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How Startup Valuation Works
Startup valuation shows how much of the company the investor gets for his investment. At the early stages, valuation is about growth potential, not present value.
Difference Between a Startup and a Small Business
Startups are different from small businesses mostly because they are designed to grow fast. So when investors put money in a startup business, they don’t just want to make money, they want the business to grow fast while they make money. This means that startups have something they can sell to a very large market. Most of these businesses are found in the tech sector. Startups usually get capital from angel investors or venture capital firms.
The value of a startup business is determined by market forces in the industry in which it operates, including:
- willingness for an investor to pay a premium to get into a deal
- level of desperation of the entrepreneur looking for money
- balance between supply and demand of money
- recency and size of recent exits
The investor’s considerations mesh with market forces. The first thing an investor considers when determining the value of a startup is the exit, or how much the company can sell for in future years. Other matters of importance include the total money it will take to grow the company to the stage that someone will buy it for one billion dollars, and what percentage of that amount the investor owns. The option pool, or stock set aside for future employees, also influences valuation.
Persuading an Investor
Traction is the number one thing that will convince an investor to put money in a business. Traction is evidence that a product or service will be used by many people. If you can show that your business offering has many users, an investor is likely to be convinced that your company is a winner. Your reputation, or prior success, is another factor that influences whether or not an investor will take a chance on your company.
Determine If a Startup Is Right for You
A startup is a viable option when embarking on a new business venture since there is a great deal of funding for early-stage startups and many big companies are buying them. If you like working hard and then moving on, this may be a good option for you. Investors take a hands-on approach since they have so much money invested. So if you like input and guidance from an expert, you may find that this type of business is best for you.
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Business Models for Startups: Choose the Best One
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Building startups is about crazy ideas becoming true. Well, not quite so. Enthralled by their know-how ideas, some cofounders sometimes forget that startups are businesses, which should be profitable to exist. And without proper business modeling, a startup is doomed for failure.
So at some point in startup development , you should answer the focal question – how to develop a business model? Well, this questions entails a row of others:
- What are the revenue model types?
- How to develop a business model, which brings profit?
- Who can help me with business modeling?
In this article, I will highlight the most popular business models for startups and tell how to choose the model that will bring success to your business. Let’s start!
What is a Business Model After All?
So is the business only about what your users will pay for? Well, that too. But in reality, the business model or a revenue model covers numerous elements and requires answering several questions:
- Who buys your products? And why?
- Where do customers buy your products?
- How much does the customer pay for the product/service?
In other words, any revenue model type explains the connections between all elements of your business: your product/services and your clients.
One shouldn’t underestimate the meaning of a business model. In fact, many business giants, which we think are great products, are nothing more than well-functioning business models.
For example, Amazon has become the biggest online retailer worldwide with no brick-and-mortar shop. Samely, Starbucks sells ordinary coffee for prices above average.
4 Questions, that will help to choose startup business model
As mentioned before, a business model is not only about “how much my product/service will cost”? The suitable startup business model helps find answers to the questions about your startups that explain why your business should exist. Before choosing the model, ask yourself:
- Who is my customer?
- What’s the domain of my business?
- How is my business different from the competitors?
- What value do I bring to my customers?
Well, these are the questions you should answer before plunging into the development and seeking funds.
Can startup business models iterate?
Do not be afraid to change something that does not work for you anymore – that’s the main rule of startup development that applies to business models too. Your startup business model is not a sentence (though they also change), and it can iterate throughout the business cycle.
Sometimes you can substitute the model as a whole. But more often, the change can be partial. For example, you can cancel annual or 6-month subscription options if you see that users rarely use them.
Expert Tip: While a change in the startup business model is ok, these should not be radically different changes. For example, if you used the ads business model for your startup, it would be risky to skip to the annual payment format.
What’s Your Startup Business Model? 4 Steps to Choose
As a Product Manager, I always help startups to find their business models. For that, I always follow the algorithm of these 4 steps.
Step 1. Whose problem are you solving?
Firstly, identify who the final customer of your product/service is:
- B2B (Business to Business) – an entrepreneur, not a private person. In this case, you work for the same company as you are. Classic examples of B2B models are software development companies, or web design agencies, outsourcing companies.
Examples: Microsoft Teams , Slack , Plai .
- B2C (Business to Customer) – promoting the product and services to individual customers. Vivid examples of such models are online shops, where people buy products, mobile apps, and games for daily life usage.
Examples: Netflix , Hulu , Dollar Shave Club .
- C2C (Customer-to-customer) – such platforms work as a connecting space for customers to provide products or services to each other. On such platforms, the peers are equal, interacting for economic benefits. This model is also called the “sharing economy”. Examples: EBay , Uber , Horizon .
Step 2. Analyze your competitors
You cannot make a statement on the market niche unless you know your competition. So take time to look at the leading game setters in the niche:
- Whom are they targeting?
- Which monetization model do they use?
- What’s the added value?
Step 3. Make a Lean Canvas
Business Model Canvas is an instrument that helps gather all your business elements in one scheme. The template usually includes nine blocks, each one dedicated to a specific direction of business processes:
- Problem – what’s the problem of each segment of users that you will be working with?
- Consumers’ Segment: to whom are you bringing value? Who’s your most important client?
- Value Proposition: what’s the consumer’s problem are you solving? What value are you bringing to the client?
- Channels of communication. How do you communicate with the consumers? How do you communicate your value proposition to them?
- Customer relations. How do you interact with a consumer? Directly or via a personal manager? Or via self-service?
- Revenue Streams. For which value will the customer pay? How are you going to monetize your project?
- Key resources. What do you need to bring your product to market? Or communicate the product’s value to the consumer? These are resources, and they can be financial, material, intellectual, etc.
- Key action steps. What does it take to make the business work? It can be production, distribution, solution search for an individual client, etc.
- Key partners – are those stakeholders who make your business possible: suppliers integrated services.
- Expenses – which expenses are necessary to make your business work.
- Unfair advantage – think about what the value is that you can have and others cannot buy.
The Lean Canvas comes especially handy in business modeling for startups with a lot of uncertainty. This artifact will give you a clearer vision of your business’s different aspects.
Step 4. Choose your business model
Finally, we have arrived at the main point of this algorithm – the choice of the business model. What your business model will be depends on a variety of factors that we have discussed before. Depending on your Business Model Canvas and the answers you will give to the questions above, you should choose the type of monetization model that suits your business best.
7 Types of Business Models for Your Business
These days, there are a lot of types of operating models. Here are the most popular ones that will be especially useful for startups.
The Freemium revenue business model is a popular format of monetization among subscription-based services. Within this model, a client can access an app's basic functionality for free and get access to the full version for payment.
The Freemium model aims to demonstrate the product's features to the client. Besides that, it attracts the maximum number of users, the majority of which buy a premium version.
Examples: Spotify, and Netflix.
Learn more about the freemium model in our article How Do Free Apps Make Money?
One-Time Payment (Pay-per-Use)
This is the simplest model that one can imagine. According to this one, you simply buy a product or a service and pay for it on a one-time basis. This type of business model is relevant for services or products that, by its nature, need not to be used more often than once in a year or half a year—for example, legal services, psychological help, car rent.
Example: STUDENTEN – a job-seeking platform for students in the Netherlands.
