The business model is at the core of any successful startup, because no matter how cool an idea is or how unique something may seem, a startup must have a viable way of making money that is worthy enough for future investment and to sustain itself. Many new startup founders throw around the term "business model" when discussing and planning strategies for their venture. Questions like "What business model works best with my idea?" or "How do I know if my startup is using the right model?" are a few questions founders need to consider which will ultimately impact the overall success of their venture in the long run.
The business model you choose needs to tie to the consumer pain point your startup is relieving, and work better than the competition's. There are many different types of models out there, and it's important to choose one that is best suited to your business. One of the worst mistakes a founder can make is trying to reinvent a business model, or create a new way of generating cash flow that "has never been done before". To an investor, that sounds like "I am going to use an unproven way of making money for my venture, and most likely not give you a return on your investment."
There are many options to generate revenue that have already been proven, and as a founder it is your job to figure out which one works best with your business. If you don't know where to start, here are 9 business models to consider for your startup that have proven to be successful for many startup and business ventures across the globe.
1. Become The Middleman (AKA The "Warby Parker" Model)
Warby Parker had the simple idea back in 2010 we all wish we would have thought of first. They decided to enter the eyewear market, noticing that the market was monopolized by Luxottica, who basically control the price of designer eyewear. With the price bar set high, Warby Parker saw huge opportunity in the market, and realized that because most brands sold the rights to huge companies like Luxottica that drastically increased their manufacturing and design costs. So what was the logical solution to this problem? Become the middleman of course! With the ability to significantly reduce the price of its product, along with the cool factor and social good elements weaved into the company's brand, they were able to capitalize by providing their consumers with large savings. Now that's what I call a win-win!
Why It Works: Becoming the middleman gives startups a serious pricing advantage, and saves consumers money. Who doesn't love that? This model also gives a startup much more control over the quality of the product or service, and gives them immediate feedback from users to continuously develop a better product. This model also allows for better control over contracts and negotiations with distributors, as well as building stronger relationships with suppliers.
Others Who Have Followed: NYC based startup Casper is using this model to change the way mattresses are bought. Scarosso is using this model in the shoe market. Brideside has successfully grown using this model for bridal party retail, and Audicus is changing the market with this model for hearing aids.
2. Become A Marketplace
One of the ever growing business models that continues to prove highly effective is becoming a marketplace. This means you are simply bringing supply and demand together. AirBNB reigns as one of the top success stories to implement this business model well. I'm guessing you thought renting rooms from random people's homes via the internet was pretty creepy when you first heard the idea. We did too, but the AirBNB founders believed in the new "sharing economy". They were convinced that the supply and demand was there, and since have convinced over 20 million+ strangers to provide and rent rooms from one another. Uber has also seen explosive growth using the same mentality to create a marketplace where strangers rent rides from strangers. Providing a service is out, and becoming the marketplace is in the ever growing e-commerce sector.
Why It Works: There are several advantages to using this type of business model. First, one of the greatest benefits is having zero to little overhead, and no inventory. You can get a swanky office space if you want, or you can run the company virtually. When you manufacture a product, you take on a lot more risk and pressure to make sure that inventory is sold. When you are the marketplace, instead of worrying about manufacturing costs, you are simply bringing the sellers to the buyers (and vice versa) and facilitating a transaction, taking a small slice of the pie from each transaction. You give sellers a place to make a profit and reach consumers, while customers are happy to find exactly what they want, usually at a discounted price.
Others Who Have Followed: Amazon is one of the leaders of this business model, creating a marketplace for those who wish to sell items, and those who wish to buy them at a better price. Raise is a a C2C gift card market, that a supply of discounted gift cards from sellers who would rather have the cash to spend as they please. Beast is another example of a marketplace that connects high level consultants for the millennial era with clients looking to outsource unmet needs in their business.
3. The Subscription Model
Mobile payments continue to rise in popularity, and consumers are trending towards a more simple, hassle-free kind of shopping experience. These trends are leading towards explosive growth in subscription based services that consumers can easily set up, and then not worry about, knowing they will receive their product or service every month. Dollar Shave Club is one of those simple subscription services that made it much easier for men (and now women) to not worry about running out of razors, and save money. Add in some crazy, well messaged commercials with a hilarious spokesperson, and you have a brand who continues to double and even triple revenues annually.
