There are many business models used to generate revenue from customers. However, most of them fall into three basic categories: transactional, commerce, and subscription.

I highlight these three models as primary based on the analysis of thousands of startups and their business models. Understanding how your monetization model works is essential for accurately calculating unit economics and using them to plan your product's growth. Generally, unit economics allows you to calculate margin profit through product metrics using the following formula: 

This formula shows how product metrics are connected to margin profit, enabling you to manage profitability by improving business processes. The AOV metric can also depend on other business processes directly related to your business model. Let’s explore this further. 

Transactional Model 

This is the most basic model, where AOV does not depend on other processes. In this model, the customer pays for your product or service, and you record the payment. Different customers may pay different amounts, and you simply calculate the average order value (AOV) across all transactions. Essentially, all business models can be reduced to this basic model, as all businesses receive payments for goods or services. 

Here, the two key metrics are AOV — average order value, and APC — average number of transactions per customer. The formula for calculating revenue is: 

Revenue = AOV × APC × B, 

where B is the number of customers. APC = T / B, where T is the total number of transactions, and AOV = Revenue / T. 

Commerce Model 

This monetization model is used in the sale of goods. In this model, a customer may purchase multiple items in one transaction, and AOV depends on the average number of items per transaction (AIQ) and the average price of items (AIV).

AOV = AIV × AIQ

If your point of growth is the average order value, you can either increase the number of items in the basket or raise item prices, depending on market conditions.

Subscription Model (SaaS) 

The next type of monetization is subscription. On the one hand, we simply expect that our customers will regularly pay for our product, and we can predict payment inflows. In some cases, this model is not much different from the transactional model, for example, utility bills or mobile phone services. On the other hand, there may be a need to create different pricing plans. 

Your business may have several pricing plans with varying costs. In addition, depending on your objectives, you can offer the option to pay for the product monthly or annually, which creates a complex structure of subscription plans. 

However, the same challenge arises—how to influence the average order value (AOV) if necessary? To do this, we need the formula for calculating AOV in a subscription model: 

where AIS_i is the percentage of customers who chose plan i, and AIV_i is the normalized cost of the subscription for that plan. 

Normalization of cost is a crucial detail. If you have several types of subscriptions for the same plan, such as monthly and annual, the annual subscription should be considered as 12 monthly payments. For example, if your monthly subscription costs 50 and your annual subscription costs 480, normalizing 480 over 12 months gives a monthly payment in the annual plan of 40.

If 10% of your customers choose the annual subscription and 90% choose the monthly one, the average order value will be calculated as follows: 

AOV = 10% × 40 + 90% × 50 = 49 

In subscription models, due to normalization, it is also important to consider the frequency of customer payments: 

where LT_i is the normalized average customer lifetime on plan i. For example, if a customer on a monthly plan pays for 5 months on average, and on an annual plan, 1.5 years (with only a portion of customers renewing), then for the monthly plan LT = 5, and for the annual plan LT = 1.5 × 12 = 18. Thus, the average frequency of transactions for customers will be: 

APC = 10% × 18 + 90% × 5 = 6.3 

Now, you can make decisions on how to increase AOV in your subscription-based business. For instance, you can simply change the subscription price, or you can encourage customers to choose a specific plan by offering additional benefits. This will redistribute the customer base among the plans. For example, if 20% of customers choose the annual plan instead of 10%, we get: 

AOV = 20% × 40 + 80% × 50 = 48 

APC = 20% × 18 + 80% × 5 = 7.6 

As we can see, by shifting the distribution toward the annual plan, the average order value decreased, but the transaction frequency increased. 

Simplifying Modeling 

To simplify working with such models, you can use ueCalc, as this service can handle all three monetization models. Simply choose the appropriate document template: Basic Unit Economics — transactional model, E-commerce — for the commerce model, and SaaS — for the subscription model.

All the features for business model analysis, identifying growth points, and optimizing the business model will work with all the specific characteristics of the monetization model, taking into account all the product metrics.

All you need to do is focus on your constraints and business, while ueCalc will take care of the model calculations.