A startup business model is a roadmap for a new business that explains how a business will operate and make money.
A business model describes the core elements of any business, which includes products or services offered by the company, its target market, what it does uniquely different from others in the same line, ways through which it gets money, what it incurs as it seeks to make wealth; plus its competitive edge over others.
Evaluate a startup business model by looking at customer value propositions, revenue streams, pricing strategies, cost structures, operational efficiencies, scalability, and growth potentials to determine whether they have enough resources for them, together with competitive environments and what prevent others from getting into it.
Creating a start-up business model is essential to recognize the customer problem and value proposition by understanding what problem the target audience is facing and then creating an attractive value proposition for the customer.
The factors of the startup business model include how the new business generates, distributes, and retains value by identifying components like price, revenue streams, cost structures, and competitive areas.
To choose the right business model, you must consider the industry trends and market dynamics and analyze the industry trends, market dynamics, and potential disruptions that affect the business model.
Read on to learn more about what a startup business model is, its types, evaluation criteria, creating a business model, the factors that affect the business model, and everything about choosing the right startup business model.
What is a startup business model?
A startup business model is a plan of action that defines how a startup will run, make money, and manage its cost structure. It is a complete business plan that shows how a startup company will generate revenue and profitability from its operations.
Michael Lewis in his book The New, New Thing defines business model as “a term of art.” He further says that “like art itself, the business model is one of those things many people feel they can recognize when they see it but can’t quite define.”
So, a good business plan is essential to start and build a successful business but at the same time, it is an important document that enables an entrepreneur to effectively execute business proposals by providing directions on what needs to be done at what time.
The Startup business model contains several key elements, which are listed below.
- Revenue Streams
- Costs Structure
- Target market
- Sustainability
- Competitors
- Alternatives
- Technology
- Customer Relationships
A well-structured startup business model is designed to help the entrepreneur verify the idea and attract potential investors. It also functions as a roadmap for business plan execution, market change adaptation, and long-term sustainability.
As per Andrea Ovans’ article in Harvard Business Review, business thinkers use the concept of a “business model” in many different ways.
Note: According to the Economic Survey Report 2022-2023, Indian startups have risen from 452 in 2016 to 84,012 in 2022.
What are the popular startup business model types?
The popular startup business model types are listed below.
- Freemium business model
- Subscription-based business model
- Pay-as-you-go business model
- Ad-based business model
- Transactional business model
- Direct-to-consumer business model
- Marketplace business model
- Razor and blade business model
- Reverse Razor Blade
- Private label business model
- Franchise business model
- Dropshipping business model
- Affiliate business model
1. Freemium business model
The word is a combination of the words “free” and “premium. A freemium business model means giving out a basic version of a product or service for free. Customers have to pay when they need additional features added to their accounts.
The freemium business model is becoming increasingly common among software (SAAS) and digital product businesses.
The examples of the Freemium business model are given below.
- Slack
- Mailchimp
- Asana
- Zoom
- Canva
What is the advantage of the freemium business model?
The advantage of the freemium model is that it allows startups to draw in many customers by going off a basic version of the product and service without any cost involved.
The users are attracted to the freemium business model. In the initial stage, businesses must ensure that people who use their goods and services will enjoy them without charging any money.
People get to know the product’s interface and features, thus increasing the chance of being converted into paid customers once the value of the premium features is realized.
Using the freemium model, startups will collect user data and feedback. This, in turn, helps in the development of products.
What are the key points of the freemium business model?
“Freemium is a business that offers limited or basic services to its clients for free and then asks for cash in exchange for advanced ones.”
Startups need to offer a version of their product or service that does not cost money but still has features that make it appealing to get clients on their side and, at the same time, have special and exciting features that they will sell if someone wants to upgrade.
So, the freemium model needs careful planning and execution to achieve the right mix of unpaid and premium services.
Research by Stastica found that Freemium apps were ranked closely in second place with a 54 percent usage rate among app developers and 33 percent generating the most revenue via this method.
2. Subscription-based business model
A subscription-based business model involves clients being billed recurrently to access certain products instead of a one-time purchase. While this amount will be paid in installments by the buyer, it is mostly computed every month or annually.