Why It Works: This business model provides an optimal balance of value to both the startup and the customer. It's simple and convenient for customers, and take a lot of thinking out of the purchasing process. Customers know they will receive their product every month around the same time, don't have to worry about reorders, and know they will get a set, flat rate that will stay within a budget. On the startup end, the value lies in being able to predict revenues through recurring sales, which is incredibly advantageous for a company's valuation. This enhances the sellability of the company, increases the attractiveness to potential VCs and buyers, and often leads to valuations up to 8 times that of similar businesses with little recurring revenue.
Others Who Have Followed: We all know Netflix revolutionized the way we consume TV shows and movies with it's very affordable monthly subscription service. Spotify did the same thing for the way we consume music, by providing consumers the means to listen to virtually any song they'd like for a small monthly subscription. SkillShare, an edtech startup, initially started where consumers would buy educational content a la carte, but has pivoted to a monthly subscription model to access their content which has proved to work better for them. Of course there is also the subscription box trend that has reigned the past few years, like BirchBox, which provides samples of high end beauty products to consumers for a low monthly subscription.
4. Customized Everything
The fashion industry is dominating the customization trend that aligns with a consumer shift towards more personalized goods that reflects their specific tastes. This is the reason Coke added names to their bottle packaging, automotive manufacturers make cars in any color you want, and massive retailers like Nike allow you to design your own custom sneakers. Custom-tailoring in the clothing sector has been on the rise, and services like Indochino and Black Lapel have taken the market by solving this problem for men's suits. The services make it simple to choose the sizes, colors, styles, and budget you want, that take out the hassle of going to a tailor, and delivers right to your doorstep. The rise of 3D printers has also created a surge of mass customization startups by providing a technology that previously was much more expensive.
Why It Works: A rising percentage of the population is interested in build-to-order products and are willing to spend 25% more according to a study by Mashable.com for products built specifically to their needs. Production time and lowering costs of customization configurators also bring much more potential to the market, compared to previous years.
Others Who Have Followed: AppyCouple is a startup that helps consumers build a custom wedding app with all the information they would need on their wedding website. Normal produces customized earbuds through 3D printing technology, and Lumosity adopted the concept by providing customized brain games tailored to your strengths and weaknesses. Mass customization retailers dominating the market like CafePress and Zazzle have also seen massive growth in recent years.
5. On-Demand Model
As the world speeds up, consumers have a adopted a preference for instant gratification. The on-demand economy has a growing appetite for greater convenience, speed, and simplicity. Smartphones have driven transformational shifts in how we consume goods and services, and many consumers have become acclimated to purchasing at the press of a button. On-demand startups like Uber are shaking up their industries, and also provide stead contracted work for consumers who want to become solo-preneurs. Startup, Handy, has also seen explosive growth by providing handymen at a moments notice, servicing a need for consumers that was not previously available for situations where a consumer can not wait a few days to fix a problem in their home.
Why It Works: The on-demand market leaders today know that this successful model is much more cost-effective, scalable, and more efficient that it's ever been. The model allows a startup to leverage new technology, while utilizing existing infrastructures. Another benefit lies in the use of freelance labor with its obvious advantages in cost cutting. There has also been an influx of VC belief and capital in this revenue model.
Others Who Have Followed: Spothero is a startup that provides parking on-demand when you are on your way to an event or into the city. Another growing startup in the space is Postmates who provide a local, on-demand delivery of goods. Glamsquad is providing on-demand services for the beauty industry, and Washio provides the same service for the dry cleaning and laundry sector.
6. The Modernized Direct Sales Model
Direct sales companies like Avon and Amway understand there is a big business opportunity in the model. In 2009, direct selling accounted for $117B in sales worldwide. Chloe + Isabel, a fashion jewelry startup, is reinventing the direct sales model by appealing to fashion forward students who have tuition to pay and others who are unable to secure full-time employment. The startup designs, produces, and markets fashion jewelry, and interested sellers or merchandisers can sign up and create their own online store to sell their jewelry and earn a 30% commission utilizing the startups technology infrastructure. The startup has seen incredible success using this model, and increased loyalty of its sellers (who are also its customers).