Slack, Zoho, Microsoft Office – all these are examples of Saas-based revenue business models. If you have ever worked in an office, you might know this one. According to this model, a company can buy software from another company for long-term usage. Besides the product or service itself, the consumer also receives technical support and customized services if needed. SaaS (software as a service) is a business model relevant to the B2B market.
When was the last time you paid for your Netflix subscription? Well, I bet you will have a hard time remembering that. The thing is, we do not even pay attention to these monthly payments from our bank accounts. Yet, this is precisely how Netflix makes money – via subscriptions.
Such services usually give their customers different subscription options – annual, half-annual, or monthly. Unlike the SaaS model, the subscription format is more typical for the B2C sector.
The transactional model is typical for products and services integrated with payment systems. This one is relevant for businesses that serve as a chain between sellers and buyers. They take fees for the transaction either with the buyer, seller, or both.
Examples: real estate agencies, PR agencies, event companies, recruiting agencies, financial/banking products.
Marketplaces allow retailers to sell their products and provide the clients with simple instruments for communication with retailers. In addition, this business model offers monetization from different channels, including purchase fees or extra services.
Examples: iHerb , Amazon , Ebay .
Ads business models have existed for many years but have become more and more unique as the world becomes more digital. You should create content that people want to read and watch to use this model while showing ads to your readers and viewers.
In this model, you can provide users with free content while monetizing your business on ads. Sometimes this model goes in hand with the crowdsourcing model, where users create the content themselves.
Examples: The New York Times , YouTube
Famous Apps and Their Business Models
Let’s look at some famous examples of revenue business models used by popular apps today.
Airbnb – Marketplace Business Model
Today Airbnb is one of the most popular marketplaces worldwide. Airbnb is a platform that connects accommodation givers with those who seek accommodation in any corner of the world. The main idea behind Airbnb’s business model is that it does not own any accommodation itself while staying the biggest accommodation provider in the world. However, it provides the instrument for people to find each other and earns from the users’ fees.
Netflix – Subscription Business Model
Netflix is the biggest entertainment platform with 193 million members (as of July 2020) from over 190 countries and annual revenue of $20.16 billion. Netflix’s key partners are prominent filmmakers, script-writers, animators, and production companies that generate quality content to stream on the platform. Users can enjoy this content 24/7 with no ads interruptions, paying a monthly, six-month, or annual subscription.
Amazon Web Services – Pay-Per-Use Business Model
Amazon Web Services (AWS) is Amazon’s subsidiary that provides cloud computing services to individual users, companies, and governments. Using AWS, users have 24/7 access to a virtual cluster of computers.
Once the users sign in to the AWS platform, they get free credits at the beginning. So partially, this resembles a freemium model. However, once the users need more cloud space and server capacity, they can purchase them and pay accordingly. This is how the pay-per-use business model works in practice.
Choosing the best type of revenue business model for your startup defines the success of your business. However, suitable business modeling answers specific questions about your business. Lean Canvas is a great instrument that helps to answer these questions and systemize all elements of your business in a simple scheme.
Uptech has broad experience in business modeling for startups based on Lean Canvas and detailed information.
What is a Business Model?
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7 Different Business Model Ideas for Your Startup
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Different business models are used for different types of startups.
As a startup business seeking long-term success, it's not enough for you to have a great idea for a product or service. No matter how great an idea is, startups may have difficulty finding success if they have yet to determine how the business will sustain itself in the long run.
As such, you should work on developing a business model that will help you ascertain how your business is going to be run. To create an effective business model, you'll want to identify your customer base, any sources of revenue , financing details, and the products or services that you're going to provide.
Different business models are used for different types of startups. For instance, if your startup is going to be selling a service online, you may want to consider the freemium model, which allows you to provide free and premium tiers for your service. If you plan on selling a subscription for the service that you provide, the subscription model is likely your best option. Once you've made a decision on how you want your company to be financed, what kinds of products you want to sell, and what your customer base is going to be, you'll be able to select the business model that meets your needs.
The seven different business model ideas that will be detailed in the following include the:
Virtual good model
Each of these business models offers many distinct advantages, which is why they have been implemented by such businesses as Amazon, Walmart, Uber, and Hulu.
1. Marketplace Model
The marketplace model is a type of business model that allows you to act as the go-between for sellers and buyers. Likely the most popular company to use the marketplace model is Amazon. They only act as the online marketplace that takes care of the transactions between buyers and sellers.
The main advantages of using a marketplace model include the fact that you won't need to store any inventory and that you won't have any overhead costs, which takes away a significant amount of the frustration and expenses that typically come with running a business. Since you don't manufacture a product, you won't need to worry about selling it. Marketplaces will usually take a small percentage of the transaction between the buyer and the seller.
If your business makes use of this model, you will need to provide customers with a reason to use your marketplace. To be successful , you likely shouldn't create a marketplace that's similar to Amazon. You could instead focus on a market that would be receptive to a smaller marketplace. For instance, a startup might want to create an art marketplace where customers can request artwork for logos, branding, and book covers. The artists on the other end could then fulfill these requests. The key is to reach out to a customer base that will be receptive to your idea.
Examples of Companies who use this model:
2. on-demand model.
The on-demand model is exactly as it sounds, which means that you will be tasked with providing customers with a service that they can request and obtain any time they please. Uber is a top example of this business model that allows customers to request a ride, after which a driver will pick them up and take them to their destination. Other businesses that use this model handle all kinds of on-demand services for everything from the beauty industry to the laundry and dry cleaning industry. With a service like Postmates, it's possible to order food, groceries, and other items via a mobile phone app. A delivery person for the company will then pick up these items and deliver them to the individual who made the request.
While this business model is similar to a marketplace, it requires more work to be put in by the startup in question. This business model is ideal for startups that are looking to cater to younger demographics that require instant gratification.
Keep in mind that this is a relatively new business model that's becoming more efficient and cost-effective with each passing day. Startups will usually need to leverage existing infrastructures and new forms of technology to provide customers with this kind of business model. Likely the most notable benefit of this model is that it takes use of freelance labor, which helps keep costs down.
Examples of Companies who use this model :
3. the disintermediation model.
The disintermediation model is a standard business model that's used by a wide range of wholesalers, manufacturers, and businesses that offer direct sales. The goal of this model is to get rid of the middleman, which lowers the cost of doing business for the manufacturer. The main benefit of using this business model is that the end-user should be able to pay a much lower cost than they normally would for a product or service.
With a standard retail business model, manufacturers will ship their products to a distributor that will act as the intermediary between the manufacturer and the customer. This intermediary will usually take a cut of the sales, which lessens the amount of money that the manufacturer or producer obtains from the transaction. This business model is ideal for startups that have the necessary resources to produce and distribute goods. The low prices that are possible with this business model should attract new customers.
4. Subscription Model
The subscription model is an increasingly popular business model that involves a company selling a service via a subscription as opposed to a one-off product. This business model is being used by a large number of companies to obtain stable cash flows that are recurrent. The most popular subscription services are Spotify and Netflix, which provide customers with access to music, movies, and TV shows for a monthly or yearly subscription fee.
If you believe that your startup can use the subscription business model, you need to target the customer base that's looking for convenience. Most customers will choose to auto-renew their subscriptions, which ensures that they always have the service that you're providing to them. Because of recurring sales, this model allows you to predict what your yearly revenues are going to be, which is fantastic when you're trying to bring in new investors.
