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Business models for a startup: an overview

Business models for a startup: an overview

27 Apr 2020

Once you come up with a great idea and decide to realize it in a startup. You gather the team, think about the realization, look for… no, not for money - you look for a business model. Until you have it, not a single investor (okay, almost not a single one) will give you a penny. A business model is how your product will make money. If you don’t have a specific vision you won’t make it further. Let’s figure out what the types of business models are and how each of them makes money. And of course, we will show you some examples.

Startup Jedi

We talk to startups and investors, you get the value.

Instead of an introduction

Choosing a nonviable business model is one of the reasons why many startups fail. A business model is a simplified vision of the business, the source of income, profit creation for users. The business model describes how the organisation creates, delivers to the clients and gains value (economical, social and other).

The term “business model” is used in a wide defining spectre to characterize the main business aspects, including business aim, product range, strategy, infrastructure, organisational set-up, sales methods, operational processes.

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Business model for a startup

How to choose a business model for your startup

In order to understand which business model will become a working option for a startup and with which models it should (and must) be combined, you have to work with Lean Canvas Template, which was masterminded by Alex Osterwalder and Yves Pigneur. The template contains a table with 9 blocks, each of them is devoted to a specific business process direction of the future project:

1. Customer segment — for whom you are creating value and who is your most valuable client.

2. Value proposition — what client’s problem you are solving, what value you provide the client with, what the product and/or service packages that you provide to each customer segment are.

3. Interaction channels — how do you interact with customers and how you provide them with your value proposition.

4. Relationships with customers — how you interact with the client: directly by appointing a personal manager to each client or through the community, or a joint product creation, and so on.

5. Income flows — for what value the client is ready to pay, what are the ways to monetize your product.

6. Key resources — what you need for product creation and its launch on the market so that the value of the product is conveyed to the consumer and the business makes a profit. For example, resources can be financial, material, intellectual or human.

7. Key types of activity — what needs to be done so the business will work. It can be industrial management, distribution, a search of a solution to a problem for a specific client, work process management for platforms/networks.

8. Key partners — everyone who favours the business: suppliers, dealers, additional services.

9. Expenses— how much you have to spend so the business works properly.

Have you planned your project? Now, you have a list of the main startup metrics, which will help you to understand what business model you need to choose as a key one and which needs to be an additional one/ones.

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Business model

Business models: considering client type - classic business model

Classic business models

Your business model directly hinges on who your consumer is. Let’s have a look at client types and businesses, which are built on its foundation.

B2B

B2B (Business to Business) a model, which implies that both the Merchant and the Buyer are entities or self-employed entrepreneurs. In plain English, it is when companies don’t work for an ordinary consumer but for similar companies.

The classic example of a B2B model in IT is software developers for organisations, web-design studios, companies that provide outsourcing services.

The successful example of a B2B model in actual practice is a German company SAP SE — a software developer for organisations. They develop automatized systems for managing internal work processes, services are adapted to the legal boundaries of different countries. Besides the supplying software, the company also provides adoption services using their methodologies. In the list of company products, there is SAP Ariba Discovery — an open platform for search of suppliers and customers; Remote Work Pulse by Qualtrics — a product which helps organisations to understand how do their employees work and whether they need any assistance during the remote work; Ruum by SAP — a project management tool, which is also used for establishing cooperation and process optimisation. The company has 200 000 clients and the majority of them are medium and large enterprises.

B2C

B2C (Business to Customer) — a business type which specializes in sales for physical entities.

The example of this model in IT is internet shops, where people buy goods for personal use, mobile applications and games, user-specific services.

For example, the SeedSheet project (USA) has developed a software, so any user is now able to create a design of his or her dream garden and plant their plants, which will grow and crop in the client’s climate zone. The service analyzes the geolocation, chooses and offers a list of crop cultures, which clients can order along with all required equipment for garden creation.

