The business model is at the core of any successful startup because no matter how cool an idea is or how unique something may seem; a startup must have a viable way of making money that is worthy enough for future investment and to sustain itself.
When you’re first starting a business, one of the most important parts of the process is planning. Although it can be tedious, you’ll want to take the initial time to determine what you’ll be selling, who your customers will be and how your business will make money.
You’ll want to select a business model and incorporate this design into your planning and research. In this guide, we’ll walk you through a business model definition, break down the different types of business models (with examples), and discuss how you can identify the best one for your business.
What is a business model?
A business model is an outline of how a company plans to make money with its product and customer base in a specific market. At its core, a business model explains four things:
- What product or service a company will sell.
- How it intends to market that product or service.
- What kind of expenses it will face.
- How it expects to turn a profit.
Because there are so many types of businesses out there, business models are constantly changing — and although we’ll discuss some of the most common types below — there is no one-size-fits-all model that can be applied to every business.
Here are the 10 components you’ll want to keep in mind:
Business models aren’t just about income — you also need to consider production costs and other factors in order to see the full picture. What goes into creating a business model?
- Value proposition: A feature that makes your product attractive to customers.
- Target market: A specific group of consumers who would be interested in the product.
- Competitive advantage: A unique feature of your product or service that can’t easily be copied by competitors.
- Cost structure: A list of the fixed and variable expenses your business requires to function, and how these affect pricing.
- Key metrics: The ways your company measures success.
- Resources: The physical, financial, and intellectual assets of your company.
- Problem and solution: Your target customers’ pain points, and how your company intends to meet them.
- Revenue model: A framework that identifies viable income sources to pursue.
- Revenue streams: The multiple ways your company can generate income.
- Profit margin: The amount your revenue exceeds business costs.
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.
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.
2. On-Demand Model
The on-demand business model implies providing your customers with the specific services they can obtain anytime they need them. Having analyzed the business models of successful companies, it becomes clear that this one works not for pickup services only: you can now order food, groceries, and other goods using your mobile app – that concept became extremely popular in 2020 and is now only in the first stages of evolving.
The ability to provide different services within a single app (however, keep in mind that you’ll need to invest significant costs into the digital product development, hire top-notch UX/UI designers and app developers with prominent skills in working with Ruby on Rails and React frameworks), is mostly focused on younger generations and it allows using freelance labour.
3. The Subscription Model
Mobile payments continue to rise in popularity, and consumers are trending towards a more simple, hassle-free kind of shopping experience. These trends are leading to explosive growth in subscription-based services that consumers can easily set up, and then not worry about, knowing they will receive their product or service every month. Add in some crazy, well-messaged commercials with a hilarious spokesperson, and you have a brand that continues to double and even triple revenues annually.
This business model provides an optimal balance of value to both the startup and the customer. It’s simple and convenient for customers and takes a lot of thinking out of the purchasing process. Customers know they will receive their product every month around the same time, don’t have to worry about reorders, and know they will get a set, flat rate that will stay within a budget. On the startup end, the value lies in being able to predict revenues through recurring sales, which is incredibly advantageous for a company’s valuation.
4. Virtual Good Model
This business model is now being reconsidered with a completely new meaning. Simply put, the virtual goods model is the approach that is commonly used for video game development and provides customers with the ability to purchase virtual goods that can only exist online (usually, within the app it’s purchased for). Today, this concept has a huge potential for being implemented in other businesses as well, such as NFT games and Metaverse development.
By the way, the last one has already announced the first cases of purchasing virtual real estate using the largest third-party marketplaces. Because this field has only started to develop, it’s never been a better chance to successfully launch a startup that goes viral. Advantages of the Virtual Good model for startups include offering a first-class gaming experience with the in-app purchase options, enhancing the user experience and engagement and lastly virtual goods are unique, context-bound items that feature individual ownership, which adds to the exclusivity.
5. Freemium Model
This combination of “free” and “premium” has become a widely used approach amongst startups over the last decade. Broken down, the model offers a basic service to consumers for free, while charging for premium services to paying members. The freemium business model has gained popularity with the prevalence of online and Software-as-a-Service (SaaS) businesses. The basic framework goes like this: a software company hosts and provides a proprietary tool for their users to freely access, such as an app or tool suite.
However, the company withholds or limits the use of certain key features that, over time, their users will likely want to use more regularly. To gain access to those key features, users must pay for them. You can see how Spotify follows this model — it gives users free and open access to its entire database of music while sprinkling in ads between songs. At some point, many users opt to pay a recurring monthly fee for the premium service so they can stream music without interruption.
Also read:
Startup update: Investors Bring More Than Money to The Table
How Startups Can Manage Their Budget Efficiently With Regular Expense Tracking
Conclusion
These are the most effective business models you can easily use for nearly any startup regardless of its field. Now that you have all the essential insights about the best strategies to use for your company’s development, we hope that there are some really good options that can ideally fit your company’s needs and objectives.