The subscription model has become very popular in the digital and service-based industries as more people find it useful. Some companies use this approach because they know they will get monthly money from the customers.
Subscription-based business model example:
- Netflix
- Amazon Prime
- BarkBox
- HubSpot
- Duolingo
What are the advantages of the subscription-based business model?
The advantage of the subscription-based business model is that it enables businesses to have a guaranteed income coming in regularly. At the same time, banks ensure that customers have a certain amount of money in their accounts by regularly charging them for services or goods.
Instead of one-time purchases, subscriptions provide businesses with steady and predictable revenues, enabling them to plan and invest in long-term growth and product development.
The subscription model motivates new customers to stay and reduces churn, as people are encouraged to renew their subscriptions to keep accessing the services they pay for.
Businesses will forecast revenue more accurately and manage cash flow more effectively because of the subscription model. As customers expand, companies find it easier to increase their scale without rapidly expanding costs, given that subscription models typically have lower variable costs.
What are the key points key points of the subscription-based business model?
“Subscription business models pertain to selling a product or service and collecting recurring revenue to continue providing that service or product. Most subscription businesses bill per month or annum.”
Startup businesses will succeed with a subscription model by providing valuable proposals, smooth operating experiences, and continual service upgrades, which validate regular payments.
3. Pay-as-you-go business model
The pay-as-you-go business model is characterized by paying for products or services based on their usage or at the point of sale, as the name suggests.
Many firms in different fields, like mobile phone subscription plans, water services, road transport, and cloud computing, have adopted this model.
Pay-as-you-go business model example:
- DigitalOcean
- Twilio
- Amazon Web Service (AWS)
- Audible
- Stripe
What are the advantages of the Pay-as-you-go business model?
The advantage of the Pay-as-you-go business mode is that it is a flexible and cost-effective solution for them because they are charged based on the products they purchase from the company.
The model removes upfront investments and long-term commitments, making it available to more users. Consumers adore the openness and power of managing their budgets and just paying for what is required as it is wanted.
Moreover, the pay-as-you-go model enables businesses to attract clients who may be committed to subscribing or following a fixed payment plan to widen their range of possible clients.
This model generates recurring profits for the business due to its continuous utilization of client payments. Hence, it promotes customer loyalty since its users feel compelled to stick due to the inconvenience of changing suppliers.
What are the key points of the Pay-as-you-go business model?
The pay-as-you-go business model allows customization of costs to meet customer requirements and reduce wastage of resources.
The pay-as-you-go business model aligns well with on-demand services, cloud computing, and resource-intensive offerings, allowing businesses to scale their resources efficiently based on actual demand. It will attract customers who are hesitant to commit to a subscription or fixed-cost model, expanding the potential customer base.
4. Ad-based business model
An ad-based business model is the term used to describe a commonly utilized business model by which companies earn money by selling spaces on their websites to other companies wishing to advertise.
This business model enables corporations to build a broad base of customers who benefit from giveaways of core products backed by advertisements.
Ad-based business model example:
- Hulu
- TikTok
- Google Search
- YouTube
What are the advantages of the Ad-based business model?
The advantage of the Ad-based business model is the companies will sell their product or services to the users at no cost or a very much lower cost.
Companies will earn money without paying users by showing ads or sponsored content. In addition, the model concerned with adverts supports users with important information and ideas that will be used to develop personalized advertisement schemes targeting particular customers, resulting in a higher degree of their achievements and possible returns.
Compared to other models, the number of users often has less bearing on the infrastructure and resources required to sustain a larger user base, such as an ad-based model, which allows greater scalability.
Key Points:
“The ad-based model helps develop valuable user data and insights that are used to create pinpointed and customized advertising campaigns.”
Businesses have other options for diverging earnings by selling high-end products and services or giving extra but charged services.
5. Transactional business model
A transactional business model is any business that makes money by serving as a transaction channel between two or more parties, such as exchanging goods, services, or money.
Businesses will make profits using transactional business models by selling their goods or services directly to customers who are either end users like me or other organizations such as businesses or firms.
Transactional business model example:
- Apple
- Nike
- Wendy’s
- Walmart
- Ford
What are the advantages of the Transactional business model?
The advantage of the transactional business model is that it provides businesses with upfront revenue and cash flow for each sale or transaction.