5. Freemium Model
The freemium model is among the more popular business models for startups since it combines free and premium services into one business model via a tiered approach. The free service that you offer to everyone would include basic features of the service. The premium component of this business model allows you to create a premium service that offers more features and perks than the free service. If your startup is centered around web design and development, you could start by offering a free package that includes some basic design services. You could then create a premium package that includes extra features like free hosting, video production, and unlimited design revisions.
These additional features may entice customers to purchase the premium package. When you select this business model, it's important that the free and premium tiers are balanced. While the free tier should offer enough features to be compelling, it's essential that the premium offering is much more appealing to your core audience. With this business model, you'll be able to bring in customers who are interested in trying out your service for free, which allows them to become familiar with the service before upgrading to a premium option.
6. Virtual Good Model
The virtual good model is commonly used by video game developers but can also apply to a range of other businesses. This type of business model provides customers with the ability to purchase virtual goods, which only exist online. In a video game, these virtual goods could be extra lives or weapon upgrades.
Many companies that create smaller games for smartphones will implement a virtual good store within the game where users can purchase all kinds of online goods. Aside from game developers, creative thinking will be needed to use this business model. A company like Facebook allows users to purchase and send a virtual gift to another user, which has proven to be popular. Since you only need to bandwidth for these virtual goods, the margins are very high.
- Acclaim Games
7. Reseller (Magic) Model
The reseller model is a business model that's very similar to the marketplace model. When a startup operates as a reseller, they will focus on promoting and selling products that are produced or manufactured by another company or individual. There are a couple of different reseller models that you can use for your startup. With companies like eBay, the products are promoted and sold on their website. Once sold, however, delivery of the product will need to be handled by the individual or company that has listed the item for sale. This type of reseller is able to avoid inventory problems.
You can also benefit from the fact that you won't need as many salespeople, which significantly lessens the costs associated with HR. The most common reseller model is the retailer model, which involves products being held at a store or warehouse by the reseller before being passed on to the customer who buys the product. While retailers hold some inventory in their stores, they only purchase a small amount from the manufacturer or producer at a given time. The primary benefit of this business model is that it's a tried and true method of obtaining a profit.
How to Choose the Most Profitable Startup Business Model
Each of these business models have different advantages that you can make use of when developing your own startup. For instance, the marketplace business model ensures that you have very little overhead and that you won't need to carry any inventory. These businesses are great because they can be run from wherever you want.
You could choose to purchase an office space or could decide to run the business virtually. The best way to identify which of these business models is right for you is to make sure that the business owner is informed about each type of business model and what the company will need when implementing one of these models.
Once you've found the business model that's right for your startup, you should be able to create a roadmap of growth for your company. With a business model in hand, you can get started on building your business. Creating a startup will usually involve identifying sources of funding , creating a business plan, and making sure that your product or service is market viable . At the beginning, you'll likely find that your budget is low, which could put a damper on growing your business. Likely the best way to navigate this obstacle is by joining an incubator for low-cost access to office space, lab space, and high-end equipment.
If you are developing a medtech or bioscience startup and require access to a laboratory, consider applying today for a space at University Lab Partners , the first wet lab incubator in Orange County ! From here, you can complete the work that's necessary for growing your business without needing to spend all of your precious startup resources to do so!
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A business model describes the value an organization offers to its customers. It illustrates the capabilities and resources required to create, market and deliver this value, and to generate profitable, sustainable revenue streams. In principle, a business model does not matter to customers; it is important to the company and the organization of its business. The business model determines the external relationships with suppliers, customers and partners. However, it is primarily focused on the company’s business processes.
Importance of the business model
The business model is the key factor that leads to success in start-ups. It provides the starting point that allows a company to maximize its profits—the sooner the business model is in place, the better. A viable business model is a key determinant (along with product development) in obtaining funding. Also, a business model must be scalable. Investors must be able to envision a start-up’s business model (from an organizational and process perspective) as the company grows.
Defining the business model
A company’s strategy defines the company’s market and customers, and determines the value proposition for the customer’s business. The business model focuses on how a start-up captures some of the value for itself (that is, how the company makes money). It determines the viability of the company. The business model focuses on coordinating internal and external processes to determine how the start-up interacts with solution partners, distribution channels and customers.
How the business model works
The business model describes, as a system, how the components of the business (that is, organizational strategy, business processes) fit together to produce a profit. It answers the question, “How does this business work?” The answer to the question consists of two parts: 1. It includes a description of the efforts that generate sales, which produce revenue. The value proposition is delivered to the target customer through a distribution channel. The flow and update of the value proposition is influenced by the relationship capital created through the company’s marketing activities. 2. It includes a description of the value-generating parts that make up the cost structure. A company’s value proposition is created through the application of its key functions and abilities, through a configuration of operational activities that includes input and interaction with a partner network. For more information on the process of designing a business model, see the article entitled Business Model Design .
Creating an innovative business model
Companies that innovate on a business-model level experience greater growth rates than companies that focus on innovation in products and operations. There are several methods that start-ups can use to create an innovative business model:
- revenue/pricing model : change how revenue is generated through new value propositions and new pricing models (to take advantage of economies of scale)
- enterprise model: specialize and configure the business to deliver greater value by rethinking what is done in-house and through collaboration
- industry model: redefine an existing industry, move into a new industry or create a new industry
For more information about developing a business model, download the MaRS workbook, Market Strategy Workbook 3: Strategic Marketing Approach . The information and exercises will help you design a business model by working through the key variables in executing a market strategy— competition , partnership , distribution , pricing and positioning .
Kurtzman, J., and Rifkin, G. (2005). Startups That Work. London: Penguin Group. IBM Global Services. (2006, September). Business model innovation—the new route to competitive advantage. Whitepaper. IBM Global Services. (2008). The Enterprise of the Future. Whitepaper.
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Starting your own business can be exciting, but also terrifying. You might have a great idea, but not know how to turn it into a profitable venture. This is where a business model comes in.
Introduction: Getting Started with a Startup Idea & Why You Need a Business Model?
A business model can help you define your ideas regarding who will purchase your product, how they will pay for it, and what features they desire. Additionally, it can assist you in estimating the amount of money required for starting up and determining if the company is worth the investment. This section will provide you with all the necessary information about what a business model is and how to create one for your validated startup idea .
What is a Business Model?
A business model is a set of systematic ways to create, deliver, and capture value. It is a blueprint for how your company will make money. A startup business model describes how a company earns income and profits from its operations. Startups mostly go for highly scalable business models that allow them to operate with few assets, zero heavy investments, and cheap capital expenditures.
In the digital age, the number of businesses that have a clear and well-tested business model is on the decline. This may be because it seems like you don't need one as long as you have an idea that has gone viral, or because people think they can create anything without having to worry about making money.
Importance of a Business Model
According to statistics, 90% of startups fail , with 10% failing within the first year and only 50% of businesses making it to their fifth year . A properly designed business model can help avoid these issues. A business model aids in targeting a company's consumer base and helps in the development of marketing plans, as well as income and expense projections, taking into account the various business models and clienteles. In order to learn about the potential accessible targets in the market, a business model should be designed. Understanding and choosing the appropriate business model allows companies to better understand the financial contributions they can make in the initial stage of their business. By evaluating a company's business model, a person can learn more about its products, as well as the business tactics it can use to grow and sustain future prospects. The other benefits of business models include the following:
- A good business model gives a company a competitive advantage and helps them understand their own operations better.
- A powerful business model gives the company a good reputation in the market and enables the owner to carve out a space for the company.
- Making a good business model from the outset leads to a well-established finance plan, which results in increased cash flows and rapid profit growth.