“Dzen money” application (Russia) analyzes the user’s budget and helps him to save money and preserve money for a costly purchase as well as to optimize expenditures.

B2G

B2G (Business to Government) — a model orientated to supply the government with products, services, business solutions.

The model offers a complicated multilevel decision-making system, competitive bidding, difficult financial conditions, supplies and utilities procurement schemes, and the great influence of administrative resources.

In real cases, this model can be connected with governmental procurement contracts for products/services (state procurements), equipment leasing, private-public partnerships and if it is an IT company, for the governmental customer they usually develop services for work automatisation in different work areas.

For example, IBM Group has developed a number of solutions for logistics in Belarus, among them — contactless fee payment in a subway with the help of credit cards, electronic ticket-punches in surface public transport of Minsk, electronic timetable boards on bus stops, self-service terminals for replenishing e-traffic documents with the help of credit cards.

C2C (P2P)

C2C (Consumer To Consumer) or P2P (peer-to-peer) — the model, which implies that the participants are equal. Usually, it is an interaction between physical entities to save money, receive income, communication or assembling in communities. This model is also called “a sharing economy” — when expenses are equally divided.

The distinctive feature of this model is the participation of the third party. It can be the platform owner, where people communicate/place their goods and services.

A bright example is BlaBlaCar that helps drivers to find road-companions and in such a way compensate expenditures on fuel, and road-companions to find drivers who can take them to the required destination point.

There is another example — Couchsurfing platform. Thanks to it people can travel and not spend money on accommodation but to stay in places of other community participants. Besides, with the help of this service, you can communicate with locals so you can discover the city and see more city attractions.

C2C platforms are usually communities united by interests: travelling, pets, etc.

C2B

With the advent of the Internet, the problem of piracy has appeared: people can watch a film or download it for free, download a music album or a book. On the other side, with years, the number of conscious users is rising — and this is how a C2B model (Consumer to Business ) appearedThat has changed the usual ways of product promotion. The concept is that users are ready to pay for the content but they need to value it by themselves. The consumer creates the value and business absorbs it.

Custdev is closely related to this model, as you explore your consumer, his unsatisfied needs, you learn to think from the user’s experience point of view, and only then, taking into account all of the mentioned above, you create the product.

One of the company examples which is working using the C2B model is Priceline.com (USA). The user sets his price for the product he needs, then the company finds a supplier who is ready to sell the product for the price offered by the user. In such a way, Priceline.come acts here as a mediator.

C2G and G2C

C2G (Consumer to Government) — a model designed to convey the request of civil society to the government to provide people with access to government documents as well as the opportunity to contact government officials.

On the other hand, thanks to the G2C (Government to Consumer) model, the government can notify citizens of fines, administrative violations and changes in legislation.

For instance, in Belarus, you can find out about the unpaid fines of the traffic police, check the restrictions on leaving the country, and also find out other information by registering on the website of the Ministry of the Interior. The www.gosuslugi.ru portal operates in Russia, through which you can find out information about violations and the cost of necessary services.

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money generation model

Choosing a money generation model

Now, a little bit of magic: how to create a unique working business model if everything seems to be invented so far?

You know who your customer is and can already imagine how you will conduct your business. It is the high-time to choose the money-making model: there are plenty of those, there are some with centuries-long stories, and some are pretty young, which are born by the rampant innovative development. The magic is in the fact that you can, and quite possibly, will definitely combine a few models. So this will make your startup a unique project with its business model. Below, there is a list of the most popular ways of making money in business.

Renting instead of buying

It is a business model where the client doesn’t buy the product itself but takes it for rent. Company’s advantage is in the revenue from each product, and the client’s advantage is in saving resources (you don’t need to buy or think how to store, etc.).

It is one of the most ancient business models: in ancient times, Romans used to take cattle for rent. Considering its modern realisation, it evolved in carsharing, bicycles, scooters, exercise machines rents.

