For first-time entrepreneurs, a startup often feels like an exciting journey associated with adventures and amazing breakthroughs. Yet, primarily, behind the idea of “dream becoming true” is a business meant to generate profit. And it’s not a success story by default.
In practice, launching a startup business is a complex and challenging process. So, on the verge of converting an interesting entrepreneurial idea into a real-life venture, it’s vital to develop an appropriate business model to make the startup a success and ensure its sustainable growth.
All startups are made differently, though, and there is no one-size-fits-all model. In this article, we’ll outline business models most suitable for startups and explain how to choose the one that will best work for your business.
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What Is a Business Model?
Given the general business purpose of making money, it might seem that a business model is about the ways of generating revenue. However, it’s more than that. It’s an entire plan describing how an enterprise can earn profit with its products or services in a specific industry or market.
The major points of focus in a business model are the following:
- Company’s products and services and the value they provide to the customer;
- Target audiences to benefit from the offered products or services;
- Prospective product or service performance on the market;
- Financial aspects to consider;
- Expected revenue sources.
The focal point of business plans that proved to be viable and successful in a modern business environment is not the revenue generation as it is but rather generating value for customers so that they are willing to pay.
Thus, a model embraces all business aspects (including revenue streams) and explains how they interconnect to bring success.
How to Choose an Optimal Business Model for Your Startup
Even when you have a good business idea in mind, there is always a lot of uncertainty and vagueness around startups since you can’t be 100% sure about the venture’s success, not to mention a whole bunch of nuances, details, hurdles, and complications that might arise along the way.
A well-defined business model can become a game changer for your pilot project and make it move in the right direction from the start. Without a sound strategy in place, though, it might be extremely difficult to gain pace and achieve long-term goals.
However, choosing the right model from a variety of options existing today is also a challenge. Since it’s a crucial decision that can determine the success or failure of your future venture, you should take it seriously. And there is a simple algorithm that will guide you to the right choice.
Identifying Your Customer
It’s the first step to take for a reason. Even with an exclusive product or service, you can fail if you don’t know who it’s for and whose problems it can solve. In the end, it’s the target market and your end customer that will determine your effective business model.
Depending on whose needs you will cater to, there are the following formats of vendor-to-customer or provider-to-customer interaction:
- Business to Business (B2B): A startup will deliver products or services to other businesses. Most often than not, those products or services are meant to improve operations, minimize costs, or optimize finances. It’s a format widely used by software development and outsourcing companies. Examples are Slack, HubSpot, and Salesforce;
- Business to Customer (B2C): A startup will provide products or services to individual consumers that purchase stocks for themselves to match their personal needs and use them on a daily basis. This format is utilized by online shops that are having their moment now and sell anything from consumer goods to mobile apps, games, music, etc. The examples here are Hulu, Netflix, Bonobos;
- Customer to Customer (C2C): A startup facilitates connections between customers selling products or services to each other. This is how online marketplaces work such as Airbnb and eBay. Other examples include companies that provide temporary payable access to certain products or services such as Uber or Sixt.
Understanding the needs, preferences, interests, and behavior patterns of your target audience won’t also go amiss. This will help outline your major customer personas within the chosen format.
Researching Your Competition
You won’t be able to carve a decent place in your industry or niche and stand out in the market unless you know your competition. So, analyzing your competitors is a must. Forewarned is forearmed. You should look at leaders in your industry to:
- Find out their target audience;
- Consider how they monetize;
- Identify the added value they offer to customers;
- Study their strengths and weaknesses.
All of these will help you create a unique customer value offer and develop a competitive business model.
Creating Your Business Model Canvas
To select a business model that will let your business grow and move to success, you should clearly understand all the aspects of your future business. A common problem with startups is ambiguity and uncertainty when it comes to enlisting and specifying the key business components to embrace.
A Business Model Canvas is a handy tool that will help you convert your business idea or concept into a business model. A ready-made template consists of nine blocks, each explaining an important business aspect:
- Key Partners: These are organizations or individuals that will make your venture work such as suppliers and distributors in a supply chain, for example;
- Key Activities: It’s the tasks, actions, and steps around which your business operation will be built to deliver the value proposition and set you aside from the competition on the market. It could be production, distribution, procurement, maintenance service, etc;
- Key Resources: These are the assets you need to let your enterprise operate and generate value for customers including both material and capital or intellectual resources;
- Value Proposition: It’s presumably the most important component of the template and your future business model. It determines your basic offering that will get customers hooked and keep them engaged. As such, it’s your major business driver;
- Customer Relationships: It’s about the ways you are going to interact and communicate with your customers;
- Channels: As the name suggests, it relates to how you will reach your customers and deliver your value proposition to them;
- Customer Segments: These are different types of customers you’ll create value for. You should think if you will target some specific customer group or a whole market niche or embrace a few customer personas;
- Cost Structure: This point covers the major cost drivers and distribution of expenses required to maintain your business;
- Revenue Streams: It’s about your future sources of profit and the ways of monetizing your value proposition to generate revenue.
Notably, all the elements in the template are grouped around the value proposition which is at the core. It aligns the rest of the business model components and puts them together. Thus, the business works to create a value proposition to solve a target customer problem and match customer prime needs.
