Have you ever wondered why so many startups fail despite getting huge investments?
The sad truth is that a bad revenue model is often the reason behind their downfall. 80% of startups fail because they can't generate enough income to cover their costs, and many burn through millions before realizing the mistake.
Let’s take a closer look at some big names in the startup world, and see how their bad revenue models led to their struggles. Understanding these lessons can help future founders avoid the same pitfalls and build stronger, more sustainable businesses.
The Revenue Mistakes That Led to Startup Failures
1. Swiggy's ₹5,000 Crore Spending Problem: Struggling with Low Profits
- Swiggy, a famous food delivery platform in India, faced big challenges because of its poor revenue model. In 2019, Swiggy spent ₹5,000 crores (around $700 million) on discounts, offers, and marketing to attract customers. While this helped the company gain a lot of customers, the costs were too high to make a profit.
- Even after raising $2.2 billion in funding, Swiggy struggled to earn enough money because of its flawed Swiggy revenue model, low profits on food delivery, and high operating costs like delivery and staff expenses. The company spent more money than it earned, making it hard to grow sustainably.
The Mistake That Ruined Successful Startups:
- While they gained a lot of customers, they didn’t have a plan to make money from these customers. The cost of running the business is like paying delivery drivers, maintaining their app, and marketing—was more than the money they earned from each order. Swiggy started realizing that they couldn’t keep spending so much and remain in business.
What They Did to Fix It:
- Swiggy started adjusting its pricing and delivery charges. Instead of offering huge discounts, they started charging more for deliveries. They also added new revenue sources like subscriptions (where customers pay a fixed amount for unlimited deliveries). This helped make the business more sustainable and profitable.
2. UrbanClap’s ₹190M Challenge: Fixing Revenue for Growth
- UrbanClap, now called Urban Company, faced big challenges with its revenue model even after raising $190 million in funding. The company earned money by commissioning service providers, but this method needed to be more sustainable. As the business grew, UrbanClap's expenses became too high, and the money from commissions needed to be more to cover these costs.
- By 2019, the company realized it needed a better plan to survive. UrbanClap changed its revenue model and started focusing on subscription-based services and value-added offerings, such as regular home maintenance. This change helped the company earn a more stable and reliable income. It also began working on long-term contracts with service professionals, which further improved its profitability.
The Revenue Mistakes That Led to Startup Failures:
- At first, this worked, but over time, the company grew bigger, and the commission they were earning didn’t cover all the expenses. They were paying for things like technology development, marketing, and salaries, and their revenue was not growing fast enough to cover all of it. This made their business unsustainable.
What They Did to Fix It:
- UrbanClap switched to a different model where they began offering subscription-based services to customers (like a monthly fee for regular beauty services). They also started focusing more on premium services with better margins (like deep cleaning, which costs more). This helped UrbanClap become more profitable and stable.
3. Webvan: The $800 Million Misstep
- Webvan was one of the first companies to offer online grocery delivery and raised an impressive $800 million in funding during the 1990s. With this large investment, the founders aimed to grow quickly and built new warehouses across the U.S. to handle more deliveries. However, they failed to create a pricing model supporting such rapid expansion.
- The revenue from each order was too low to cover the high costs of running warehouses, delivering groceries, and maintaining operations. Their focus on expanding delivery services overlooked the fact that the company was spending far more than it was earning.
- By 2001, Webvan couldn’t sustain its high logistics and infrastructure costs, and the company went bankrupt. This collapse resulted in massive losses for investors and became a well-known example of how an unsustainable revenue model can ruin even a well-funded business.
The Revenue Mistakes That Led to Startup Failures:
- While Webvan had a good idea, it spent too much money building a large infrastructure without enough demand for its service. It spent millions on big warehouses and delivery trucks, but the money it was making from customers was not enough to cover these costs.
What They Could Have Done Differently:
- Webvan didn’t properly understand their customers' needs. They didn’t calculate how much they needed to charge customers to make their business profitable. They expanded too quickly without a proper plan for how to make money. Webvan went bankrupt because their revenue model wasn’t realistic and couldn’t support their huge expenses.
4. Zomato’s ₹389 Crore Loss: Delivery Costs and Competition
- Zomato, one of India’s leading food delivery platforms, faced significant financial challenges despite its early success. To attract customers, Zomato relied heavily on discounts and incentives, which reduced its profit margins. In 2017, the company reported a loss of around ₹389 crore (approximately $46 million). A major reason for this was the high cost of building and maintaining delivery infrastructure, which drained its resources.
- To recover, Zomato began exploring other revenue streams like advertising and launching Zomato Gold, a subscription program offering dining and delivery benefits. These moves helped the company diversify its income sources. However, the initial rush to expand rapidly without a scalable and profitable revenue model put immense financial pressure on the business.
The Revenue Mistakes That Led to Startup Failures:
- Zomato was offering food at a low price, while their delivery costs (drivers, fuel, etc.) were much higher than what they were earning from each delivery. They couldn’t charge customers more because it would make people stop using their service. They weren’t earning enough from each customer to cover the huge delivery expenses.