- A pre-developed startup business plan enhances the organization's financial stability.
Types of Business Models
In the market, startups are categorized into different types based on the business models they choose to pursue. However, not all of these models are necessarily profitable. Some of the most common business models used today are low-risk startup models.
Low Risk/High Reward Model
A low-risk model is one where there is minimal risk involved in starting up the company. These businesses require little capital to get started, have fewer obstacles to entry than other company models, and have high-profit potential, making them an excellent alternative for people who wish to start their own business without risking everything. For example, a company may sell its product with no upfront costs to them or their customers. This can include selling consultancy services, freelancing (selling skills), and much more. This type of model works great for people who want to sell products that they think will sell well in the market with very little investment on their part.
High Risk/High Reward Model
The most common business model is the high risk/high reward model, where the entrepreneur invests a lot of time and energy to build something that they hope will be successful. To achieve such a high degree of accomplishment, these people had to take significant risks. Successful entrepreneurship is inextricably linked to taking risks. Regardless of how strong your cash flow is or how much effort or time you put in, the end result might be positive or negative. You must be prepared for the physical, financial, and psychological stress that comes with establishing a business and keep believing in yourself and working hard to see the fruit of your efforts. This is what you typically see with startups like Facebook or Microsoft. These tech giants undertook high risks and invested their time and resources in creating exceptionally unique and highly demanded platforms. Taking risks surely leads to miraculous evolutions in the history of the business world.
Best Startup Models
There are two different types of best startup models:
- Bootstrapping is when an entrepreneur starts a business with their own time, skills, and resources. This self-funded business does not rely on the support of common financing methods, such as crowdfunding, investment, or loans from banks.
- Scaling up is when an entrepreneur starts with a small business and then invests in making it bigger. To scale a business means opening the door to more work duties and creating opportunities while remaining cost-effective and meeting your company's demands without suffering or overstretching. It's all about adjusting to the increasing workload, clients, or users, and then delivering.
Perks of Choosing Bootstrap Business Model
- Retaining Full Ownership: This business model allows the owner to fully own their business with zero shares in equity. When anyone starts a business based on investors' funding, they often ask for a huge share in equity and have a say in decision making. This is why Bootstrap is ideal in the longer run. You have control, and you get to do whatever you want.
- Gets Rid of Unnecessary Burden: When you start a business through a loan or investment, there is a burden on your shoulders to return it. Instead of designing a complete and long-term lasting business model, you focus on earning revenue even if that disturbs the essence of your business. However, with the bootstrap business model, you feel a sense of freedom. You focus on maintaining the essence of your business and strategically develop ways to increase cash flows.
- Empowers Business Owner: Starting a business on your own empowers a person. Building it from scratch highly motivates a person to keep going and gain success. We recommend following our checklist for starting a business .
Perks of Using a Scaling Business Model
- Creates Efficiency: When a business is ready to expand at the right time, it efficiently brings in more profit for the corporation. They are able to deal with different circumstances while still remaining rigorous.
- Creates Growth Consistency: When the business has grown into a stable state, the owner makes sure to scale it to keep the growth factor consistent. Though it seems like staying in the same state is safe, businesses don't last long if they aren't growing. Scaling a business ensures that growth is gradually increasing with time. The owner makes sure never to stop at some level; they keep taking new steps on the ladder while ensuring they don't trip at any step.
- Adaptable to Tough Situations: Creating flexibility ensures that the business is able to adapt to tough situations and thrive nonetheless. Businesses not only scale for growth but also to create new opportunities for income generation. The market is ever-changing, and one cannot entirely depend on a single business to maintain sustainability. Scaling your business to another aspect makes your corporation more adaptable to unplanned events. If a part of your business is disturbed by a change in the market, you can smoothly earn from another domain of your business.
Sizes of Companies and Their Typical Business Models
Different types of companies operate at varying scales in different industries. Some start-ups operate in the early stages of their life cycle, for example, operating small brick-and-mortar shops but not yet an online store. Others begin with an online store and later expand to include physical stores, while some might take the opposite approach. There are also companies that do not have either brick-and-mortar or online stores, and instead focus on other channels like social media. A start-up can be of various types, but the most common categories are:
- Business-to-business or B2B
- Business-to-consumer or B2C
Technology start-ups focus on developing a new product or service with the aim of disrupting an existing market. Since technology is in popular demand nowadays, tech start-ups are now focusing more on innovativeness, scalability, and growth.
Market research for startups is crucial in identifying potential customers and understanding their needs. A business-to-business start-up offers a product or service for sale to other businesses. Some B2B firms produce a component of a final product and sell it to distributors, who then sell it to their own customers. Moreover, a business-to-business deal can also occur when a company produces a product used as a component in another company's product. For example, Intel sells Apple processors for use in the Macbook Pro.
Business-to-consumer (B2C) refers to the process of selling products and services directly to customers who are the end-users of the company's products or services. Consumer start-ups sell products and services directly to consumers. Some early-stage start-ups will have an initial product or service that they offer for free. They do this to acquire customers and improve the product before taking it live. They may also offer their customers other products and services in addition to their core offerings in order to generate revenue while they build up their main offering.
How to Choose the Perfect Business Model for Your Start-up?
Choosing the right business model is not easy. That is why there are tools available to help you with this choice. One such tool is the Business Model Canvas, which is a diagram used to create a visual representation of a start-up's business model. A blank canvas can be found online and needs to be filled in with five important components: value proposition, customer segments, key activities, channels, and revenue streams. Another tool is the St. Gallen Business Model Navigator, which can help you select the best model for your business needs and provide templates for all models you might need when starting your own company. If you want to start raising money, you should know how to make the most out of your pre-seed funding round.
Common Mistakes to Avoid When Developing a Business Model
Developing a business model can be tricky, especially for first-time entrepreneurs. Here are some common mistakes to avoid when developing a business model:
1. Failing to Understand Your Target Market
One of the biggest mistakes entrepreneurs make when developing a business model is failing to understand their target market. It's important to conduct market research and gather data about your target audience's needs and preferences before developing your business model. Without this information, you risk developing a product or service that no one wants or needs.
2. Focusing Too Much on Features and Not Enough on Benefits
Another common mistake entrepreneurs make is focusing too much on the features of their product or service and not enough on the benefits. Features describe the characteristics of your product or service, while benefits describe how those characteristics will help your target audience. By focusing on benefits, you can create a more compelling value proposition and increase the chances of success for your business. It is important to consider these benefits when conducting startup financial modelling and projecting your revenue streams.
3. Not Validating Your Business Model
Many entrepreneurs make the mistake of assuming that their business model will work without testing it first. It's important to validate your business model by conducting market research and getting feedback from potential customers. This can help you identify any flaws in your business model and make adjustments before launching your business.
4. Failing to Plan for the Future
Another common mistake entrepreneurs make is failing to plan for the future. It's important to consider how your business model will evolve over time and make plans for growth and expansion. This can help you stay ahead of the competition and ensure the long-term success of your business.
5. Ignoring Financial Projections
Financial projections are an important part of developing a business model. They help you estimate how much money you will need to start and grow your business, as well as how much revenue you can expect to generate. Failing to consider financial projections can lead to a lack of funding or an inability to sustain your business over time.
By avoiding these common mistakes, you can develop a strong and effective business model that will help you achieve your goals and succeed in the market.
