In our previous article, we compared MVP and Proof of Concept. Today, we would like to share startup business models. When you get ready to launch a business, you need to know what your business model will be. While you may think this is something that you can worry about later, it’s best to get organized.
Here we will take a look at the different types of business models, the benefits of having one in place, and how to factor your model into your strategic planning process.
What is a startup business model?
“Business modeling is the managerial equivalent of the scientific method – you start with a hypothesis, which you then test in action and revise when necessary” – Joan Magretta, ‘Why business models matter.’
Do not be confused with Traditional Business Plan. The difference between Traditinal Business Plan & what startups need we’ve written here.
A business model is a summary of how your startup will make a profit. It looks at:
- The products and services your business will sell
- The target market you will sell to
- The expenses that you will incur from making and selling your product or service
- Your customer value proposition. This is a marketing statement that defines why a customer should buy your product or service and how you will solve your customers’ problems. It also should explain your unique selling points and how your product and service differentiate you from your competitors
Why is it best to have a business model in place early on?
Having a solid business model in place as soon as possible will benefit your start-up in the following ways:
- It will help you to devise a proof of concept (POC) and minimal viable product (MVP)
- It will make it easier to turn an initial profit
- Business model will enable you to review your processes and reduce costs
- It will make it easier to get early investment
- It will help you recruit exceptional talent
For example, take the audio-chat mobile app ClubHouse. It’s still in Beta and is currently invite-only but has a market valuation of $100m (€83m). This high valuation would not be possible without a thorough business model. And they used a tactic we described previously in our article 24 Tactics used by Big Startups to solve The Chicken and Egg Problem
Twelve examples of startup business models
There is a wide range of different business models available. The one you choose will depend on the type of product or service you are trying to sell.
Here are twelve of the most popular.
This is when you generate the majority of your revenue from advertising. This model is frequently used by magazines, free mobile apps, and online blogs.
Although your users are not paying to view your content, your advertisers pay you for ad placements.
Commonly used with software as a service (SaaS) and mobile apps, this is when you offer part of your product or service for free, and charge for premium features.
On average, freemium businesses convert between 2% and 4% of their customers, making it a potentially profitable business model.
One of the most popular business models in the modern age, this is when customers are charged an ongoing subscription fee to use a service. You can frequently see this model in mobile apps, newspaper subscriptions, and online streaming services.
4. The ‘razor/razor blade’ business model
The razor/razor blade business model is when you sell a product at an affordable price and sell companion products at a high-profit margin. For example, razor blade companies will sell handles at a loss-leading price and blades at a high margin.
Conversely, you may choose to sell the initial product at a high margin and additional products at a low margin.
Brokerage and marketplace businesses are when you connect sellers with buyers and charge a fee for doing so. A marketplace allows both parties to find each other while a brokerage business model is more one-sided.
These business models are commonly seen in online marketplaces like eBay, Amazon, and Etsy, as well as insurance and real estate brokers.
Crowdsourcing is when you create a platform and encourage customers to create their own content on it. For example, social media platforms like Instagram, Twitter, and Facebook.
You can then sell advertising spots to appeal to the people who use the platform.
7. Affiliate marketing
Affiliate marketing is similar to the advertising business model. You are providing free content, but you get your revenue from affiliate marketing.
This is when you provide links to products and receive a commission every time someone buys something you promote.
Low-touch business models offer low prices by providing no-frill products or services.
For example, think flat-pack furniture that customers have to put together themselves or banks that only operate online.
The pay-as-you-go business model is when customers use your product or service as they need it, and you charge them at the end of a set period. For example, printer ink or electricity usage.
Franchises are commonly seen in the hospitality industry. It’s when other entrepreneurs pay you to use your business name and model. You offer branding and support in exchange for a cut of their profits.
Leasing is when you rent your product out to customers. They pay a monthly or weekly fee to use it and return it back to you when done.
Disintermediation is when you sell your product directly to the customer rather than through a supply chain. This lets you sell at a lower cost and build up strong customer relationships.
It definitely pays to determine the startup business model as soon as possible, even before you launch. This will allow you to optimize your business strategy planning and increase your chances of success.
One thing to bear in mind, it’s essential to update your business model as your business evolves. Internal and external factors may affect your business and as a result, the way your business generates profit may change.
We would appreciate if you share your thoughts regarding shared startup business models.
If you need advice determining the best startup business models for your start-up, You Are Launched can help. We have been working with a wide range of lean start-ups since 2014, helping them to grow, develop and generate high levels of profit.