What They Did to Fix It:
- Zomato realized this and started focusing on other ways to earn money, like running advertisements on their platform (businesses pay to advertise on Zomato). They also introduced subscription services (like Zomato Gold) where customers could pay upfront for special discounts. This helped them make money in addition to delivery charges.
5. Jabong’s ₹100M Loss: Discount Dependency and High Costs
- Jabong was once a leading name in India’s online fashion retail market, competing with platforms like Myntra and Flipkart. However, its dependence on heavy discounts and sales promotions led to financial trouble. Jabong raised over $100 million from investors, but the revenue model couldn’t support the high operational costs involved in managing an e-commerce platform, especially one with a large inventory.
- The company's reliance on deep discounts to attract customers meant that its profit margins were very low. Unlike sustainable business models, Jabong lacked a steady and reliable income source. Instead, it focused on boosting sales through frequent sales events, which added to its losses. This strategy proved costly, as the high expenses of running logistics, warehousing, and inventory management were not matched by sufficient revenue.
The Revenue Mistakes That Led to Startup Failures:
- The company relied too much on discounts, which meant they were barely making any profit on each item they sold. Jabong needed to find ways to make more money from customers rather than depending on giving things away for cheap.
What They Could Have Done Differently:
- Jabong didn’t have a strong pricing strategy, and its business model wasn’t focused on creating value for customers beyond discounts. In the long run, this caused the company to lose its competitive edge. In 2016, Jabong was acquired by Myntra, and the business model was shut down.
6. Hike Messenger’s ₹150M Struggle: Unable to Monetize Effectively
- Hike Messenger, launched in 2012, wanted to be India's version of WhatsApp and Telegram. It quickly gained attention, raising over $150 million in funding from investors. However, despite attracting millions of users, the company struggled to convert its popularity into steady income. Hike relied on revenue from stickers and in-app purchases, but these sources were not enough to support the company’s high infrastructure and marketing expenses.
- The platform faced intense competition from WhatsApp, which was more widely adopted and offered similar features. By 2016, Hike had made several attempts to pivot, introducing new features and exploring different revenue streams, but none proved sustainable. The company ultimately shut down its messaging service, choosing to focus on the social networking space instead. However, the constant changes in strategy and the inability to establish a reliable revenue model caused it to lose its footing.
The Revenue Mistakes That Led to Startup Failures:
- Hike couldn’t figure out a good way to make money. While they had a large user base, the methods they were using to earn money (like selling stickers) didn’t work.
What They Could Have Done Differently:
- Hike needed a better plan to earn money from its users. They tried to add other services, like news and content, but it was already too late. Eventually, the company closed down its messaging services and shifted to social networking, but by that time, many of its users had already left. They never had a clear, profitable revenue model.
The Pitfall: Bad Revenue Models Costing Billions
What’s the Real Problem?
- Many startups fail not because they don’t have good ideas, but because they don’t have a solid way to make money. A lot of companies spend huge amounts on marketing, expansion, and technology without understanding how much money they need to make from their customers.
Why Does This Happen?
- Startups often focus too much on getting big fast and attracting customers. But if they don’t plan properly to make money, they end up spending more than they can earn. This is why startups like Webvan and Hike failed. They didn’t have a proper plan to balance their expenses and revenues.
How to Avoid the Pitfall: 3 Essential Strategies
To avoid making the same mistakes, here are three things every startup needs to do:
1. Refine Your Unit Economics
What is Unit Economics?
- Unit economics is about understanding how much money you make from each customer (called lifetime value, or LTV) and how much it costs you to acquire that customer (called customer acquisition cost, or CAC).
What to Do?
- You need to make sure that for every customer you acquire, the money you make (LTV) should be higher than the money you spend to acquire them (CAC). For example, if it costs you ₹100 to get one customer, you should earn more than ₹100 from that customer in the long run. If you don’t, your business won’t be profitable.
2. Diversify Revenue Streams
What Does This Mean?
- Don’t depend on just one source of income. For example, if you run a restaurant, you might not just rely on food orders. You could also sell beverages, and stock, or offer subscriptions for special deals.
What to Do?
- Look for different ways to make money. If you only rely on one thing, you risk losing it. For example, Swiggy added subscription services to make more money apart from just deliveries.
3. Continuous Optimization
What Does This Mean?
- Always check how well your business is doing and make changes if needed. Look at how much you’re spending, how much money you’re making, and whether your pricing is right.
What to Do?
- If something isn’t working, fix it or try a new way. For example, if your delivery charges are too low and it’s costing you more to deliver than you make, raise the price slightly or reduce your discount. Small changes can make a big difference in making your business profitable.
Conclusion
Building a successful startup isn’t just about having a good idea or funding. It’s about having a strong revenue model that supports growth. As seen with companies like Swiggy and Webvan, a weak revenue model can ruin all the hard work and investments, no matter how much money or customers you have.
To learn from the mistakes of others and avoid similar pitfalls, read how "10,000 Startups Lost $50B: Learn from Their Mistakes" in our detailed blog post. Make sure your revenue model can grow with your company and cover costs. Learn from others' mistakes and plan for a sustainable model to ensure long-term success.
Thanks for reading! I hope you found it helpful. See you soon in the next blog post, where we'll dive into more tips for your startup's success.
Stay tuned and keep building!