How to Test and Validate Your Business Model
Before launching your business, it is important to ensure that your business model is viable and will be successful in the market. Here are some steps to test and validate your business model:
1. Conduct Market Research
Market research is crucial in validating your business model. It involves gathering and analyzing data about the market, potential customers, and competitors. By conducting market research, you can gain valuable insights into the needs and preferences of your target audience, as well as identify gaps in the market that your business can fill.
2. Build a Prototype
Building a prototype allows you to test your product or service in the market and get feedback from potential customers. This can help you identify any issues or areas for improvement before launching your business.
3. Conduct User Testing
User testing involves getting feedback from potential customers on your product or service. This can be done through surveys, focus groups, or other forms of market research. By understanding what your customers want and need, you can develop a product or service that will meet their needs and stand out in the market.
4. Analyze Your Financial Projections
Analyzing your financial projections is crucial in validating your business model. This involves creating a financial plan that outlines your expected revenue and expenses, and then comparing it to industry benchmarks and competitors. By doing so, you can identify any potential issues and adjust your business model accordingly.
5. Seek Feedback
Seeking feedback from mentors, investors, and other business owners can be invaluable in validating your business model. They can provide valuable insights and advice based on their own experiences, which can help you identify potential issues and adjust your business model accordingly.
By following these steps, you can test and validate your business model to ensure that it is viable and will be successful in the market.
Tips for Creating a Successful Business Model Canvas
The Business Model Canvas is a popular tool for creating a visual representation of a start-up's business model. Here are some tips for creating a successful Business Model Canvas:
1. Start with a Value Proposition
The first component of the Business Model Canvas is the value proposition. This describes the unique value that your product or service provides to your customers. It's important to start with a clear and concise value proposition that communicates your product or service's benefits in a compelling way.
2. Identify Your Customer Segments
The next step is to identify your customer segments. This involves understanding who your target customers are and what their needs and preferences are. By doing so, you can tailor your product or service to meet their specific needs and develop targeted marketing strategies to reach them.
3. Define Your Key Activities
The key activities component of the Business Model Canvas describes the activities that are necessary to deliver your product or service to your customers. This includes everything from product design and development to marketing and sales. It's important to identify the key activities that are essential to your business and focus on optimizing them for maximum efficiency.
4. Choose Your Channels
The channels component of the Business Model Canvas describes how you will reach your customers. This includes everything from traditional marketing channels like advertising and public relations to digital channels like social media and email marketing. It's important to choose the channels that are most effective for reaching your target customers and focus on optimizing them for maximum effectiveness.
5. Determine Your Revenue Streams
The revenue streams component of the Business Model Canvas describes how your business will make money. This includes everything from product sales to advertising revenue. It's important to identify the revenue streams that are most important to your business and focus on optimizing them for maximum profitability.
6. Consider Your Cost Structure
The cost structure component of the Business Model Canvas describes the costs associated with running your business. This includes everything from product development and marketing to overhead costs like rent and salaries. It's important to identify the costs that are most important to your business and focus on optimizing them for maximum efficiency.
7. Keep it Simple and Clear
Finally, it's important to keep your Business Model Canvas simple and clear. Avoid using jargon or technical language that may confuse your audience. Instead, focus on communicating your business model in a way that is easy to understand and compelling to your target customers.
By following these tips, you can create a successful Business Model Canvas that effectively communicates your business model and helps you achieve your goals.
The Role of Market Research in Developing a Business Model
Market research is a crucial step in developing a successful business model. It involves gathering and analyzing data about the market, potential customers, and competitors. By conducting market research, you can gain valuable insights into the needs and preferences of your target audience, as well as identify gaps in the market that your business can fill.
The first step in market research is to conduct a market analysis. This involves gathering data about the overall market size, growth trends, and key players in the industry. By understanding the broader market landscape, you can identify opportunities and potential challenges for your business.
Once you have a good understanding of the market, the next step is to conduct customer research. This can involve surveys, focus groups, or other forms of market research to gather information about the needs and preferences of your target audience. By understanding what your customers want and need, you can develop a product or service that will meet their needs and stand out in the market.
In addition to understanding the broader market landscape and the needs of your target audience, it's also important to conduct a competitive analysis. This involves gathering data about your competitors, including their strengths and weaknesses, pricing strategies, and marketing tactics. By understanding your competitors, you can identify ways to differentiate your business and develop a unique value proposition.
Market research is an iterative process, meaning it requires ongoing analysis and adaptation. As your business grows and evolves, it's important to continue gathering data and refining your business model. By staying up-to-date with market trends and customer needs, you can ensure that your business remains competitive and successful.
In conclusion, market research is a critical step in developing a successful business model. By conducting a market analysis, customer research, and competitive analysis, you can gain valuable insights into the needs and preferences of your target audience, as well as identify opportunities and potential challenges for your business. By making market research an ongoing process, you can ensure that your business remains competitive and successful in the long run.
How to Pivot Your Business Model When Things Aren't Working Out
Sometimes, even the best-laid business plans don't work out as expected. In these situations, it may be necessary to pivot your business model in order to adapt to changing market conditions or customer needs. Here's how to do it:
1. Identify the Problem
The first step in pivoting your business model is to identify the problem. What is not working in your current business model? Is it a lack of demand for your product or service? Are you not generating enough revenue to sustain your business? Are there new competitors in the market that are taking away your customers?
2. Brainstorm Solutions
Once you've identified the problem, it's time to brainstorm solutions. What changes can you make to your business model to address the issue? Can you change your target market or customer segments? Can you offer new products or services that better meet customer needs? Can you change your pricing model to better reflect the value of your offerings?
3. Test Your Ideas
Before making any major changes to your business model, it's important to test your ideas. This can be done through surveys, focus groups, or other forms of market research. Determine what your customers want and need, and test different ideas to see what works best.
4. Implement the Changes
Once you've tested your ideas and determined what works best, it's time to implement the changes. This may involve rebranding your company, changing your product offerings, or targeting a new customer segment. It's important to communicate these changes to your customers and stakeholders so that they understand why you are making them.
5. Monitor the Results
After implementing the changes, it's important to monitor the results. Are you generating more revenue? Are you attracting new customers? Are you meeting your business goals? If not, it may be necessary to pivot again or make further adjustments to your business model.
Remember, pivoting your business model is not a sign of failure. It's a necessary step in adapting to changing market conditions and customer needs. By identifying problems, brainstorming solutions, testing your ideas, implementing changes, and monitoring the results, you can successfully pivot your business model and ensure the long-term success of your company.
The Importance of Flexibility in Your Business Model
Flexibility is an essential aspect of any successful business model. In today's ever-changing market, it is crucial to be able to adapt quickly to new technologies, customer needs, and market trends. A flexible business model will allow you to pivot your strategy when needed and take advantage of new opportunities as they arise.
One of the most significant benefits of a flexible business model is the ability to respond to customer feedback. By listening to your customers and their needs, you can adjust your product or service offerings to better meet their demands. This can lead to increased customer satisfaction and loyalty.
A flexible business model can also help you stay ahead of the competition. By continually innovating and adapting to new technologies and trends, you can differentiate yourself from other businesses in your industry. This can give you a competitive edge and help you attract new customers.
In addition to responding to customer needs, a flexible business model can also help you navigate economic downturns and other unexpected events. By being able to pivot your strategy and adjust your offerings, you can better position your business for success even in challenging times.
