Every new startup faces the critical task of developing a business model that will bring in the most revenue. A business model is the route by which income makes its way into the company, and the possibilities are virtually infinite. In this post, we’ll look at why you need a startup model, examine examples of models that are working well today, and provide the steps you can take to choose the best model for your startup.
Why is a Business Model Important?
Imagine a potential investor asked you about your business idea and you explained every detail about how your product serves a real need for a specific customer base. No matter how spectacular your product or fertile the market, an investor would say that you haven’t explained a business idea, but simply a product.
While business can’t happen without deliverables, they’re just one aspect of the whole. A business model explains how the marketing, messaging and strategies for targeting consumers will synergize with the solution being offered in order to generate awareness and incentivize sales. Customers value not just what they buy, but also how they buy it.
Types of Business Models
There are many ways to innovate upon business models that already exist, but here are the basic models to start with:
- Direct selling model: In this model, your business sells products to consumers and has the option to partner with business owners who can sell the products. Another way to do a direct sales model is to hire sales representatives who get paid on commission or to work with affiliate marketers. One example of this is Amway. In the past, some have wondered if Amway is a pyramid scheme, but the company has since dispelled those rumors. Now it is known for offering partnerships to entrepreneurs and generating profits from the sales made to end consumers.
- Subscription model: Any deliverable can be packaged into a subscription model, whether you’re selling clothes, providing software or offering an online coaching service. For example, you could create subscription boxes for your inventory that feature personalized products for every customer. Or, you can bill your customers monthly or annually for the service or platform you provide.
- Broker model: In the broker business model, you act as a go-to between the end consumer and another party, and profit from service transaction fees in the process. This is often the model many tech startups opt for. For example, Cash App is a free app anyone can start using to make instant money transfers to other users, and the company makes money by taking a percentage of each transaction as a fee.
- Marketplace model: The marketplace model provides a platform for businesses and customers to find each other. Just like in the broker model, the company gets a slice of the pie by taking a percentage of each sale.
How to Determine the Best Business Model
To determine the best model for your startup, there are several factors to consider:
- Evaluate the size of your product’s potential market. This informs the size of your target customer base, which affects how you should best approach the market.
- Identify your competition, look at their models and consider the unique value they offer. A sense for the existing landscape can help you find untapped opportunities in your market.
- Define your target customer. Honing in on who your customer helps you figure out how you can get their attention and convert them.
- Determine your unique selling proposition (USP). Your USP is the answer you give a customer when they ask, “why choose you over your competitor?” Focus on what makes you different in a way that fulfills an under-served need or improves upon what’s currently offered elsewhere.
A business model explains to your team and your stakeholders the strategy that will incentivize sales and drive profits. In today’s global marketplace, businesses must make unique offers to compete. The more you learn about your target customer and the existing market, the better you can identify opportunities.