Moreover, the transactional model enables organizations to earn money from a wide range of clients, including those with no interest or capability to make regular payments.
The business will profit more per transaction from this model, especially for exclusive or expensive products or services.
This Model aligns with the product well with ordinary online and offline businesses that sell clients physical or virtual goods one-time.
Key Points:
“Transactional models, especially with premium or high-value offers, generate higher profit per transaction. They align with traditional retail and e-commerce businesses where customers prefer one-time purchases.”
The transaction model is how businesses have long earned their keep. The revenue stream flows in as soon as one of the items or services they sell is bought by someone outside them, priced at the cost of production plus an added profit.
6. Direct-to-consumer business model
The direct-to-consumer business model is the practice of a business selling products directly to consumers without intermediaries like retailers or wholesalers.
Elimination of middlemen seeks to empower businesses to establish direct relationships with customers, leading to increased profit margins and better control over customer experience.
Direct-to-consumer business model example:
- Casper
- Warby Parker
- Teva
- Everlane
- The Honest Company
What are the advantages of the Direct-to-consumer business model?
The advantage of the direct-to-consumer business model is that it eliminates intermediaries and middlemen, allowing businesses to establish a direct relationship with their customers.
This model will significantly increase profit margins by eliminating the expenses linked to conventional distribution channels and retailers.
Furthermore, the Direct-to-consumer model controls the end-to-end autonomy across the customer journey concerning marketing, branding, sales, and customer service.
Further on, this model enables the provision of important customer data insights that will improve product development, marketing strategies, and personalized recommendations.
This model helps track the market faster and facilitates quick responses to customer feedback and market trends by minimizing the number of intermediaries involved.
Key Points:
“This model will offer important customer details and ideas, which lead to individualized offers and focused marketing.”
With this model developed with customized experiences, customer loyalty and advocacy for the brand increase.
Companies will benefit from quicker get-to-market timelines and adaptability in response to buyer’s feedback and market patterns.
According to Statista, India has around 600 million internet users and 185 million online shoppers, making it the third-largest digital shopping base after the United States and China.
7. Marketplace business model
A marketplace is a business model that connects multiple buyers and sellers to transact online or offline.
The platform is designed to offer necessary resources and services, enabling smooth and safe transactions. For example, these resources will be payment gateways or help desks for user assistance.
Marketplace business model example:
- Amazon
- Upwork
- Fiverr
- eBay
- Etsy
What are the advantages of the Marketplace business model?
The advantage of the marketplace business model is that it enables businesses to act as intermediaries, connecting buyers and sellers on a centralized platform.
This model is more convenient and efficient for both parties because it enables buyers to receive various products or services from sellers without any difficulties, besides the exposure of many buyers by sellers.
Moreover, trust and credibility are promoted by this model through mechanisms like user reviews, ratings, and verification processes, leading to less risk in transactions between people who do not know each other.
“This model works well in such sectors as e-commerce, hotel service, and freelance services, where a marketplace benefits buyers and sellers now.
Key Points:
“Network effects will lighten up the burden on marketplaces such that every user benefits from every increase in people’s participation. Bringing together central marketplaces supports sectors like e-commerce, hospitality, and freelance services.”
Marketplace platforms make money from transactions on their platform. However, in their price to offer sellers a large platform, they get a percentage of the transactions done.
8. Razor and blade business model
The razor and blade business model is a company that sells a basic product for a lower price and charges a lot for complementary consumables.
The objective is to increase the sales of a product by selling the basic product at a low price.
The examples of the Razor and Blade business models are listed below.
- Harry’s
- Keurig K-cup pods
- Nintendo
- Amazon Kindle
What are the advantages of the Razor and blade business model?
The advantage of the razor and blade business model is that it promotes customer loyalty and recurring revenue streams.
This model involves having a company provide (the “razor”) a product that is durable but sold at lower prices or being sold for nothing, intending to get profits subsequently from sales of supplementary or replaceable products (“blades”).
Customers who stay in the ecosystem typically continue buying consumable products and are loyal, thus ensuring that the firm has a continuous flow of money. With the same customers, the business will sell them other goods or services, allowing deep selling.
So, users are encouraged to keep buying related things to retain the functionality of a primary product. This model leads to captive customers of consumable goods.