Overall, building flexibility into your business model is essential for long-term success. By being willing to adapt and change as needed, you can stay ahead of the competition and better meet the needs of your customers.
Examples of Successful Business Models in Different Industries
The following are some examples of successful business models in different industries that have been able to grow and sustain in today's competitive market.
Subscription Box Model
Subscription boxes are becoming increasingly popular in the e-commerce industry. This business model involves sending customers a box of products on a regular basis, such as monthly or quarterly, for a set price. The products in the box are curated according to the customer's preferences. Birchbox, a beauty subscription box, and Dollar Shave Club, a grooming subscription box, are two examples of companies that have successfully implemented this business model.
The freemium business model offers customers a basic version of the product or service for free, with the option to upgrade to a premium version for a fee. This model is commonly used in the digital industry, particularly with mobile apps and online tools. Dropbox, a cloud storage service, and Spotify, a music streaming platform, are two examples of companies that have successfully used this business model.
Direct-to-Consumer (DTC) Model
The DTC business model involves companies selling their products or services directly to consumers, bypassing traditional retail channels. This model has become increasingly popular in the fashion industry, with companies like Warby Parker, an eyewear company, and Everlane, a clothing company, successfully implementing this approach.
The platform business model involves creating a platform that connects buyers and sellers, earning revenue through transaction fees or advertising. Airbnb, a home-sharing platform, and Uber, a ride-sharing platform, are two examples of companies that have successfully implemented this business model.
The membership business model involves charging customers a fee to gain access to exclusive content, products, or services. Amazon Prime, a membership program that offers free shipping and access to streaming services, and LinkedIn Premium, a subscription service that offers additional features for job seekers, are two examples of companies that have successfully implemented this business model.
The razor-blade business model involves selling a product at a low cost, then making a profit on the consumable products required to use the product. This model is commonly used in the printer and shaving industries. Gillette, a shaving company, and HP, a printer company, are two examples of companies that have successfully used this business model.
The crowdfunding business model involves raising funds from a large number of people, typically through an online platform, to finance a project or product. Kickstarter, an online crowdfunding platform, and Indiegogo, a similar platform, are two examples of companies that have successfully implemented this business model.
The pay-what-you-can business model allows customers to pay what they can afford for a product or service. This model is commonly used in the restaurant industry, with some restaurants allowing customers to pay what they can for a meal. Panera Bread, a bakery-cafe chain, has implemented this model through its Panera Cares program.
These are just a few examples of successful business models in different industries. By understanding these models and how they have been implemented, entrepreneurs can learn how to create a sustainable and profitable business model for their own venture.
How to Choose the Right Pricing Model for Your Business
Choosing the right pricing model for your business depends on several factors, including your target audience, industry, and business goals. Here are some tips to help you choose the best pricing model for your product or service:
- Know your target audience : Understand your target audience's willingness to pay and what they value in your product or service.
- Research the competition : Analyze your competitors' pricing strategies and determine how you can differentiate yourself in the market.
- Consider your business goals : Determine what your revenue targets are and which pricing model will help you achieve them.
- Test and iterate : Don't be afraid to experiment with different pricing models and adjust as necessary based on customer feedback and market conditions.
Different Pricing Models
There are several pricing models that you can use to monetize your product or service, including:
- Cost-plus pricing : This model involves adding a markup to the cost of producing your product or service to determine the selling price. It is a straightforward approach that ensures you cover your costs and make a profit.
- Value-based pricing : This model involves setting a price based on the perceived value of your product or service to the customer. It requires a deep understanding of your target audience and their willingness to pay.
- Subscription pricing : This model involves charging customers a recurring fee for access to your product or service. It is a popular model for software-as-a-service (SaaS) companies and other businesses that offer ongoing services.
- Freemium pricing : This model involves offering a basic version of your product or service for free while charging for premium features or services. It is a common model for mobile apps and online tools.
- Dynamic pricing : This model involves setting prices based on current market conditions, demand, and other factors. It is commonly used in the airline and hotel industries.
How to Monetize Your Product or Service with Your Business Model
Creating a successful business model requires not only defining your value proposition and target customer segments but also determining how you will generate revenue. In this section, we will explore various ways of monetizing your product or service and how to choose the right pricing model for your business.
Once you have chosen the right pricing model for your business, it's time to start monetizing your product or service. Here are some ways to generate revenue:
- Direct sales : Sell your product or service directly to customers through a website, online marketplace, or physical store.
- Affiliate marketing : Partner with other businesses and earn a commission for promoting their products or services to your audience.
- Licensing : License your product or service to other businesses for a fee.
- Advertising : Sell advertising space on your website, mobile app, or other digital platform.
- Sponsorship : Partner with other businesses to sponsor your product or service in exchange for exposure to your audience.
Monetizing your product or service is a crucial aspect of creating a successful business model. By understanding your target audience, researching the competition, and choosing the right pricing model, you can generate revenue and build a sustainable business.
The Role of Customer Feedback in Developing a Business Model
Customer feedback is a critical component of any successful business model. It provides valuable insights into how customers perceive your product or service, what they like and dislike, and what changes they would like to see. Incorporating customer feedback into the development of your business model can help ensure that you are meeting the needs of your target audience and delivering a product or service that they truly value.
One effective way to gather customer feedback is through surveys. Surveys can be conducted online or in-person and can provide valuable information about customer preferences, pain points, and satisfaction levels. Another method is to engage with customers through social media or email and encourage them to share their thoughts and opinions.
Once you have gathered customer feedback, it is important to analyze and interpret the data. Look for patterns and trends in the feedback to identify common themes and areas for improvement. Use this information to make informed decisions about how to adjust your business model to better meet the needs of your customers.
It is also important to continue gathering feedback and making adjustments over time. The needs and preferences of your customers may change, and your business model should be adaptable to these changes. By staying attuned to customer feedback and making adjustments as needed, you can ensure that your business remains relevant and successful in the long term.
Developing a successful business model requires careful consideration of several key factors. Conducting market research, understanding your target audience, choosing the right pricing model, and incorporating customer feedback are all essential components of creating a sustainable and profitable business. By following the tips and examples outlined in this guide, entrepreneurs can develop a strong and effective business model that will help them achieve their goals and succeed in the market.
A successful business model starts with a clear and concise value proposition that communicates your product or service's benefits in a compelling way.
Identifying your target audience and tailoring your product or service to meet their specific needs is crucial for success.
It's important to choose the channels that are most effective for reaching your target customers and focus on optimizing them for maximum effectiveness.
Choosing the right pricing model for your business depends on several factors, including your target audience, industry, and business goals.
Customer feedback is a critical component of any successful business model. It provides valuable insights into how customers perceive your product or service, what they like and dislike, and what changes they would like to see.
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7 Business Models for Startups And How To Choose The Best For You
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Startups can take all forms and shapes. But when it comes to choosing the best business model for your startup, there is only a limited amount of choices to consider.
Building a startup from the ground up is a demanding process. Even if your startup is built upon a great idea for a product or service, this would not be enough to guarantee success. As startups, especially early on, are not established companies, they must find ways to sustain themselves in the long run.
For this reason, startup entrepreneurs should work hard to develop the best possible business model that fits their business and purpose. Particularly, there are tools like the business model canvas that startupers can use to identify their customers, revenue streams, cost structure , etc.
This article will provide details on the various existing business models for startups and how to decide what is best for you.