Auction

It is a business model where buyers influence the final cost of the product. The product is sold to the buyer who has offered the highest bid-price. It is also an ancient business model: on the auctions B.C., people were selling cattle or slaves.

Nowadays the auction model is used by eBay. The service provides merchants with a possibility to sell any products. Payment for merchandise, its transportation happens without eBay participation. The merchant pays the fee for using the service which consists of the fee for setting a lot and a percentage of the sale price, buyers can use the site for free.

Another example is WineBid auction house specialized in selling wine (California, USA). Private entities and dealers put up lots — wines for sale for connoisseurs from all over the world. To ensure that wine is not sold below its real value, sellers set a minimum acceptable price.

Subscription

The company concludes a contract with the client, which stipulates the frequency and terms of service.

In the 17th century, German booksellers started to actively use this model — they supplied multi-volume encyclopedias and reference books by subscription. Most publishers of newspapers and magazines still work using this model.

Nowadays many mobile applications and web services work on a subscription basis: for example, Netflix, Spotify.

Netflix is an American company that provides films and series. The company’s source of income is subscriptions. Netflix now has 60.6 million subscribers in the United States and 97.7 million in other countries. Users are offered three types of subscription depending on the quality of streaming content: basic (standard resolution), standard (high resolution), premium (ultra-high-resolution, content is available on several devices at once).

F2P

F2P (Free to play) — a business model for monetizing computer/mobile games. The client can install the product for free and use it but you have to pay to get the gaming advantage or level up the hero.

Often, for in-game purchases, the developer interposes in-game currencies — diamonds, coins, bonuses that you can get by transferring a specific sum of money to a specific account (then it converts into in-game money and charges to the gamer’s account.), or by watching the partner’s ad or completing some sort of in-game quest.

This model is used by developers of Massively multiplayer online role-playing game (MMORPG) to avoid pirate copying. The bright example is World of Tanks.

Freemium

Freemium (Free + Premium) — an innovative business model, where the client can get a free basic product package, and if you want to get an extended (premium) package — you have to pay.

The basic package is designed to show products advantages. Besides, it attracts the maximum possible number of users, part of them buys the premium package, and that’s how the business receives income.

Examples — Spotify, Yandex.Music. Clients, who use free packages, have to interrupt using the services for advertising. What is more, basic version platforms have limited functionality.

SaaS

The SaaS model (Software as a Service) is a system of selling program products, when the client uses it via the Internet. The user doesn’t need to install the software or download the application as well as he doesn’t need to check the updates and worry about the program compatibility. The client pays and receives access to the application like taking it for rent.

SaaS-project examples are a service for business management “Bitrix24” and office toolset Zoho.

PaaS

PaaS (Platform as a Service) — a business model for cloud services when users receive access to using the information-technological platform: operational systems, database management systems, middleware software, developing and testing tools, given by a cloud provider.

The provider of the cloud platform can charge a fee from users, regarding the consumption level: tariffing is possible according to the time of operation of consumer applications, the amount of processed data and the number of transactions over them, or the network traffic.

In practice, the PaaS model is a web-server or a database: the client controls the applications while the provider controls the operating system.

Long Tail

Long Tail — a business model which supposes selling a wide range of products. This business model negates Pareto’s law, where selling 20% of products brings 80% of income. The long Tail business model gives a possibility to receive up to 60% of income from realising poor demand projects.

The most famous example of this model works in practice — Amazon.

Lock-In

Lock-In (“Razor and blade”) — the model which implies selling the basic product for a low price and additional products for a high price.

Buying the main product for a low price or even for free, the merchant gets the buyer’s trust and gets hooked on some kind of addiction. Usually, it is almost impossible to use a basic product without buying sources.

The brightest example of this model is Gilette shaving sticks and blades for it.

Franchising

Franchise or franchising is a business model where one of the parties (franchiser) gives to another (franchisee) a right for some kind of business for a charge, to use the made-up model to do the business under the franchiser’s trademark.

Well-known examples are McDonald’s and Burger King.