Key Points:
“The low initial cost of the “razor” lowers the barrier to entry and encourages adoption. Once customers are locked into the ecosystem, they are more likely to remain loyal and continue purchasing the consumable “blades,” providing a steady revenue stream. “
Businesses will also cross-sell and upsell additional products or services.
9. Private label business model
A private label business model means a product made by one company and sold under another company’s brand name. Retailers normally utilize private labeling to have unique goods in their stock, broaden their range, and cut competitor prices.
By emphasizing on initial installations in manufacturing facilities, companies can use private labeling to brand their products differently as such establishing brand identity.
Private label business model example:
- Cosmetics
- Paper products
- Supplements
- Cleaning products
- Frozen foods
- Snacks
What are the advantages of the Private label business model?
The advantage of the private label business model is that it allows businesses to create and sell products under their brand name while outsourcing the manufacturing or production process to third-party suppliers or contractors.
Companies will make their products different from what others have and create brand awareness without necessarily spending a lot of money installing equipment or manufacturing goods.
The margins of this type of goods are well above average relative to profit margins associated with reselling products of already established brands. In this sense, firms that manufacture such products have freedom regarding pricing as well as how they will be positioned.
According to Fortune India’s, article titled “ Economic Survey 2023: Start-ups Envisioned as the ‘Spine of new India” the
India’s startup ecosystem has been rapidly expanding in recent years, and government-recognized startups have skyrocketed from just 452 in 2016 to an impressive 84,012 by 2022.
Key Points:
“It often gives out the profit more than the other brands if they are resold because one will choose the price of the product and where to place it.”
This model helps you in the creation of different products that adapt to changing trends in the market, enabling businesses to produce long-term relationships with their customers while building trust in the brand.
10. Franchise business model
Franchise business models are agreements entered into between a franchisor and an independent business owner. A franchise business model consists of a franchisor and a franchisee.
Franchise business model example:
- Subway
- 7-Eleven
- Great Clips
- Ace Hardware
- The UPS Store
- Anytime Fitness
- Nothing Bundt Cakes
What are the advantages of the Franchise business model?
The advantages of the franchise business model are that it enables businesses to expand rapidly and achieve widespread geographic reach with relatively low capital investment.
Companies will leverage the franchisee’s resources and local expertise by licensing their brand, products, and operational processes to the franchisees. At the same time, they keep control over the quality and consistency of the brand.
Franchisees also typically shoulder a considerable share of the franchisee’s startup expenses and day-to-day running costs, less financial trouble. Through sales and duties paid over time, the franchisor gets recurring revenue.
Through franchising, businesses allow the entrepreneurial drive and desire for success from their employees committed to their locations.
This model minimizes the risks and costs of owning and operating several locations of growth and market penetration.
Key Points:
“This means that franchising will expand very quickly and cover many places with a franchisor getting away with spending less money.”
The model offers a steady flow of profits that recur from initial franchise fees as well as continuing royalties. It lets companies gain from the franchiser’s skill and business energy; still, customers find enforced on quality together with the same brand values.
11. Dropshipping business model
A dropshipping business model occurs when products are sold to customers by a retailer or seller without keeping any inventory or handling the shipping of the products.
Suppliers are based locally, and shipping charges are minimal, implying that delivery time is greatly reduced, improving customer experience.
Dropshipping business model example:
- AliExpress
- Wholesale Central
- Sunrise Wholesale
- Spocket
- Printful
What are the advantages of the Dropshipping business model?
The advantage of the dropshipping business model is that it requires minimal upfront investment and inventory management, as businesses do not need to carry physical stock or maintain warehousing facilities.
Instead, they act as intermediaries by passing customer orders to third-party suppliers or manufacturers, who send the products directly.
Using this model will reduce your spending and the chances of keeping stock in storage and loss.
In addition, with dropshipping, there is no need for any physical retail space. This allows them to offer as many kinds of goods as possible. Consequently, such organizations will operate purely through the Internet.
Businesses will easily include or remove items based on prevailing demand, which indicates that by considering this design they will exhibit scalability and flexibility. Dropshipping further outsources invoices and shipping, preventing order fulfillment from being a logistical nightmare.