Why It Works: This model is perfect for today's economy where people are more willing than ever to supplement their income, and seek new career paths. With unemployment still high, and more companies offering supplemental income opportunities, this model continues to rise in popularity. Another reason is that social media allows sellers to reach more people than ever, increasing their success as merchandisers, and bringing in higher revenues for the company. Finally, software available now has dramatically improved productivity and flow for direct sales reps.
Others Who Have Followed: Sequoia-funded newcomer, and another jewelry and accessories startup Stella & Dot has found massive success in using this type of business model. Trumaker, is also finding success with this model in the mobile men's apparel space and call their direct sellers "Outfitters".
7. Freemium Model
This combination of "free" and "premium" has become a widely used approach amongst startups over the last decade. Broken down, the model offers a basic service to consumers for free, while charging for premium services (advanced features and perks) to paying members. Linkedin is one of the best examples of a successful freemium model, with the free version letting users share professional profiles, while the premium offerings are talent solutions and premium subscriptions with added features. One of the most interesting reasons Linkedin's model works is because each new member that signs up for free or premium increases the value for other members. Make sure if you choose this model that you find a balance between what you give away so that users will still need or want to upgrade to a paid plan.
Why It Works: One of the greatest advantages to a freemium strategy lies in its ability to be a marketing tool for your service, which helps early stage startups scale by attracting a user base without costly ad campaigns. Freemium models also tend to be more successful that 30-day free trials and other offers like that. Customers are much more comfortable with accessing a service for free, and the no strings attached feeling that comes with before deciding to make a purchase.
Others Who Have Followed: Dropbox, Hulu, and Match.com are all very popular services that have adopted a successful freemium model. Dating app Tinder has also adopted a freemium model, offering exclusive features to users who pay a low monthly fee. Survey service PollDaddy, video sharing service Vimeo, and photo sharing service Flickr are all members of the freemium model group as well.
8. Reverse Auction
This type of model is the reverse of Ebay where the buyers switch roles with the sellers. Buyers who care about price offer bids for a service to the seller,s and if the seller accepts the bid, the buyer must agree to all of the seller's terms and conditions. Sellers benefit from access to a marketplace, while the buyers feel like they are getting a great bargain. One of the most successful implementations of this model is Priceline, where travelers give up convenience for low prices on airline tickets, rentals, and other travel accommodations. Priceline provides a win-win marketplace for it's B2C marketplace, and because of that has seen significant revenue growth.
Why It Works: Price sensitive buyers feel great, because they feel good about the deal they won, while the company also wins by facilitating the deal with its sellers who get access to a marketplace and are still making a profit on inventory that might not have sold otherwise.
Others Who Have Followed: FedBid allows government agencies to use the reverse auction model to award contracts to businesses. Stayful uses the model to help boutique hotels fill unsold inventory which would otherwise go to waste. Squeezify uses this model for freelance work, and MyHammer has found success with the business model helping consumers receive quotes from service experts.
9. Virtual Good Model
We all know the game Candy Crush and its addictive qualities that have wasted more hours than most of us are willing to share. Candy Crush understands the power of the virtual good model, and made a ton of its revenues for digital products like extra lives or features like a "color bomb". Virtual goods are online only products users pay for normally in games or apps such as upgrades, points, gifts, or weapons. The app Hot or Not used this model well by allowing its users to send virtual roses to other users costing between $2 to $10, and the game Clash of Clans has users that spend thousands of dollars each month on their in-app purchases.
Why It Works: One of the greatest advantages of virtual goods are the high margins, since they cost only what the bandwidth required to serve them does. The objects sold create real value for consumers, for example, in a game, buying a sword adds to the real fun people are having playing a game. Market liquidity continues to increase as more gamers live in virtual worlds. Virtual goods are also more increasingly becoming a way for people to show affection and meaning as we continue moving more into an app obsessed world.
Others Who Have Followed: Facebook added this revenue model to its social aspect by allowing users to give virtual gifts to one another. Other startups like Acclaim Games, Meez, and Weeworld have also implemented virtual goods from the gaming aspect.