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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 too. And the main goal of business is to make money. Otherwise, you are not likely to survive in the competition and win investments.
So at some point in startup development, you should answer the focal question – how will my business make money? The best way to answer this question is to choose the business model for your startup.
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 Model only about what your users will pay for? Well, that too. But in reality, the business model covers many elements and requires answering several questions. Usually, the business model answers the following 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, the business model 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. Some business giants, which we think are great products, are nothing more than innovative 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. Your 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.
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.
4 Steps to Choose the Best Business Model for Your Startup
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.
- 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.
- 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 startups with a lot of vagueness that they bring. 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. This choice 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 business models. Here are the most popular ones that will be especially useful for startups.
The Freemium 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, 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 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.
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.
Famous Apps and Their Business Models
Let’s look at some famous examples of 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 business model for your startup defines the success of your business. However, selecting a suitable business model 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 finding the best business model for startups based on Lean Canvas and detailed information.