Specifically, startups business models that will be mentioned are the following:
- Marketplace model
- On-demand model
- Disintermediation model
- Subscription model
- Freemium model
- Virtual good model
- Reseller model
Each of these business models has significant advantages. That’s why thousands of startups and businesses around the world use them.
The marketplace model is a business model that lets your business act as a middleman between buyers and sellers. The most typical example of the marketplace business model is Amazon, which handles the transactions between buyers and sellers.
The biggest advantage of the marketplace model is that businesses do not need an inventory. They do not manufacture goods, so they are not responsible for storing or selling them. This saves them a lot of money and frustration since they do not have to pay any overhead costs.
Companies using the marketplace model make money by taking a small fee from each transaction between buyers and sellers.
On Demand Model
The on-demand model is what the name suggests. It delivers goods or services upon request by the buyers with only a small delay, mostly to prepare and deliver whatever that is. A typical company that uses the on-demand business model is Uber or any other grocery delivery service that became popular, especially during the pandemic.
What is interesting about this business model is that it is similar to the marketplace. Still, it requires a little more work since people need to make the deliveries.
This business model takes advantage of digital technologies and is ideal for innovative startups that cater mostly to younger generations. Another benefit of the on-demand is that it keeps costs low and utilizes a lot of freelance labour.
This standard business model is used widely by wholesalers, manufacturers and businesses to sell directly to their customers. This business model’s utility is eliminating intermediaries and thus achieving lower costs. As a result, consumers end up paying a much lower cost than they normally would for such a product or service.
This business model is most appropriate for startups with the resources to manufacture and distribute goods. With lower prices, these businesses can attract significantly more clients.
The subscription model is one of the popular business models right now. Companies such as Spotify and Netflix are prominent examples of giving access to music, movies, and TV shows. In this model, companies are selling their services on a month-to-month or yearly subscription rather than making a one-off sale. By doing so, they establish recurring cash flows.
If you believe your startup could use the subscription model, you should target the customer base looking for convenience. Many of those customers set their subscriptions to auto-renew to ensure they always have access to their favourite services.
What is good with the subscription model is that startups that opt in for it can better predict their yearly revenues.
The freemium model is another well-known business model used by a variety of startups around the world. Using a tiered approach, these companies offer premium and free services to their customers. The free service includes the most basic features, and they can upgrade to a premium plan whenever they want.
It is important, however, that both tiers are balanced. That means that the free service should offer enough features to be compelling. At the same time, the additional benefits that come with the premium service should be appealing enough to make people pay for the extra.
This business model is especially great for new startups, as their customers can access their services for free. By doing so, they become familiar with this particular service, and they are more likely to upgrade to this premium plan rather than another.
Virtual Good Model
Game developers widely use the virtual good business model, but it could apply to other business types. Businesses using this model provide strictly virtual goods that do not exist in the physical world. Typically, they are parts of a game and can take the form of extra lives or various character upgrades.
Many app development companies and Facebook use this business model inside their applications, proving to be lucrative. There are no costs involved in selling a single unit of these goods, and bandwidth is only required. As a result, profit margins are high.
The reseller business model is very much similar to the marketplace one. Startups with this type of business model focus on promoting and selling products which are, however, manufactured by some other company. A typical example is eBay.
Reseller companies sell products on their websites, but their work is over once the sale is made. Handling the product and reaching the customer is an obligation of the person or company that has listed the product online. As such, there are no inventory problems, and the number of staff is kept to a minimum.
However, there are variations to the reseller model, but the most popular one is the retailer model. In this case, retailers hold a small number of goods in-store or warehouse to be sold to their customers. Once the stock is over, they renew it and so on.
How to Choose the Best Business Model for your Startup
Each business model comes with its benefits. You must consider some things first to choose the best for your startup. Is your startup selling services or products? For example, if you sell a product, then the freemium model would not be applicable as this is mostly used for online services.
Another thing to consider is the availability of money. Do you have enough money so that your startup can sustain high overhead costs like storage or salaries? If not, the marketplace business model could be ideal for you, considering that it makes sense for your business.
When startup founders are called upon to choose a business model for their companies, is to know their options and how each one works. Only then can they make informed decisions that are to their best benefit.
Having chosen a business model that you think is best for your startup, you can create a business plan for growth and make sure that your product or service is viable.
When starting out, one of the first things you need to do is submit your startup to gain exposure and start building your organic traffic. However, it is also common for startups to not have enough money for anything they need to spend. If that’s the case for you, too, you should know that there are cheaper alternatives to save money and run your business without an issue.
For example, you can have a virtual office rental that you can use as your main business address. It will look more professional, but you can also run your business from home, which is convenient and more productive .
Are you interested in entrepreneurship and seeking help choosing the best business model for your startup? Then, look at the Erasmus+ EYES project , which seeks to train first-time entrepreneurs with the skills they need to create successful businesses focusing on sustainable growth, social impact and achieving the SDGs.
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How To Choose The Most Profitable Business Model For Your Startup
Startups are typically born out of big, innovative, bright ideas. However, even the most luminous idea will quickly fade and die out, if you fail to execute it properly. That’s why, at the core of every successful startup , there needs to be a sound, profitable business model.
The idea itself is just the first step in the business building process. Sure, you need to offer the marketplace something cool, new, and unique to garner the attention of your target audience.
But, that alone isn’t close to enough. You must also build a solid framework which will enable you to turn your idea into a profitable and sustainable business.
You need to determine which marketing strategies and channels you’ll need to utilize to effectively reach potential customers, and how you’re going to present your offers to them.
That framework which will guide you and largely influence all your marketing and advertising efforts, as well as ultimately determines the success of your new venture — is the business model you opt for.
So, the logical question now is…
How Do You Decide Which Business Model To Adopt?
Before you can start turning your idea into a full-fledged business, there are several questions you need to ask yourself.
The answers will give you a better sense of direction and help you determine the right approach.
Here are the crucial aspects you need to take into consideration while making your decision:
Your Target Market
Before you move any further, you first need to test whether your idea is actually viable. Research your target market to get a scope of your possible customers, and make sure that there’s a need which your product/service can satisfy.
If too few people are interested in what you have to offer, or people don’t want what you’re offering, it’s best to go back to the drawing board.
When entering a specific market, it’s vital that you understand who you’ll have to face off against. Check to see how many people are already doing what you want to do, and how successful they are.
Then think about what is it you can do better? How can you add more value? What will make your business stand out ?
Having some competition is actually a good thing. It proves that your idea has merit, and that there is indeed a demand for the type of product you’re planning on creating.
However, it’s best to steer clear of oversaturated markets, where the completion is both tough and plentiful, as it can be extremely difficult and quite costly to fight for every single customer.
Although you won’t be able to rely on data until you’ve been in business for a while, it helps to create a mental image of your ideal customer.
Think about WHO exactly is it that you want to serve. What are their demographics, interests, major problems they’re facing, their life-long goals?
Once you have a clearer image of who your potential customers are, it’s much easier to figure out how best to approach your target market.
Creating a customer avatar will also help you choose the right marketing channels and strategies, as well as the tone of voice you’ll use when getting your marketing message in front of them.
The big idea that made you decide to start a business in the first place, will be your main source of revenue. However, you should also consider what other possibilities there are to add multiple revenue streams.
For instance, you might include other products that you can offer as upsells and cross-sells. Or perhaps you can add affiliate products to your offers and generate additional income through commissions.
Don’t just focus on selling one product or service. Explore all your different options and try to bring in money from multiple streams .
What Is The Value You Bring To The Market?
