Building startups is about making crazy ideas a reality. No, not exactly. Some cofounders are so enthralled by their know-how ideas that they forget startups are businesses as well. And the primary goal of business is profit. Otherwise, you’re not going to be able to compete and win investments.
So, at some point during the startup development process, you should address the central question: how will my business make money? Choosing a business model for your startup is the best way to answer this question.
In this article, I will highlight the most popular business models for startups and explain how to select the model that will help your company succeed. Let’s get started!
After All, What Is A Business Model?
Is the Business Model solely concerned with what your users will pay for? That, as well. However, the business model encompasses many elements and necessitates the answers to several questions. Typically, the business model responds to the following questions:
- Who buys your goods? And why is that?
- Where do your customers buy your goods?
- What is the customer’s price for the product/service?
In other words, the business model explains the relationships between all aspects of your company: your products/services and your customers.
A business model’s significance should not be underestimated. Some business titans, which we regard as excellent products, are nothing more than novel business models.
Amazon, for example, has become the world’s largest online retailer despite having no physical stores. Similarly, Starbucks sells ordinary coffee at above-average prices.
4 Questions to Ask When Choosing a Startup Business Model
As previously stated, a business model is more than just “how much my product/service will cost.” The right startup business model can help you find answers to questions about your startup that explain why it exists. Before deciding on a model, consider the following:
- Who is my client?
- What is the scope of my business?
- What distinguishes my company from the competition?
- What value do I offer my customers?
These are the questions you should ask before diving into development and seeking funding.
Is it possible for startup business models to iterate?
The main rule of startup development that applies to business models is to not be afraid to change something that no longer works for you. Your business model is not a sentence (though they do change), and it can evolve over time.
You can sometimes substitute the entire model. However, this is not always the case. For example, if you notice that users rarely use annual or 6-month subscription options, you can cancel them.
While a change in the startup business model is acceptable, it should not be radically different. For example, if you used the ads business model for your startup, skipping to the annual payment format would be risky.
Four Steps to Selecting the Best Business Model for Your Startup
As a Product Manager, I am always assisting startups in determining their business models. I always follow the algorithm of these four steps for this.
Step 1: Whose Problem Are You Trying to Solve?
First, determine who your product/final service’s customer is:
- B2B (Business to Business) – a business owner, not a private individual. In this case, you both work for the same company. Software development firms, web design agencies, and outsourcing firms are classic examples of B2B models.
Microsoft Teams, Slack, and Plai are a few examples.
- B2C (Business to Customer) – marketing products and services to specific customers. Online stores where people buy products, mobile apps, and games for daily use are all good examples of such models.
Netflix, Hulu, and Dollar Shave Club are a few examples.
- Customer-to-customer (C2C) platforms serve as a connecting space for customers to provide products or services to one another. On such platforms, peers are treated equally and interact for economic gain. This business model is also known as the “sharing economy.” Examples include eBay, Uber, and Horizon.
Step 2: Examine Your Competition
You can’t make a market niche statement unless you know who your competitors are. So take a look at the top game setters in the niche:
- Who are they aiming for?
- What is their monetization strategy?
- What is the benefit?
Step 3: Create a Long Canvas
Business Plan Canvas is a tool that helps you organize all of your business elements into a single scheme. The template typically consists of nine blocks, each dedicated to a different aspect of business processes:
- Problem – what is the problem of each user segment with which you will be working?
- Consumer Segment: To whom do you provide value? Who is your most important customer?
- Value Proposition: What problem are you solving for the consumer? What value do you provide to the client?
- Communication channels How do you interact with your customers? How will you convey your value proposition to them?
- Customer service. How do you deal with customers? Whether directly or through a personal manager? Or do you prefer self-service?
- Streams of revenue Which price will the customer pay? How will you monetize your project?
- Important resources What do you require to get your product to market? Or convey the value of the product to the consumer? These are resources, and they can be financial, material, intellectual, or any combination of the three.
- Steps to take. What does it take to run a business? It could be production, distribution, or finding a solution for a specific client.
- Key partners are those stakeholders who enable your business to function: suppliers who provide integrated services.
- Expenses – which expenses are required to run your business?
- Unfair advantage – consider the value that you can have that others cannot.
