Choosing the right business model is as important as choosing the right business to pursue. At present, technology is revolutionizing the way we live. Very few areas are untouched by technology. So, it is wise to choose businesses that adhere to technologies. App-based startups are flooding the markets for the last 10 years and there are no signs of a slowdown in the future also. All these startups leveraged the inexplicable adoption rate of smartphones and the internet.
Still, many of these startups shut down their operation within one or two years after launch. The type of business they took in hand may have had good potential but the business model they followed may be flawed or ill-suited.
So, it is very important to select an apt model. One of the worst mistakes made by a startup founder is to reinvent a new model to generate great cash flow. But, this may reduce the confidence of investors and become reluctant to invest. A business model can be influenced by region, capital, type of business, unit economics, to name a few.
Below I have presented some proven business models and it is you who has to select the right one for your startup.
The marketplace model is popular in the on-demand circle. More than 80% of the app/web based firms follow this model. Another name for this model is the less ownership model. The investment needed in this model is very small. In this model, you just bring supply and demand together. In this business model, you connect a stranger with a stranger. The best example of this is Ubereats business model, which is the no. one on demand food delivery firm. They bring together all the restaurants on board an app. Airbnb, which rents public spaces for affordable rate follows this model.
Even e-commerce sectors like Amazon, eBay, Flipkart use this model. The overall cost involved in this model is small. If your startup is app-based, then this model will suit you. All said the stakeholders involved in this model is high.
Pros: Apart from less ownership, the fixed cost and inventory cost is almost nil. A mobile app is enough to run this business i.e. you can run it virtually. With this model in place, you don’t have to worry about the manufacturing costs, indirect expenses, storage, R&D, etc. Instead, you can focus on your core business.
The on-demand model is more or less close to the marketplace model. On-demand based firms are operating in the market only in the last 10 years. With the advent of technology and less time available for other works, people have less attention span and want to get everything in a short time possible. In simple words, they need instant gratification. For example, if they need to ride on a cab, they need it immediately before them.
This instant gratification of the people is leveraged by the on-demand firms. Uber is the market leader in the on-demand market. Many other startups have followed the Ubereats clone business model, Postmates, Lyft, foodpanda, Go-Jek, etc are some of the popular firms following this model. To be precise, the on-demand based firms are a result of innovation in traditional firms.
Pros: The firms that follow this model can be cost-effective, efficient, and effective. Maximum can be done with limited infrastructure. VCs, Angel investors are interested in this type of startups because of the exciting revenue model. Large scale employment to non skilled people is possible.
Subscription based model
This model is mostly used by software product companies and web-based companies. The subscription model became popular after the increased usage of mobile phone payments and EMI. Subscription plans come in the form of daily, monthly, half-yearly, quarterly, and yearly payments. Customers who don’t want to buy a product fully can use it using a subscription basis since it is easy and hassle-free. One of the top companies using the subscription model is Netflix. Netflix is a video on demand firm. People subscribe to Netflix on a monthly or yearly basis and enjoy their service.
Pros: This model allows the customers to think a lot before opting for this service. Because of this, the service provider put extra effort to give a quality output. If the customer is satisfied, the work of customer retention is easy. Similar to the on-demand model, it is like by the VCs and angel investors in general. The competition for startups using this model is high. So, a small compromise in the product quality can lead to the customer moving to the competitors.
The startups which follow this model provides a product for free to its users but, certain features of the product are available exclusively for premium/paid customers.
If the product is liked by the users who use it for free, it may propel them to further use other features by paying to get the premium service. LinkedIn, Vimeo, and Dropbox is some of the leaders in this segment. For example, LinkedIn provides most of its services for free. While their premium services include talent acquisition by users, skill enhancing videos, MOOCs, etc. This became an instant hit for LinkedIn. If you want to follow this model, make sure your service pushes the user to opt for the premium service.
Pros: One of the top pros of using this model is that it can be used as a marketing tool to allow users to go for the premium service. One step further, the premium service can be offered as a subscription model. Many startups are a combination of freemium and subscription models.
The reseller model is close to the marketplace model but here, you buy the products from others and resell it with a certain margin. Unlike the marketplace model, the initial investment and infrastructure required are big. Amazon and Flipkart, apart from being a marketplace, also act as resellers. Many firms which follow the marketplace model move to resell after some time.
Affiliate marketing can be a subcategory of this model. Affiliate marketers generate revenue from the commission they get for selling each product.
New entrepreneurs who have to bootstrap their business cannot use this model for their startup since the capital required is big. Instead, they can start as a marketplace and then change to the reseller model after getting a standard revenue.
Direct sales model
This business model needs no introduction. If you know the operation of Tupperware, Avon, Herbalife, Mary Kay, Amway, then you would have understood what direct selling model is. This type of direct sales model suits only product companies. In direct marketing, you target specific customers and reach them. There is no need for unnecessary marketing costs. Customers can buy from the comfort of their home in direct marketing. The margin and commission per product are big in direct marketing. Using this model, you can employ people from outside as sales reps to sell your products.
Pros: By following this model, you create an additional source of income for office goers and people with good communication and speaking skills. In this age of social media, it is even more easy to get the products to the people with zero money invested in marketing.
Ad-based business model
The best example for ad-based business model is Facebook. The service offered by Facebook is free of cost. But still, it generates millions of dollars in ad revenue. The ad-based model can be sustainable only if the customer base is wide. Most importantly, the service offered should be engrossing enough to hold the customers.
After reaching a wide user base, you have to convince other companies to advertise on their medium. The cost of acquiring such a large customer base is expensive and takes a lot of time. The service offered should be creative and innovative.
Pros: The only work is to create a wide customer base. Physical infrastructure is not necessary, unlike some product and manufacturing firms.
Innovative startups come in the field of IoT, SaaS, AI, ML, and mobile apps. SaaS is a model of lending the software using the subscription model.
Mobile apps include productivity, gaming, self-improvement, just to name a few. Tech startups based on fintech, agritech, edutech, food tech, etc. Building services like security, documents applying, etc for government departments and private companies. All the above are computer-based startup types for which a strong technical knowledge of software development is required.
The business model is dependent on the revenue model and revenue model, in turn, is dependent on the business region, ROI, initial capital, type of customers, product/service type, etc. So the business model should be selected keeping in mind the above factors.
If a potential competitor of yours is following a particular model and facing loss then, you should follow some other model. In such a way analyze the models followed by other companies similar to you. This ensures you to be extra cautious.
Go through the above two points before choosing the model and I would recommend you to do a ground report and financial analyses whether the selected model will be sustainable in the long run.
Enough said, it is now up to you to choose the right model. These models are the latest trend. There are some ways to adopt/choose the right business model. Below, I have mentioned some important aspects to consider before selecting a model.
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