How to Find the Best Startup Model for You?
Every successful business owner can tell you that the right startup model is the cornerstone of success. You can have the best business idea ever, but if you don’t find the right plan to turn it into a marketable product or service, you’re setting yourself up for failure.
Essentially, a business model should answer the question of how a company makes money. This means answering two additional questions:
- Who are the customers?
- How to make a profit?
The right business model needs to ensure that your growth is sustainable and you can increase your profit over time. Of course, this is a bit of an oversimplification, as there are many other factors to take into account.
How to Find the Right Model
When starting a new business, the first step is to take a close look at the market. Your ability to quantify the market can make or break your business. Size and growth are the two most important determinants. Even if the market isn’t big yet, it may worth entering it if you know that it will grow in the future.
Once you’ve gathered enough knowledge of the market, you need to find the right consumers to target. You need to identify the ideal customer, which is a person whose needs meet your core business the best. This can take quite a bit of research, but it’s necessary to figure it out since your business plan will depend on it.
The next thing you need to establish is the value proposition. Essentially, it should showcase all the reasons why a customer should choose your product over the competitors’. This is where you need to find out how to add as much value to your product or service as possible and find a way to be unique.
After this, you need to find the best ways to reach your customers by building strong distribution channels. Some of the things that have to be considered when doing this:
- Product type
- Investment needed
- Level of control that you’ll have
Of course, there is no business without revenue. This is why the last item on your list is creating the revenue streams.
So how do you keep track of all this? Well, the answer is the business model canvas.
What Is a Business Model Canvas?
This concept is a visual representation of all the factors mentioned above, along with the other relevant ones. It offers a comprehensive look at your business model, which offers you a way of evaluating all of its components and bring innovation into your business.
Aside from the factors in the section above, the business model canvas encompasses the following:
- Key resources
- Key activities
- Key partnerships
- Cost structure
The main benefit of a business model canvas is that it allows visual thinking. This makes decision-making much easier for managers. You can also make the necessary changes right away, so you can update it whenever necessary. Lastly, it makes the nine key aspects of a business model easy to understand so that everyone can have an idea about how the company will generate profit.
An important thing to remember is that you always need to pay close attention to your competition and their business models. If you don’t do this, you might lose your competitive advantage. They might be able to use the chances before you, which will ultimately lead to losing revenue.
Another useful resource is the Technology Product Canvas, to help you decide on the best model.
7 Startup Models You Need to Know About
There are many business models out there, especially in today’s business environment, where everybody wants to be different. However, there are some that are universally good and can take you to the success of your desire.
1. Direct Sales
Direct sales are among the best ways to present your product to customers. Even though it’s losing popularity due to the development of digital marketing, this traditional approach still has many advantages.
The model is best suitable for complex products. This way, consumers get to actually see it in action and you can rest assured that a knowledgeable person will demonstrate it. This highly increases the chances of selling it, since people are more likely to respond to live demonstrations than to media campaigns.
Still, it does have some flaws. You might not be able to reach as many people as you could with a media presentation. It can also be a more expensive solution.
Kirby is a great example of a company that uses direct sales. Its salesmen are able to show how the product works, which is a very persuasive way of convincing someone to buy it. It creates stronger bonds with customers, which is among the main reasons for the company’s success.
Franchising is great for businesses that don’t have enough funds to operate on their own. Basically, a franchisor gives a company (franchisee) the right to use its brand to sell their own products. In return, the franchisee pays royalties to the franchisor.
Those without much experience can benefit the most from this. A small business receives the support they need and use the franchisor’s business model, so there’s no need to create one from scratch.
The biggest disadvantage is that you may not know how good the franchisor actually is since they tend to present too good of a picture of their franchise. This is why you should choose them carefully.
McDonald’s is probably the most well-known franchise. The company sells its rights and products to many franchisees and make tons of money off of them.
3. Freemium Model
There’s a lot of confusion going around when it comes to freemium. Many people think that it means having a premium product and offering a free trial. However, this isn’t the case. Freemium actually means that you have a product that many people use, but only a minority pays for it.
This works best for SaaS (Software as a Service) products. A vast majority of them are freemium, meaning that they’re free to use, but you have to pay for additional features.
