A business model is essentially the method used by a business in generating revenue. There are different business models, and each one uses has its own unique application. One of the questions founders have to ask themselves is, “what is my business model?” It is important to establish from the very beginning what business model would be best for your startup and why. Knowing your business model will help you determine what marketing strategies to use and the startup metrics that are best suited for your startup. Here, I will talk about the different business models and how to choose the best model for your startup. But before then, let’s get this one thing out. 

Business models vs Revenue Models

It may sound like a no-brainer but these concepts are often misunderstood and most people use them interchangeably. The reason is that on the surface, the one thing every business is focused on is generating revenue. So whether you are looking at the business model or revenue model, most people tend to focus on ”revenue”. But while revenue models are all about the business aspects concerned with ‘generating revenues”, business models go a step further. Business models involve all aspects of a business including, revenue model, marketing model, logistics, and human resources. Because of the interconnected nature of business models, founders may find it difficult to choose a business model for their startup. We know this, and that is why we want to show you the easiest way to do it. If you are already familiar with the different types of business models, then skip this next section, otherwise, keep reading. 

Here Are 7 Common Business Models you should know of

The Ecommerce Business Model

This is a type of business model where all transactions between businesses or businesses and customers are carried out online. Ecommerce is very popular with so many people turning to online marketplaces to buy and sell things. There are about 4 major categories of eCommerce business models. These are; 

Business to Customer (B2C) - transactions involve a business (retailer) and a customer also known as E-tailing. 

Business to Business (B2B) - transactions involve two or more businesses. Common with SaaS companies. 

Consumer to Consumer (C2C) - transactions involve two consumers. A typical example is the Facebook marketplace. 

Consumer to Business (C2B) - transactions are typically between a consumer and a business. Here the consumer sells to the business. Example Shutterstock, and Getty images.

It is worth noting that a Startup may have two business models. For example, eBay allows both business-to-consumer transactions as well as consumer-to-consumer transactions. 

SaaS Business Model

The Software as a service (SaaS) business model is a subscription-based model. Here consumers subscribe to the use of the software which can be web-based, a mobile/desktop application, or both. For this business model, a long-term relationship with the consumers is the key to success. Startups operating with this model have to remain innovative in order to encourage their customers to keep subscribing to use their product or service. A one-off subscription will not suffice, the goal is to have recurring revenue. SaaS business model services both businesses and individual consumers. Some companies that use this business model are MailChimp and Slack.

Subscription Business Model

The subscription business model is similar to the SaaS business model. They rely on recurring subscription which is typically on a monthly basis. The only difference between the two is that Startups operating with the subscription business model serve individual consumers only. This can be seen in the subscription packages that are being offered. SaaS businesses typically have packages designed for both businesses (enterprise packages), and individuals. Whereas Startups with the subscription business model will have packages designed for individuals only. An example of a Startup with this model is Netflix.  

Marketplace Business Model

Startups like Airbnb, and eBay operate a marketplace business model. Here the Startup serves as a middleman to facilitate transactions between the buyers and the sellers. Revenue is accrued by taking a certain percentage of the transaction value. This can be in the form of a commission that either the buyer or seller has to pay for using the services or a listing fee.

Advertising Business Model

This is common among social media startups. Users are allowed to register and use the platform for free without any restrictions. The company then generates profits by charging businesses a specific amount to advertise their products on their platform. In essence, these startups take advantage of their huge user base to offer a second service (advertising) to a specific niche group.  With roughly 90% of its revenue coming from advertising, Startups with this business model are concerned about their active users. More active users mean more bargaining power. Facebook, Instagram, Twitter, and YouTube fall under this category. 

Transactional Business Model

Startups with a transactional business model provide their customers with a means to carry out monetary transactions for a small fee. Startups in this niche market are referred to as fintech companies. They offer online payment solutions to their customers via web-based software or mobile app. Either way, the company takes full responsibility for securing the funds of its customers. The success of this business model leans heavily on how trustworthy the business is. A negative review would do twice as much damage as it would to Startups operating with other types of business models. 

Usage-Based Business Model 

This business model shares a lot of similarities with the subscription business model. However, it is rapidly taking over, especially among SaaS Startups. As the name implies, customers are charged based on how much of the company’s product or service they use. Rather than measure revenue in terms of recurring subscriptions, the usage-based model aims to motivate its customers to use more of its products and services. The more they use, the more the company stands to gain in terms of revenue. 

3 Steps to choosing the right business model for your Startup

Step 1: Get a Blueprint

As a founder trying to break into a niche market, you don’t have to figure everything out for yourself. It is time-consuming and you could do much better by learning from those who have already been there before you. Yes, you have a different product or service but by observing the major players in the same niche market, you get to know which business model works the best and why. Apart from developing a blueprint for your own business, you can also learn what they are doing wrong and devise a solution that works. 

Step 2: Make sure it is scalable

When choosing a blueprint, opt for one that is scalable. Many investors look out for this before making an investment. A scalable business model guarantees opportunities for growth and earning higher revenue in the future at a relatively low cost. Notable features of scalability are low customer acquisition cost (CAC), high gross margin (ability to raise profits without losing business), and high customer retention rate. 

Step 3: Determine the cost, pricing, and marketing channels of your products or services

You need to know how to price your products and services and one way of doing so is by looking at what the competition is offering. It is not all about innovation, if the price is way off the average market price for a similar product or service, then you are likely going to lose customers. To remain competitive, you must understand the cost structure (sum of fixed and variable costs) of your business. This will help you determine the price of your product and to choose an appropriate marketing channel. Knowing these will help you determine which business model to settle for and this will likely be the one with the most acceptable cost structure. 

Conclusion

A business model is a blueprint that shows how your startup will be run from start to finish. It is one of the first things every founder must figure out right after they come up with a great business idea. Knowing what business model to use for your Startup will also help you to determine which growth metrics to use. If you have no idea what these ‘Growth metrics” are, then you can read all about them here. And if you still have any questions, feel free to reach out to us. We are here to help.