular model.
Cremades argues that early-stage monetisation strategies should be treated as assumptions that require testing rather than fixed decisions made at launch. As businesses develop their products and learn more about customer behaviour, their pricing structures may need to change.
The decision also affects how investors evaluate a company, since different revenue models produce different levels of predictability and operating costs. A startup generating recurring payments may be easier to forecast than one relying on irregular contracts, although recurring revenue doesn't automatically mean the business is profitable.
Subscription Models and the Appeal of Recurring Revenue
Subscriptions have become a common approach among software-as-a-service companies and digital platforms because they allow businesses to collect payments at regular intervals.
Companies such as Salesforce and Zoom use recurring payment structures to provide customers with continued access to their software. Depending on the product and customer, subscriptions may be charged monthly or annually, with different pricing tiers offering varying levels of functionality.
For startups, recurring revenue can make financial planning more manageable because future income becomes easier to estimate when customer retention remains stable. It can also support longer customer relationships, giving businesses opportunities to introduce new products or services over time.
But maintaining those relationships requires continued investment in the product, and customers may cancel when they no longer receive enough value to justify the expense.
A company with strong subscription sales can still face financial difficulties if acquiring customers is expensive or cancellation rates remain high. Founders must therefore examine customer retention alongside revenue growth when assessing whether the model works.
Freemium Products and Free Trials as Customer Acquisition Strategies
Freemium models allow customers to use a basic version of a product without payment, while additional features or higher usage allowances are reserved for paying subscribers.
Spotify and Slack are examples of businesses that have used free access to introduce users to their services and encourage adoption of paid offerings.
The model can reduce the initial commitment required from customers, making it easier for people to explore a product before deciding whether it meets their needs. It also creates opportunities for users to recommend the service to colleagues or friends.
Yet providing free access introduces costs that don't necessarily generate immediate income, making conversion rates an important part of the business model.
If too few users upgrade, a startup may find itself supporting an expanding customer base without generating enough revenue to cover infrastructure and operational expenses.
Free trials offer a different arrangement by allowing customers to experience a product for a limited period before payment becomes necessary. Founders choosing between these approaches need to consider how quickly customers can recognise the product's value and whether continued free access encourages eventual purchases.
Transaction Fees and the Economics of Digital Marketplaces
For businesses connecting buyers with sellers, transaction-based pricing can offer an alternative to subscriptions.
Platforms such as Airbnb and Uber earn revenue by facilitating transactions between participants and collecting fees associated with those activities. Rather than requiring every user to pay for access, the business generates income when customers complete transactions.
This structure can make participation more attractive because users don't necessarily face recurring charges before receiving a service.
Revenue also grows as transaction activity increases, although that creates exposure to changes in demand and purchasing behaviour.
Marketplaces face another difficulty during their early development: they need enough suppliers to attract customers, but suppliers may hesitate to join until customers are already active.
Founders must account for this relationship when estimating customer acquisition expenses and the transaction volume needed to sustain operations.
Advertising, E-Commerce and Licensing Offer Different Routes to Revenue
Advertising allows digital businesses to generate income by selling access to audiences, often while providing their main service to users without charge.
Google and Facebook helped establish this approach across search and social media, where advertising revenue depends on audience activity and advertiser demand.
For smaller startups, advertising can be difficult to sustain without an engaged audience that advertisers are willing to pay to reach. The model also requires attention to privacy obligations and the effect advertising may have on the customer experience.
E-commerce offers a more direct relationship between a purchase and the revenue received, with businesses selling physical or digital goods to customers.
While the structure is relatively straightforward, companies selling physical products must account for inventory, shipping, returns and other expenses that can reduce profitability.
Licensing provides another route for businesses that own valuable technology, patents or other intellectual property. Instead of selling a product directly to every customer, the company grants another organisation permission to use its assets in exchange for a fee or royalties.
Cremades identifies licensing as a model that can support growth without requiring an equivalent increase in delivery costs, although its success depends on the value of the intellectual property and the willingness of organisations to purchase access.
Service-Based Businesses and Hybrid Revenue Models
Some technology startups begin by offering consulting, implementation services or custom development while building products intended for a larger market.
This approach can provide income during the early stages of a business, when product sales may be limited and founders are still learning what customers need.
Working directly with clients can also reveal recurring problems that could eventually be addressed through standardised software or other products.
The limitation is that service-based growth often depends on staff availability. As demand increases, businesses may need to employ more people, which can raise operating costs alongside revenue.
Hybrid models allow companies to combine different sources of income without depending entirely on one pricing structure.
A software provider might charge recurring subscriptions while offering separate implementation services to larger clients. An online retailer could introduce recurring product deliveries alongside individual purchases, giving customers different ways to buy.
Combining revenue streams can help businesses serve different customer groups, but it also requires careful management of pricing and costs.
How Founders Can Identify the Most Suitable Monetisation Strategy
Cremades recommends examining customer behaviour before deciding which pricing structure to adopt, since purchasing expectations differ across industries and markets.
A company selling enterprise software may find that customers prefer annual agreements because their purchasing processes are built around established budgets. Consumers purchasing occasional digital services may instead favour individual payments or short-term commitments.
Understanding when customers receive value can help founders determine which approach is appropriate.
If a service delivers continuous benefits, a subscription may align with how customers use it. When value is delivered through a single transaction, charging for that transaction may make more sense.
The cost of serving customers also needs consideration, since revenue growth has limited value when expenses rise at a similar or faster rate.