The Lean Canvas is especially useful in startups with a lot of ambiguity. This artifact will help you gain a better understanding of the various aspects of your business.
Step 4: Select Your Business Model
Finally, we’ve arrived at the crux of this algorithm: the selection of the business model. This decision is influenced by a number of factors that we have previously discussed. You should select the type of monetization model that best fits your business based on your Business Model Canvas and the answers you provide to the questions above.
7 Different Types of Business Models for Your Company
There are numerous business models available today. Here are the most popular ones, which will be especially beneficial to startups.
Model of Freemium
The Freemium model is a popular monetization format for subscription-based services. A client can use an app’s basic functionality for free and then upgrade to the full version for a fee under this model.
The Freemium model aims to show the client the features of the product. Furthermore, it attracts the greatest number of users, the majority of whom purchase the premium version.
Examples include Spotify and Netflix.
Single Payment (Pay-Per-Use)
This is the most basic model that can be imagined. This one states that you simply purchase a product or service and pay for it once. This business model is appropriate for services or products that, by definition, should not be used more than once a year or half a year, such as legal services, psychological counseling, and car rental.
Model Based on SaaS
SaaS-based business models include Slack, Zoho, and Microsoft Office. If you’ve ever worked in an office, you’ve probably heard of this one. This model allows a company to purchase software from another company for long-term use. Aside from the product or service itself, the consumer also receives technical support and, if necessary, customized services. SaaS (software as a service) is a B2B-relevant business model.
Model of Subscription
When was the last time you paid your Netflix bill? I’m sure you’ll have trouble remembering that. The problem is that we don’t even notice these monthly payments from our bank accounts. However, this is exactly how Netflix makes money – through subscriptions.
Customers who use such services typically have three subscription options: annual, semi-annual, and monthly. The subscription model, as opposed to the SaaS model, is more common in the B2C sector.
The transactional model is common for products and services that are linked to payment systems. This one is important for companies that act as a link between sellers and buyers. They collect transaction fees from the buyer, seller, or both.
Real estate agencies, public relations firms, event companies, recruiting firms, and financial/banking products are some examples.
Marketplaces enable retailers to sell their products while also providing clients with simple tools for communicating with retailers. Furthermore, this business model allows for monetization through various channels, such as purchase fees or additional services.
Examples include iHerb, Amazon, and eBay.
Ads business models have been around for a long time, but they are becoming increasingly unique as the world becomes more digital. To use this model while showing ads to your readers and viewers, you should create content that people want to read and watch.
In this model, you can provide free content to users while monetizing your business through advertisements. This model is sometimes used in conjunction with the crowdsourcing model, in which users create their own content.
The New York Times and YouTube are two examples.
Well-known Apps and Their Business Models
Let’s take a look at some well-known business models used by popular apps today.
Airbnb’s Business Model as a Marketplace
Today, Airbnb is one of the world’s most popular marketplaces. Airbnb is a platform that connects accommodation providers with those looking for lodging in any part of the world. The main idea behind Airbnb’s business model is that it does not own any accommodation while remaining the world’s largest accommodation provider. It does, however, provide a tool for people to find each other and earns money from user fees.
Subscription Business Model at Netflix
Netflix is the largest entertainment platform, with 193 million members (as of July 2020) from over 190 countries and $20.16 billion in annual revenue. Netflix’s key partners are well-known filmmakers, scriptwriters, animators, and production companies who create high-quality content for the platform. Users can access this content 24 hours a day, seven days a week by paying a monthly, six-month, or annual subscription.
Pay-Per-Use Business Model at Amazon Web Services
Amazon Web Services (AWS) is a subsidiary of Amazon that provides cloud computing services to individuals, businesses, and governments. AWS provides users with continuous access to a virtual cluster of computers.
Users who sign up for the AWS platform receive free credits at the start. As a result, this is similar to a freemium model in some ways. However, if users require more cloud space or server capacity, they can purchase it and pay for it. In practice, this is how the pay-per-use business model works.
Choosing the best business model for your startup is critical to its success. Choosing a suitable business model, on the other hand, answers specific questions about your company. The Lean Canvas is an excellent tool for answering these questions and systemizing all aspects of your business in a straightforward manner.