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“How to choose the right business model?” — with a similar question, 9 out of 10 startupers-beginners wake up in the middle of the night in a cold sweat. If you are among them — this article is for you. If you have already decided on a business model, the information below will help verify the correctness of your choice and you will definitely sleep peacefully. Let's get closer to the point.
Clarifying the terms: what is a startup business model?
A business model is a way how an organization creates, delivers, and receives value in an economic, social, cultural, or other contexts. In simpler terms, the business model can be described as a logical reflection of how the company works at all its levels and, most importantly, how it ensures sales and profits. The business model is designed to describe how individual enterprise structures interact with each other and how the final product is created, delivered to consumers and monetized.
Important: do not confuse the concepts of a business model and a business plan. Business plan — a document that confirms the viability of your business and includes a description of the specific steps of building a business, the necessary investments, etc.
Is there much to say about the importance of a startup business model?
It determines the fundamental aspects of a startup (as for any business), which are:
- consumer;
- value proposition;
- finances;
- opportunities.
Source: Statista (2019)
Based on these components, Alexander Osterwalder and Yves Pinier created a business model canvas — a simple and convenient tool, more about which you can read below.
Business Model Canvas: what it is and how to use
Using the business model canvas as a template, you can refine the existing model according to your needs or create own ideal startup business model.
It's hard to believe, but this frightening, at first glance, 9-block table can help you look through your entire business model in a few minutes, find weaknesses and understand what is important for your startup. It looks like this:
We suppose you are thinking now: where to start filling in it? Everything is quite logical:
- define your potential clients (customer segment);
- determine what values ​​you can propose for your clients; and why it is better from those proposed by competitors (value proposition);
- define the distribution channels to receive these values ​​(channels);
- choose what kind of relationships to build with customers (customer relationships);
- calculate revenue streams;
- determine the resources you need (key resources);
- determine your key actions (key activities);
- think about your partners and suppliers (key partners);
- study the cost structure.
That is how the startup business model is shaped.
Options for startup business model
And now let’s go down to the meat. Filling in the canvas table, many questions will inevitably appear. To understand all these issues is desirable to have a successful example. Of course, there are many options for startup business models. Frankly, to analyze all of them thoroughly, we would need to release a guidebook of at least one hundred pages. Therefore, below we analyzed the most interesting and proven startup models that are already used by the top companies in the world.
.1 Marketplace
In simple terms, a marketplace is a platform where services or goods of other companies are sold. Conventionally, there are three types of marketplaces: for goods, for services and hybrid type. One of the most prominent representatives of this business model is Airbnb — an online platform for placing, searching and short-term rental of private housing around the world. Its co-founders Brian Chesky, Joe Gebbia and Nathan Blecharzik managed to grow one of the top unicorn companies from the Airbed & breakfast initiative:
On the one hand, the platform allows people to place their extra space in listings and receive additional income in the form of rents. On the other hand, Airbnb allows travelers to book unique dwellings from local hosts, saving them money and allowing them to communicate with local people.
Where the profit comes from:
- Commissions from Hosts
Airbnb charges a fixed fee of 10% on hosts for each booking through the platform.
- Traveler's Transaction Fee (Guests)
Airbnb charges 3% of the reservation amount as a commission from travelers after each confirmed reservation.
Marketplace Business Model in Atoms:
Why this startup business model works:
In a world where technology dominates, we are used to having all the information at a hand, just a click away. Creative companies turn this behaviour model into their trump card, offering many different on-demand services. The main advantage of this startup business model is the ease of use and convenience, which makes it very attractive to customers around the world.
Also, using new technologies and relying mainly on freelance work, this startup business model significantly reduces the cost of doing business. Moreover, marketplace startup business model also eliminates the risk factor: the one who provides goods/services remains responsible for them, and not the platform itself.
Other companies that use this business model: Amazon, Raise, Beast.
.2 Subscription Model
Subscription is perhaps the most common and convenient option for a client-service interaction. Having set it up in just a couple of clicks, the consumer receives the desired product or service every day / week / month. By the way, a McKinsey & Company study (2018) showed that 46% of customers already pay for online broadcasting from services, and 15% out of them became subscribers of the corresponding e-commerce service within one year after the survey.
Content streaming services are perhaps the most popular examples of the subscription startup business model. Of course, in this context, we have to mention Spotify.
Spotify is a streaming music service offering the legal ability to listen to online tracks from a huge music catalog. The service can be used on desktops, mobile devices, as well as on the web, game consoles, televisions and stereo systems. Music selection algorithms that almost perfectly adapt to the tastes of listeners — this is what makes users fall in love with this service once and forever.