Founders should calculate the financial implications of customer acquisition, technical infrastructure and ongoing support before making assumptions about profitability.
Competitor pricing can provide useful context, but copying another company's model without understanding its financial structure may create problems. A startup needs to establish whether its own customers will pay enough to support the service being offered.
Why Customer Lifetime Value and Acquisition Costs Matter to Investors
Investors examine more than headline revenue when assessing whether a startup has a sustainable business model.
One commonly used measure is average revenue per user, or ARPU, which shows the income a company generates per user during a defined period.
Customer acquisition cost, known as CAC, measures how much a business spends to attract a new customer. This can include marketing and sales expenses associated with acquiring that relationship.
Customer lifetime value, or LTV, estimates the economic value a customer may generate throughout their relationship with the business.
Cremades' guide presents a simplified approach to calculating LTV using average revenue per user, gross margin and customer churn. The calculation can provide an estimate for subscription businesses, although its usefulness depends on reliable data and consistent reporting periods.
Churn measures the proportion of customers who cancel their subscriptions or fail to renew within a given period.
Together, these measures help founders assess whether customer relationships can produce enough revenue to support the cost of acquiring and retaining them.
For example, a business that spends heavily to acquire subscribers may struggle if those customers cancel after a few months. A company with stronger retention may have more time to recover its acquisition costs, although it must still manage the cash required to fund growth.
Why Startups Should Keep Testing Their Pricing
A pricing strategy that works during a company's launch may become less suitable as the product develops and its customer base changes.
Early customers may be willing to pay for a limited service because it solves a pressing problem, while larger organisations could require additional functionality or different contractual arrangements.
Cremades recommends testing pricing structures, product packages and billing periods to understand how customers respond.
Businesses can use controlled experiments to compare offers, although meaningful results require sufficient data and care when interpreting changes in purchasing behaviour.
Customer feedback also provides information about whether the product's value is understood.
When prospective buyers consistently reject a price, the problem may involve affordability, competition or an unclear explanation of what the service provides.
Reducing prices isn't always the appropriate response, since discounts can weaken margins without addressing why customers hesitate to purchase.
Founders need to understand whether the product delivers enough value and whether the payment structure matches the way customers use it.
Common Monetisation Mistakes That Can Affect Startup Growth
Underpricing is a common concern for founders who want to attract customers quickly, but low prices can become difficult to sustain when operating costs increase.
A startup may achieve strong early adoption while generating too little income from each customer to cover its expenses.
Charging more than customers are willing to pay creates a different problem, leading potential buyers to delay purchases or choose competing products.
Cremades also identifies unclear product value as a frequent weakness, notably in businesses offering multiple pricing tiers.
Customers need to understand what changes when they move from free access to a paid subscription, or from a basic package to a more expensive version.
When that difference isn't clear, users may have little reason to upgrade.
Ignoring feedback can make these problems worse, since founders may continue using a pricing structure that customers have already shown they don't accept.
The guide encourages businesses to remain willing to change their approach as they learn more about purchasing behaviour and market demand.
How Revenue Models Influence Startup Fundraising
A startup's revenue structure can affect how investors assess its potential growth and financial performance.
Cremades' guide references an analysis of 3,989 pitch deck teardowns, arguing that founders benefit from explaining their pricing models and financial metrics clearly when approaching investors.
The source doesn't provide a detailed methodology establishing how these presentations affected fundraising outcomes, so the figure should be treated as background to the author's analysis rather than independent evidence of investment success.
Investors commonly want to understand how a company acquires customers, what those customers pay and whether revenue can grow without an equivalent increase in expenses.
Businesses generating recurring income may offer greater visibility into future sales, but investors also need to examine retention, customer concentration and operating costs.
A startup producing $1 million in annual recurring revenue and another generating $1 million through individual service contracts may have different financial characteristics. Their valuations will still depend on profitability, growth expectations and the risks associated with their markets.
Founders preparing to raise capital should be able to explain why they selected their monetisation strategy and what customer behaviour supports that decision.
Financial projections become more convincing when they are supported by actual sales, customer retention data and evidence that the business can acquire customers at a sustainable cost.
Building a Revenue Model That Supports Long-Term Growth
Choosing a monetisation strategy requires founders to understand how customers purchase their products and whether those transactions can support a profitable business.
Subscriptions may suit services providing continuous value, while transaction fees can work for marketplaces and businesses connecting buyers with suppliers. Companies with valuable intellectual property may find licensing attractive, while others may combine product sales with professional services.
The appropriate choice can change as a startup grows and learns more about its customers.
Cremades' analysis encourages entrepreneurs to treat pricing as an ongoing business decision, supported by financial measurements and customer feedback rather than assumptions made during product development.
For founders approaching investors, the ability to explain how revenue is generated can be as important as demonstrating demand for the product.
A startup may begin with a simple pricing structure and adjust it as its business develops, but those changes need to reflect what customers are willing to purchase and what the company can afford to deliver.
About Alejandro Cremades
Alejandro Cremades is an entrepreneur, author and fundraising advisor whose work focuses on startup financing, venture capital and business development.
Through StartupFundraising.com, he provides resources covering investor outreach, pitch preparation, financial planning and fundraising strategies for entrepreneurs.
His guide, The Ultimate Guide to Startup Monetization Strategies: Choosing Your Revenue Model, was distributed on 31 October 2026.
Website: https://startupfundraising.com/
