While the company’s innovative nature means that its exact business model would be something … [+]
When entrepreneurs use the term business model, they often mean “how the company makes money”. However, in order to better understand the implications of this question, it is important to distinguish between the business model and the revenue model:
- A revenue model is a close answer to this question. The revenue model is the combination of all of your revenue streams. It is closely related to the area of your business where customers send money to your company.
- The business model is a broader term. It incorporates the revenue model, but also deals with other aspects of the business such as: B. the cost structure. (This is well illustrated in the popular Business Model Canvas.) For example, while a traditional retailer’s sales model is only concerned with customer transactions, the business model is concerned with suppliers, locations, marketing, employees, and so on.
Because of this, it is somewhat unrealistic to simply select a business model for a startup. The company’s innovative nature means that its precise business model is a unique combination of various factors and involves several important decisions related to the business.
Use a blueprint
That means you don’t have to reinvent the wheel.
Take a look at the established players in your industry. Mimic what they do and, if necessary, iterate on based on the unique aspects of your business. For example, you might want to keep the same revenue model but offer different value propositions. It is no accident that almost all project management software solutions use a freemium subscription-based revenue model. What sets them apart is their exact solution and not the way they make money.
The second option is to take a business model from another industry and apply it to an industry in which this model is not yet established. This is riskier, but being the first to succeed has great advantages. For example, Booking.com has set up an online marketplace (similar to eBay) for the hotel industry.
Use a scalable model
Scalability is For most startups, it’s more of a requirement than a choice. The extremely risky nature of business implies that the potential must be great for the company to be worthwhile. Because of this, your business plan needs to be scalable.
Hourly billing advice is not particularly scalable, while a software solution with marginal costs close to zero (the cost of adding an additional customer) is extremely scalable. That’s why the vast majority of successful tech startups are in the digital world.
Understand your cost structure, pricing and marketing channels
How much does it cost to develop the product or perform the service? How much does it cost to ship it to your customers? How much do competitors charge customers for similar offers?
Knowing your company’s exact cost structure will help you evaluate your offering, which in turn will help you choose the right marketing channels and revenue models.
Because of the low marginal cost of most software products, “free” has become a popular price choice. That said, while giving something away for free is a great way to attract customers, it creates an obvious problem – how do you actually make money?
Ads, affiliate offers, and most importantly, freemium offers (i.e. part of your offer is free, part is paid for) are the most common solutions to this problem, but they are not perfect.
In general, it is safer to avoid “free” business models in the early stages of your startup. This makes it easier for you to check that people really want what you are doing. You can always add free offers as your startup project reaches the growth phase.
Understand your revenue model
At the highest level, there are two types of revenue models – transactional and subscription models. The main difference is that in the first option you are selling property with one-time transactions, while in the second option you are selling temporary access.
The subscription model makes a lot of sense in the scalable digital world as it provides the business with predictable, recurring revenue (and hopefully higher customer lifetime value) while requiring a lower upfront investment from the customer.
Because of this, many older software giants (Microsoft, Adobe) are trying to migrate from a transactional to a subscription-based revenue model.
If you’re building a scalable digital startup, the 2021 subscription model should be the default choice.
- Use your competitors or tech startups in other industries as a blueprint.
- Make sure your business model is scalable.
- Understand your cost structure as it defines your choice of marketing channels and prices.
- Choose your sales model.