Where the profit comes from: Spotify's main idea is that people can opt out of piracy by making it easier for them to access music legally. Subscription is exactly what allows paying for rental rights and provide income to the music owners. It works like this: listening to music online is free, but at the same time the unobtrusive advertising is present and a certain functions are limited. To set off the add and get the full range of functions, you must subscribe to the premium version with a small monthly fee.
Subscription Business Model in Atoms:
Why this startup business model works:
The value of this model lies in the ability to predict revenues through repeated sales, which is incredibly beneficial for the valuation of the company. This increases the company's sales ability, its attractiveness to potential venture capitalists, as well as consumer loyalty. Another advantage is the ability to quickly and easily collect information about consumer preferences.
Other companies that use this business model:Netflix, SkillShare, BirchBox.
.3 On-Demand Business Model
This is a startup business model in which you meet the needs of customers through the immediate provision of goods and services. An ideal example is Uber, a service for calling private drivers, which has become perhaps the fastest growing startup in history.
The excellent condition of the cars, their quick delivery, the ability to call a car using a mobile application, as well as evaluate customers and drivers — all these factors made Uber the most popular service among analogues in the USA.
Where the profit comes from: One way to generate profit is to charge fee for a client. The second — is promotional offers and partnerships with third parties.
Uber cooperates with automobile owners and drivers, and together they set a minimum fee. Uber provides partners with orders via online booking from a single application and charges a certain amount of commission. The commission charged by the company varies from 20% to 25% of the total amount charged to the client, these tariffs vary from country to country.
On-demand Business Model in Atoms:
Why this startup business model works:
New technologies + existing infrastructure + focus on the immediate satisfaction of user needs — this is a simple recipe for success for startups who have chosen this model. Another important advantage is the use of freelancer labor, which significantly reduces costs.
Other companies that use this business model:Spothero, Postmates, Glamsquad.
.4 Freemium model
The essence of the freemium business model (free + premium) is that consumers get access to basic functions for free, and to get more advanced ones they need to pay an additional monthly fee.
The freemium applications are very popular today. For example, if you are an advanced user of Linkedin, then you know exactly what we’re talking about.
Where the profit comes from: Linkedin is one of the best examples of a successful freemium model. The free version allows users to create and maintain professional profiles, while premium offers are solutions with certain privileges that can be divided into two large groups: Networking, profile, job search and Statistics / Analytics.
Freemium Business Model in Atoms:
Why this startup business model works:
This business model makes it possible to scale up early-stage startups, attracting users without expensive advertising campaigns. It’s easy for consumers to get started with a product. Even the “30 day trial period” or the “Money Back Guarantee” are much greater barriers for new users to decide to use a product than a “Free” statement.
Theoretically, it’s easy to make upsell — to sell something else. Customers are already using your system, so using a special offer, changing the payment model, or simply as a result of the user having outgrown the “free” version are the ways to stimulate the payment.
Other companies that use this business model:Vimeo, Dropbox, Hulu, Match.com.
.5 Reverse Auction
The essence of this startup business model is that buyers name their price for the service or good and, if the seller accepts the price, he sets his conditions for the buyer. Priceline was the first company to choose such a business model in its field and, as we see, it was a right decision.
Priceline is a system specializing in travel services. How does it work? Sometimes the number of hotel reservations is less than expected. Therefore, the hotels go out with special offers to an online auction, where the cost of living is determined by the guest.
This auction has one important feature: you are the only participant. You offer your price for accommodation in the region you need, taking into account the required options for your accommodation, and the site informs you of the existence of such anonymous offers from hotels, motels and hostels.
If there are such offers, then after making a payment on the site using a bank card, you will receive an email with the name of the reserved hotel and the address where it is located. The site will immediately bring you available offers from hotels, or offer to increase the bid and change the search parameters.
Where the profit comes from: Priceline provides a win-win platform for the B2C market. This makes it possible to get huge revenue on the percentage of transactions.
Reverse Auction Business Model in Atoms:
Why this startup business model works:
An unusual way of pricing is a “magnet” for users of a product. In the same way, such a startup business model increases customer loyalty — he feels himself an important, decisive link in the transaction.
On the other hand, choosing such a model, your product will always be in demand by those companies that wish to sell their products and services, that could not be marketed.
Other companies that use this business model: FedBid, MyHammer.
Generally speaking, no matter what business model you choose, there is always a clear algorithm of actions that you need to follow. In particular, there is such a thing as a startup checklist, which details what and how to do in order to succeed. We have already prepared a Startup Checklist for you, and all you have to do is to read it.
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Each of the above-mentioned models is good in its own way. Nevertheless, probably the best option is their combination, and the ideal — is to create your own explosive business model, an example of which others will follow. Remember: your customer and his needs should be the center of your model. Well, of course, do not forget about the technical component of your business model. High-quality custom software is a must if you want to get a significant competitive advantage and build an effective business model. Perhaps, this is the secret sauce that turns a startup into a thriving company.
