If your startup doesn’t have any business model, it’s a hobby, not a business. That’s because a business model is a company’s plan for making money. It contains information about the company’s products or services, target markets, and any expenses that may occur.
That’s why after you’ve got a billion-worth idea, the very first thing to do is to choose a business model for it.
In this guide, I’m listing the four steps most businesses take to define the right model for their company. But before we move to the steps, let’s review what popular business models are there.
5 Popular Business Models for Startups
There’s no universal business model that’ll work just for any startup. Even the largely popular ‘Uber for X’ model won’t work for each company.
According to the Business Model Navigator, there are 55 business model patterns. Quite enough to choose from.
We’re going to focus on the most popular ones:
- Advertising
- Reseller
- On-demand
- Subscription
- Freemium
Let’s take a brief look at each.
Advertising model
At the core of the advertising, model is a free product or service. You either attract the audience by creating content or interaction and engagement, then sell access to advertisers.
The best example of the companies that adopted the advertising model and make money out of it is Google and Facebook. They let people use their services for free but gain money by selling ads. In 2019 these two giants took up to 59% of the US digital ad revenue.
Reseller model
Let’s take a look at how Amazon and eBay work. They represent partner companies or individuals and get paid for promoting their offers.
Amazon charges a $39.99 fee from each seller + transaction fees. While sellers make money from the difference between the selling price and the price they get the stuff from manufacturers.
On-demand model
The on-demand or sharing economy model works by ‘access is better than ownership’ principle. It means the owner (e.g., Uber driver) provides services to seekers (people looking for a ride). Uber platform serves as an intermediary. The company doesn’t provide vehicles; they work with people who already have cars.
This model is quite popular in taxi services or food delivery. On-demand platforms gain money by charging a fee, often from both users and service providers.
For example, Lyft takes 20% on fares + service fees; Airbnb charges 3% from owner + 6-12% from guests.
Subscription model
Companies like Netflix, Amazon Prime, or Adobe offer monthly payments instead of traditional one-time purchases.
Users pay $8.99 monthly to watch Netflix instead of $108 collected per year. It makes the service affordable for users that can’t pay the full price at once and help Netflix predict monthly or annual revenues.
For Netflix, subscriptions are a way to pay off the production of TV series and purchase rights. As well as collect more money in the long run.
Freemium model
Here’s how it works: you offer to try a basic service for free, but users can get an upgrade for a fee.
This model is quite common in social gaming and software. Evernote, Skype, Dropbox, Spotify, and Candy Crush Saga have adopted the freemium model. For instance, Candy Crush made over $600,000 per day with it.
Freemium and subscription models aren’t the same, though. You can still watch YouTube videos if you’re okay with ads or no background mode. But can’t watch anything on Netflix if you miss the monthly payment.
4 Steps to Choosing a Business Model
Before you choose the business model, consider these things:
#1. Target market
Is there anyone who actually needs your product?
Uber, for example, solved the problem of high taxi prices and poor customer service. Airbnb helps travelers to save on hotels by renting a room or a flat for a short time.
These apps solved existing user problems—high costs, low-quality service, long waiting times. That’s why people loved these apps and keep using them.
#2. Potential customers
Who’s going to use your product? Does it bring anything new? Can your potential customers afford it?
If the startup solves non-existing or already solved problems, it may be better to not launch it at all.
Uber Eats was targeted at people too busy to cook at home or even eat out:
- Time-pressured people
- People with kids
- Tech-savvy millennials
Restaurant delivery seemed like a perfect option, but not all restaurants had enough money to hire couriers.
#3. Competitors
Most probably, there’s already a company doing what you’re planning to do. You need to find out who they are and how you can do their job better.
For example, Uber Eats, Just Eat, and Glovo are food marketplaces, but each with a slightly different approach.
- Just Eat uses the order-only business model; people choose food from their catalog, and the restaurant has to arrange the delivery;
- Uber Eats, on the other hand, has its own couriers who take care of the delivery; it’s called ‘order & delivery’ business model
- Glovo also offers food delivery from restaurants, but they also deliver groceries, alcohol, and pharmacy.
#4. Revenue streams
How will your product make money?
If you’re making a social network, you can sell ads. If it’s an Amazon-like marketplace, you charge a commission from sellers, and so on.
What’s more important, most of the billion-worth startups have a few revenue sources. Amazon makes money by charging fees from sellers, but that’s not their only source of income.
Amazon revenue streams:
- Online stores: $141.25B
- Retail third-party seller services: $42.75B
- AWS: $35.03B
- Subscription services: $19.21
- Physical stores: $17.22B
- Other: $14.09B
It also has physical stores, online stores, subscription services, AWS hosting, and other revenue sources. Amazon covers more users and makes more money.
The best option is to look at your competitors and figure out how they make money.
If you’re only developing the startup idea, a must-have step is creating a startup business plan. It’ll help you with decision-making and testing the idea itself.
But in case you’re focused on the business model, try out Business Model Canvas made by Alexander Osterwalder. It’s a visual template that can help you identify different elements of your business model.
Namely:
- Customer Segments
- Key Partnerships
- Key Activities
- Revenue Streams
- Value Propositions
- Channels
- Key Resources
- Customer Relationships
- Cost Structure
Want something simpler? Try the Lean Startup Canvas. It’s a modification of the traditional business canvas, designed specifically for startups.
That’s it! Each of the models I’ve listed is good—in its own way. But don’t stick to only one model. You might want to combine a few in one startup right now or as your business grows. Or even create your own unique business model.