Another question you need to answer when choosing your business model:
How much value does a potential customer gain from your solution?
Think in terms of how big of an impact it will have on their lives.
Does it help them finally solve a burning problem they’ve been struggling with for years? Will it enable them to get a step closer to achieving one of the goals?
If you’re only focused on what business model will be most lucrative for you, and neglect the customer, you’re bound to fail — spectacularly.
Customers are the lifeblood of every business, and their wants and needs have to be at the very center of your business. Understanding your customers’ desires will help you determine how best to approach the sale, and what price they’ll be willing to pay.
It’s a simple matter of understanding how much a specific problem costs your audience, and what are the returns they expect to get by investing in your solution.
Always aim to give MASSIVE value for the price you’re asking. If the customers feel like they’re getting a ton of value compared to their investment, your business will quickly flourish.
The Business Model Canvas
An extremely useful tool you can leverage when choosing your business model is the Business Model Canvas.
The concept was first developed in the book Business Model Generation, by Alexander Osterwalder and Yves Pigneur.
This canvas helps up-and-coming entrepreneurs clearly define all the different aspects of their business. It also gives you a clear visual representation of your business, which will be a valuable resource throughout your entrepreneurial journey.
Utilizing the Business Model Canvas as a template, you can refine an existing model to best suit your needs, or create your own ideal business model.
The canvas highlights the vital aspects of any business:
· The Infrastructure — consisting of your key business activities, key resources necessary for creating and providing value to the customers, and your business partners
· The Offer — your value proposition, or in other words — the products and services you’re offering to the customers. Here, you can also include the price point, the main benefits they receive, as well as add feedback later on that will help you refine and perfect your offer.
· Customers — Here, you should include everything you know about your target audience, market, potential and existing customers. This information will be of immense help when determining which marketing strategies and channels to utilize in order to maximize your results.
Having an entire business structure and all your core activities and key resources in one place will prove extremely helpful, especially if you plan on working with a team.
Examples Of Successful Startup Business Models To Consider
There are quite a few proven, lucrative startup business models to choose from. However, it’s your job to carefully review all the different options laid out in front of you. Gauge their functionality and compare the advantages different models provide, and select the one that best fits your business idea.
To help you get started, here are x examples of profitable, sustainable startup business models:
1. Product/Service Model (Hook & Bait)
When most people think of a “business”, they envision a company selling products or services. So, it’s no surprise that creating and selling your own products is the approach most people lean towards.
This model is actually quite broad, and in reality, can encompass one or more other business models. The main advantage of this model is the flexibility, or rather — lack of restrictions.
You can, in theory, create whichever product or service you want, and promote it through any marketing channel of your choosing.
Additionally, you have the freedom of framing your offers however you see fit, and selling them as physical or digital products, one-off purchases or ongoing subscriptions.
The main drawback, as you can assume, is the time, money, and energy required to get this business model up and running at full steam.
Product creation is a demanding process. Also, it can take some time to build up the brand, create effective marketing strategies, and start pulling in the profits.
However, when executed correctly, this business model has huge potential and can generate substantial return on your investment.
2. Reseller (Magic)
This model is the polar opposite of the previous one. Here, you don’t actually create or even own any of the products that you sell to your customer.
Instead, this business model revolves around representing a company/brand and turning a profit by promoting their offers to your target audience.
There are a few different variants of this model.
Many ecommerce shop owners are Amazon and eBay resellers. They simply set up a website where they promote and sell the products. The revenue comes from the difference in the selling price, and the price they acquire the products from.
Affiliate marketers can also be considered a sub-category of this business model. Affiliates’ main revenue source comes from commissions they get with each sale of the affiliate product they generate.
Typically, affiliates create and operate blogs where they provide valuable content to the audience, and cash in by including links, banners, and ads to the affiliate offers.
Of course, most retail shops can also be categorized under this business model, as well.
3. Ad-Based Model
Although extremely effective, to be successful and profitable, this business model requires you to have a large customer base or audience.
At the core of this model is the idea of providing a free product or service, and relying on ad revenue.
Essentially, the profits in this model come from advertising services you provide to other companies/brands. This can either be in forms of clicks or views you provide, or by having their ads placed on your website.
The bottom line here is — the more people you can reach, the higher your profits will be.
The prime example of this model is Facebook. The platform is completely free to use, and the millions they pull in come solely from advertising revenue.
4. Subscription-Based Model
This business model is typically employed by software companies and app-based businesses. Rather than offering their product as a one-off purchase, companies using this model can enjoy recurring revenue in forms of monthly payments.
Another main advantage of this model is easier (compared to some other models) customer acquisition and retention.
Instead of asking for a substantial up-front investment, this model facilitates the buying decision with a relatively low initial cost. Most people will make the decision to invest $5 a month more easily than investing $50 on the spot.
As for the customer retention — if the customers enjoy the service you’re providing, they won’t need much convincing to renew their subscription.
The key here is that you need to provide a premium quality product/service that gives the customers exactly what they need.
That’s one possible drawback of this model. You need a large customer base to continuously pull in substantial revenue on a monthly/yearly basis.
A great example of this model is Netflix.
The on-demand business model was largely birthed out of our need for instant gratification. In a world dominated by technology, we’ve gotten quite used to having all information at our fingertips, just a click away.
So, why should it be any different with services? Companies that have recognized this behavior pattern are offering a myriad of different services on-demand.
The main advantage of this model is the ease of use and convenience, which makes it quite appealing to customers all over the world.
Also, by utilizing new technology and relying mostly on freelance work, this business model drastically lowers the costs of operating a business. It also virtually removes the risk factor by providing the service when the customers request it.
Among the most popular examples of this model are Uber and Airbnb.
The broker business model capitalizes on the physical distance between the sellers their customers.
It revolves around providing a platform where buyers and sellers can congregate, and facilitating their interactions.
The company handles their transactions and ensures security. The revenue is typically generated by applying small fees to these transactions.
Some of the best-known examples of this model are Amazon and PayPal.
Amazon connects sellers and buyers from all corners of the world, and makes what would otherwise be an impossible purchase, extremely convenient.
PayPal, on the other hand, allows you two parties to safely and securely transfer funds, wherever they are in the world.
In essence, they both simply recognized the supply and demand, and created a business model that capitalizes on it.
This business model applies a clever strategy of drawing the customers in with a free product, while making certain features exclusively available to premium (paid) users.
Although the core product is free, it’s also either limited in functionality, or the premium license offers quite a few advantages.
For example, Vimeo allows you to upload videos on their platform completely free of charge. But limits the amount of data you can upload weekly.
On the other hand, they also provide 4 different payment plans. Which significantly increase these limits and add functionality to the video player, password protection, collaboration, etc.
The appeal of this model is that the customers can see and experience your service for free, without any risk. Hence, a lot more people will be inclined to check out what you have to offer.
On the other hand, you need to be extremely persuasive. Convince them that the advantages of upgrading to a premium user are vast and well-worth it.
So, you need to strike a perfect balance. Between providing enough value for free. And having an enticing offer that will incentivize the users to go premium.
Keep in mind that choosing the right business model for your startup is a process. There are quite a few ways to go about starting your business. And you need to carefully weigh all your options before making the final decision.
For your business endeavor to be successful and profitable, it’s vital that you do the research and ensure the model you opt for is compatible with your idea and target market.
Hopefully, the information and examples shared in this article will help you do just that and set you on the right track.
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