The biggest advantage of freemium is that you get to reach a lot of people. Everyone loves free stuff, so people are likely to use the product. Then, something called the network effect happens. Basically, it means that the more people use something, the more they like it. Eventually, this leads to people paying for additional features.
However, this only happens with a minority of users, meaning that you need to reach potentially millions of people before you can make enough money.
MailChimp is a great example of freemium SaaS. It’s an email marketing platform that lets you automate your marketing campaigns. It offers users a basic account with 2,000 subscribers and 12,000 free monthly emails. If you want more than that, you have to pay.
4. Subscription Model
Thanks to the development of SaaS products, the subscription model is slowly replacing the business revenue model. For the latter, the key is to get customers to make a one-time payment. Instead, with the subscription model businesses focus on recurring payments.
Modern technology allows pretty much every product to be subscription-based, which is why this model is suitable for all kinds of products. The main advantage is customer loyalty since it’s easier to build long-term relationships this way.
A big risk, as in most cases, is competition. This is especially the case with this model, since each time you lose a customer, you haven’t only lost a purchase but a part of your sustainable income. This is why customer satisfaction is of the utmost importance. You need to ensure that your product can evolve to match the customers’ changing needs.
Examples of this model are all around us, and you’re likely using at least one. Services like Netflix are famous for being subscription-based, as are many internet and cell phone services.
5. Marketplace Model
Becoming a marketplace means that you can create both supply and demand at the same time. This can be a fairly hard model to use, but it may bring tons of benefits that other models don’t.
First of all, you have little to no overhead, and no inventory to deal with. Your entire company can be digital, which means that you can bring the buyers to the sellers without leaving your home or office. There’s no manufacturing, and the pressure that comes with it, nor do you need to advertise once you’re established.
All you have to do is provide people with opportunities to make transactions and take a small cut out of each.
This isn’t to say that running this kind of business is easy. On the contrary, you need to make sure that both buyers and sellers are satisfied. This can be quite challenging and requires continuous innovation. You need to ensure that the sellers will have a wide enough audience and the consumers will be able to find what they’re looking for.
When talking about this model, the first company that comes to mind is obviously Amazon. Thanks to this business model, it’s one of the world’s most valuable companies that brings over a million sellers and hundreds of millions of buyers together.
6. Reverse Auction
Pretty much everyone knows how regular auctions work: buyers compete with each other by bidding as high as they can to buy a product. In a reverse auction, it’s the sellers bidding to sell to buyers by undercutting each other. The results are usually lower prices, which a huge number of people see as great deals.
Usually, each seller fills out a standardized form and places their products for bidding. By looking at the competition, they can create their prices and modify their offer to attract more consumers. This has a lot of advantages but can also be a little tricky.
You need to make sure not to draw a buyer in by all means, or risk hurting your cost-effectiveness. This is why you always need to pay attention to how much you’re willing to lower the price.
Priceline is a good example. It promises to deliver the cheapest travel accommodations. It also mixes this and the marketplace model, since the sellers are those that ensure such low prices.
7. Virtual Goods Model
This model is an embodiment of modern technologies. If you’ve ever bought a skin for your game character or send someone a virtual gift, you’ve participated in some business’ virtual goods model.
While some consumers may perceive such goods as having ‘no real value’, many more have bought into the virtual goods model, as evidenced by its success. Mobile games, apps, and even chat rooms contain these virtual goods that people can buy, for the fact that it brings them a kind of satisfaction. This isn’t any different than buying new shoes or a cup of coffee, which ultimately serve the same purpose.
The advantages of this startup model is a huge variety of products that you can create. Even buyers can make money in some cases. For example, in the popular simulation game Second Life, a user bought an entire island for a ton of money. Though this may seem insane, she ended up making it all back and a lot more by developing and selling property in the game.
This is still a young model with tremendous growth potential. If you have an idea about the virtual goods that you can make, this can definitely be the right choice.
The Final Word
Choosing the right business model can be a bit tricky, but you should never try to start a business without it. Finding the right business model for you means that you know everything there is about the way your business operates and generate revenue. Apart from the above, there is also the conventional model of selling products and services.
Make sure to take a close look at the market you’re entering and its potential, your ideal customer, and your competitors.
The most important thing to consider when choosing a business model is the way your company creates and distributes value to the consumers. Once you understand this fully, you’ll have no trouble finding the startup model that will work for you.
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