All business models startups begin with a great innovative idea. They have visionaries who ace the niche markets, but why is it that only few succeed. Have you ever thought about why only 10-12% of startups make it but the rest just fizzle out? The answer is selecting the right business model for the startup idea.
The failure of a startup idea can be because of a lack of funding, poor marketing and sales, poor pitching, and so much more. All this can be scary, but not if you prepare well with a suitable business model and a business plan. It will help you secure your place in the marketplace and make it a sustainable venture, earning constant revenue.
Why do You Need a Business Model?
A business model defines how your company creates, delivers, and captures value and how it will sustain itself in the long run. With a business model, the operational strategies become defined, and it is easy to identify and work on revenue streams.
Business Models Steer a Startup Idea in the Right Direction by
- Aligning with a value proposition by highlighting the USP and what customers can expect from you.
- Predicting the revenue generation
- Giving a competitive advantage and outshining others in the market
- Directing resource allocation
- Providing flexibility to adapt to changing market needs and shifting customer preferences.
- Attracting investors by presenting the research, expected profits, and returns.
A business model becomes the core of implementing the startup idea. Therefore, it is important to evaluate the different business models that will work best to make your startup idea a success. You can either choose one model or use a mix and match to meet your goals. In this guide, we have listed seven powerful business models that can transform your startup idea into a scalable and profitable business.
(1). Subscription-Based Model
One of the most popular of business models for a startup idea, this structure involves selling a service or product via subscription, i.e., they pay recurring fees to continue the use. This can be on a monthly, quarterly, or annual basis.
The subscription model is popularly used by startups who are looking for predictable revenue with recurrent cash flow and customer retention. This model makes it easy to bring in more investors and streamline the business practices.
Why we Like it for a Startup Idea?
- Makes it easy to predict the revenues because most consumers find it convenient to set up auto-renew.
- Builds long-term customer relationships
- Provides insights into customer behavior
- Allow easier upselling and cross sell as businesses can continuously update the services
Challenges
- Has high customer acquisition costs
- Needs constant value addition to retain subscribers
Popular Subscription Models
- Spotify
- Netflix
- Amazon Prime
- Adobe
- Cloud storage services
For example, if your idea is a grocery store, you can sell subscriptions to deliver a set of goods every month.
(2). Freemium Model
It stands for free + premium upgrades. Startups offer the initial use of the product or service free with basic inclusions, but the premium features require payment. Startup ideas benefit from this business model as they can combine free and premium services into one business. It attracts more customers and converts them into long-term paying customers over time.
This type of tired approach first offers the consumer a no-holds basic service, which gives them a sneak peek into the perks of additional features and exclusive services or the premium service.
Why we Like it for a Startup Idea?
- Because of the low entry barrier, it attracts a larger customer base
- Boosts brand loyalty and engagement
- Free users convert to paid users, bringing in more constant revenue
Challenges
- The user might never upgrade to the premium version
- Free users might switch if they have to pay for the costs of support, server, etc.
Popular Freemium Models
- Spotify
- Zoom
- Dropbox
For example, a website design startup idea can offer a bundle of premium services including more security and design options.
(3). Marketplace Model
This simple business model acts as a platform between the buyers and sellers. Revenue comes in the form of commissions, listing fees, transaction charges etc. It provides both an interactive space to communicate securely. The thing to remember to make this type of startup idea execution using this business model a success is to find customers that are receptive to a small marketplace.
Why we Like it for a Startup Idea?
- No need to worry about maintaining inventories and dead stock
- Reduces overhead costs
- It’s easy to scale as more users join in
- The more users join in, the more valuable it becomes because of the network effect.
Challenges
- Needs high initial investment for setup and customer acquisition
- Supply and demand balance is very volatile
Popular Marketplace Models
- Upwork
- Airbnb
- Agoda
- Uber
- eBay
For example, you can create a baked goods marketplace where the consumers can request baked goods as per their dietary preferences, and bakers can fulfill the requests.
(4). On-Demand Model
This type of business model provides service to consumers on demand. Real-time products or services are the USP of this model. The startup needs to provide the product or service with speed, convenience, and accessibility. This business model is great for startup ideas who are looking to provide instant gratification.
Why we Like it for a Startup Idea?
- Meets instant customer demand and hence increases customer loyalty
- Has no or little inventory and operational overheads.
- Uses technology to optimize service
- Low costs because freelance labors are employed
Challenges
- Requires investment in the latest technology and AI
- Needs strong backend operations to ensure customer satisfaction
- The market is price sensitive and has high competition
Some Popular On-Demand Models
- Ola
- BlinkIt
- Zomato
- Urban Company
- TaskRabbit
For example, a pharma company might use this model to deliver products to its customers on demand.
(5). Direct-to-Consumer (D2C) Model
Directly from the business’s house to the customer’s house. This business model does not involve any middlemen or retailers or wholesalers. The startup will be responsible for everything from manufacturing to promotions to delivery. This business model gives the owners the full control over their operations and customer interactions.
Why we Like it for a Startup Idea?
- Has higher profit margins
- Full control and flexibility over branding, pricing, and customer experience
- Gives the freedom of personalizing the sales and marketing efforts
- Enables data-driven decisions
Challenges
- Requires strong branding
- Takes time to build customer trust
- Repeat customers might be less
- Needs a solid digital marketing, manufacturing, and delivery backbone for seamless operations
Some Popular D2C Customer Models
- Mamaearth
- Sugar Cosmetics
- MyGlamm
- Tesla
- Decathlon
For example, a baker will supply cookies and other select products to consumers directly.
(6). Licensing and Franchising Model
It is a simple business model in which startups sell the rights to use their brand, technology, or IP to third parties. Franchising is used by startups to use an established brand’s business model in exchange for a fee.
Why we Like it for a Startup Idea?
- Needs low capital investment to expand the business
- Income generation through royalites, or equity
- Faster market penetration
Challenges
- Brand dilution
- Quality control might become difficult with different operators
Some examples of this model
- Bento kitchen
- Microsoft
- McDonalds
(7). Affiliate and Commission Based Model
Also known as the advertising model, in this type of business model, the startup earns by promoting third-party products or services. Individuals can partner with the business to promote their products or services and the startup gets payment in the form of commissions, or fees on completed transactions.
Why we Like it for a Startup Idea?
- No inventory costs and low upfront costs
- Can be scaled easily using digital marketing strategies
- Easy to integrate business model
Challenges
- Revenue depends on the third-party performance
- Requires high traffic and strong marketing to make measurable profits
Some Popular Examples of Affiliate Business Model
- Amazon associates
- Booking.com
- Expedia
- MakeMyTrip Affiliate
- Reseller Club
Conclusion
Selecting the right business model can make or break your startup idea. In order to make your business sustainable and profitable, take some time to understand the unique advantages and challenges of each business model. Consider your goals, target audience, resources, scalability potential, and market trends before making a decision.
Read Also: The Ultimate Guide to Pitching Investors for Fundraising