Low/high touch

A business model tied to contacts (high touch) or their practical absence (low touch) between the seller / other company representatives and the client.

If we are talking about high touch, the company representatives have a key influence on sales and customer retention. The business won’t work without interaction.

Examples: money management, financial services, accounting firms; personal services — beauty salons.

Low touch implies minimal interaction between company employees and customers. Ikea example.

Crowdfunding

This business model offers financing the project by a great number of private entities. This model helps to:

  • Launch the business from scratch if you don’t have your funds for it;

  • Check consumer demand — if a potential customer is not ready to give even $ 1, then the product is not interesting to the target audience;

  • Launch the sales — those who invested in your project may become your potential customers in the future;

  • Do not attract professional investors to the project.

Crowdfunding implies that in exchange for financial support, the donor receives a reward, which relates to the project — a finished product, advantages for its acquisition/use.

Financing is built using the “all or nothing” principle: the project is realized only if the sum required for its realisation is raised in a fixed period of time. At the same time, crowdfunding platforms can earn by taking a percent from the fees. For example, the most famous crowdfunding platform in the world — Kickstarter — takes 5% of the funds raised for the project.

Self-service

A model where the creation of value is partially transferred to the client and in exchange, he receives a lower price for the goods.

This model is traditionally used by supermarkets, grocery stores, clothing stores.

However, it can be used in the service sector. Accorhotels, the French hotel chain, has implemented this model in their hotels. The guests are offered inexpensive rooms with the possibility of self-service: people pay for the room through the terminal, and in return — they receive the keys and independently put their belongings in the room.

This model is used by self-service car washes, gas stations, and some cafes.

Either-way market (Mediator)

The business helps to organise effective interaction of two groups which complement one another groups. Recruitment agencies and search engines (give advertisers an audience) are working by using this model.

For this business model, the so-called indirect network effect is extremely important — the more people from one group use a certain platform, the more attractive it becomes for another group of customers. The effect works in both directions. If you correctly guide user groups, the indirect network effect will increase, and customers will be firmly attached to the company.

For example, in this case, Google is a tripartite market that brings together ordinary Internet users, website owners and advertisers.

Pay-per-use

Pay-per-use — is one of the new-made models, its concept lies in the fact that the client chooses the set of services/goods and at the specific time that he needs and, thus, does not spend extra money. For example, when you use a mobile phone, you choose the package of services that is most beneficial and convenient for you: an unlimited number of minutes of conversation within the network, 300 minutes for calls to other networks and 2 GB of Internet traffic (because you have Wi-Fi at home and work). You do not pay extra money for unlimited mobile Internet and do not overpay the operator for calls to other networks.

Another example — a company develops software and provides several packages for customers with different functionalities — this is Pay-per-use.

“Aikido”

The model got its name from Japanese martial art, the essence of which is to merge with the attacking enemy and redirect his energy. Using this model, the company seeks to take a position opposite to that of competitors in order to avoid confrontation. The bet is on the innovativeness of the product, which provides avoiding competition in the industry.

A well-known example of this model is Cirque Du Soleil, which refused tricks with animals and staked on an element mix of opera, ballet, theatre, performance with classical circus art.

 

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Conclusion

Choosing a business model has a key influence on the startup’s success. To decide which business model template you need, you have to work with Lean Canvas: “workout” your future project through the nine points, devoted to different business processes. The received detailed information will help to choose the main and additional startup business models.

Business models can be classified by the type of the client and the monetization model. In business models of the first type participate three subject categories: business, a client (consumer) and government. There can be a countless number of monetization models, by combining the most popular classic elements, which have proven their reliability: rent instead of purchase, auction, subscription, SaaS, PaaS, Long Tail, Lock-In, franchising, low/high touch, self-service, either-way market, Pay-per-use, “aikido”. Don’t be afraid to risk, and good luck with exploring your own, inimitable business model for your startup!

27 Apr 2020

 

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