Selecting Your Business Model
At this point, you’ve already put the puzzle of your business aspects together and have a common understanding of how your future venture should function. So, you are ready to choose a business model that will guide the growth and development of your enterprise.
The Best Business Models for Your Startup
Just casting a quick look at a variety of business models available these days is enough for a startupper to get confused and even frustrated. Yet, not all of the existing frameworks are good for startup projects. To ease your choice, we’ve cut down the list to 6 models that best suit startups.
Freemium
It’s a widely popular strategy successfully used by multiple startups across the globe. It implies providing a basic version of a product or service for free while premium features and advanced functionalities are made available at a fee.
It’s worth noting, though, that usually, a basic version doesn’t look scarce against the payable one. It offers enough features to be functional while a premium version comes with appealing benefits that are worth paying some extra.
Benefits
- The model can help startups quickly attract a large number of users without investing too much;
- Thanks to a free version, startups will enable users to try the product and engage with it. This will improve customer retention and increase the payable customer conversion rates;
- Startups will enjoy a great degree of flexibility in trying different pricing strategies to better match customer needs.
Examples: Netflix, Zoom, Skype.
On-Demand Model
On-demand or pay-per-use model is just what it sounds like. Customers only pay for the product or service when they need it, on a one-time basis.
Normally, it engages an app to connect to customers and is applicable to a variety of services and products, from pickup and rental service to the beauty industry, food delivery, laundry, etc.
Benefits
- Customers won’t have to pay for the features they don’t use which will further add value to your offering;
- Startups are free to tailor pricing to customer needs to cover more categories of potential customers;
- Frequent usage by different customers can be a sustainable revenue stream for a startup;
- With a focus on the younger generation, technology, and innovation, this model has great development and upscale potential.
Examples: Uber and Postmates.
Subscription Model
Unlike with one-off products, when using this model, companies sell their services via subscription. Subscriptions are provided on a monthly or yearly basis and, usually, can be renewed automatically.
Benefits
- The biggest benefit of this model for startups is stable cash inflows that occur recurrently, thus ensuring better revenue predictability, which is important at early stages;
- A subscription allows startups to lock in customers and retain them for longer, especially if a company continuously provides value;
- Gaining an opportunity to update existing products and promote new ones by gathering data on customer preferences and behavior;
- The cost-effective operation makes this business model easy to scale up, so startups can grow quite quickly.
Examples: Spotify, Apple TV, and Youtube Premium.
Marketplace
Marketplaces work as platforms for connecting sellers with customers and maintaining transactions between them. In the meantime, you can use the platform to provide a number of added services that might be of use to your clients.
Benefits
- Startups can easier acquire customers to grow their customer base relatively quickly;
- You don’t need to create your own stock or inventory since all products are shipped and delivered by sellers;
- Startups can save on overhead costs since retail platforms take only a small part of seller-to-customer transactions.
Deciding to use this model for your future venture, you should ensure a reason for customers to seek and use your specific marketplace.
It’s advisable that you refrain from mimicking marketplaces similar to that already implemented and exploited by the industry giants. Instead, you should find a target market receptive to your product.
Examples: eBay, Amazon, Etsy.
Free-From-Mediation Model
This strategy is actively implemented by multiple wholesalers, manufacturers, and enterprises built around direct sales. The major idea behind it is to sell products and services to the end user, without intermediaries.
Benefits
- Without middlemen, startups capable of producing and distributing goods on their own can lower and optimize their business costs;
- End users will enjoy lower costs, without added fees and expenses;
- The company gets a chance to raise profit margins while ensuring easier access to its products or services;
- Startups are free to juggle various business scenarios to gain a stronger competitive advantage.
Examples: Dell, Apple, Samsung, Walmart, Amway.
SaaS-Based Model
In a digital world where businesses constantly seek to fortify their online presence by switching to digital formats, the demand for all types of software keeps increasing.
Within this model, one company purchases software from another company for continuous use. A digital product normally comes along with technical support and personalized assistance or service if necessary.
Benefits
- Software as a Service (SaaS) is a great choice for startups planning to enter a B2B sector;
- The model requires lower upfront investments and operational costs enabling startups to enter the market quickly and scale efficiently;
- Predictable and recurring revenue streams will make it easier for startups to forecast and manage their cash flows;
- This type of business is accessible from anywhere increasing the reach and potential customer base for startups.
Examples: Microsoft Office, Zoho.
Is It Possible to Change a Startup Business Model Over Time?
The world is evolving, and the business world doesn’t stay still too. Changes are normal, they drive progress and growth. If you try something and it doesn’t work or work not efficiently enough, you can change it to optimize your business and give it a new boost.
Thus, during a business cycle, you can replace the entire business model or introduce partial modifications to catch up with your plans or new ideas. The only tip here is to treat everything mindfully and thoughtfully.
Avoid any radical changes that might bring just the opposite effect. Think twice before switching from one approach to another. Always consider the outcomes and results you want to get and weigh the potential risks.
Summing Up
Picking the right business model for your startup venture largely defines its success and development. Hence, take your time to get prepared and use the insights you’ve got about startup strategies to launch on the right foot and move in the right direction to achieve your developmental and monetization goals.