Key Points:
‘The dropshipping business model comprises acting as an intermediary forwarding customer orders to third party suppliers or manufacturers who ship the products directly to the customers.”
It offers flexibility and scalability in its products while reducing the logistical challenges related to order fulfillment and shipment.
12. Affiliate business model
Affiliate marketing is a business that pays third-party publishers to generate traffic or leads for its products.
This model lets companies use the marketing activities and current customer volumes of affiliate associations, making it possible for them to grow their traffic and generate revenue without using any traditional advertising or marketing costs.
Affiliate business model example:
- Smart Passive Income Blog
- Nerdwallet
- The Wirecutter
- Finder
- The Points Guy
- Skyscanner
What are the advantages of the Affiliate business model?
The advantage of the affiliate business model is that it enables businesses to tap into the marketing efforts and existing customer bases of affiliate partners, who promote and sell the company’s products or services in exchange for a commission.
Companies may use this model to increase their customer base without spending more money. They may also use affiliate programs to ensure friendly cooperation between seller partners and their organizations. Payment depends on sales volume when an administrator decides not to pay such remuneration through sales generated by only certain partners to minimize expenditures.
Further, Businesses will use the affiliate model to learn more about how customers act and whether they effectively promote their products. This means you will track and analyze the performance of different affiliates and marketing channels.
This model also allows businesses to increase the number of affiliates whenever they want from the product line they offer.
Key Points:
“In the affiliate marketing business model, you work with affiliates who market your products or services for a piece of the earnings derived from every valid conversion or successful sales.”
The affiliate model offers important clues on what makes people act the way they do when it comes to buying things, as well as how marketing efforts will succeed and allow for growth since new partners may come on board with an increasing product range.
How To Evaluate Successful Business Models?
Evaluation of successful business models is assessing whether a company will create, deliver, and capture value sustainably and profitably, as well as align with customer needs and market dynamics through its strategic approach.
The key elements to evaluate a successful business model is listed below.
- Target audience or customer segments
- Customer usage patterns and behaviors
- How the product & service reach the customers
- Marketing and advertising approaches
- Day-to-day activities and processes required
- Necessary resources like people, technology, and infrastructure
- Revenue model and sources of income
Evaluate successful business models to ensure that the present one is adequate for your plans. Should there be a change in business strategy, then a corresponding modification in the business model will be necessary.
How to choose the right startup business model
Choosing the right startup business model is essential to carry out a thorough evaluation of what you are selling or providing, the people you are targeting in terms of age group, sex, and income level, among others, competitors surrounding the same field as you and operational powers that would define the best method for making something happen then benefiting from it through sales.
Choosing the right business model for a startup, you will consider things like:
- Customer needs: How your model aligns with your customer’s needs and expectations and how they buy
- Market potential: The target market, customer budgets, and competition
- Sustainability: Potential revenue, costs, and scalability
- Alternatives: What other options are available in the market
What are the steps to create a business model?
The steps to create a business model are below.
- Identify your audience
- Define the problem
- Develop your value proposition
- Choose your revenue streams
- Define your cost structure
- Identify key partners
- Test your model
- Adapt and improve
Try out these steps in your business model in real-life situations to check how well it does and apply the necessary changes to improve its effectiveness, over time.
What are the critical factors in sizing up business models?
The critical factors in sizing up business models is to check the value proposition, target market, revenue streams, cost structure, competitive advantage, scalability, and the overall ability of the firm to create, deliver, and capture value sustainably and profitably.
First, we must look at the value proposition, which essentially means what unique benefits customers offer and how it meets their particular needs.
The value proposition should be examined, focusing on the unique benefits offered to customers and their specific needs.
Understanding the target market is essential, we should also know what they want, their actions, and how much they are willing to spend. The revenue streams need to be looked into to ensure they will survive in the future, making it essential to look into cost structures to maintain profit margins.
Which model is highly followed by successful startups?
The freemium business model is highly followed by successful startups, especially in the technology and software industry or SAAS.
Giving an entry-level product or service free of charge characterizes the freemium model. The goal of providing a free version is for users to pay for an upgrade possessing more features or capabilities. It has been realized as an effective strategy for user acquisition, product adoption, and revenue generation.
What is a business model formula?
A business model formula is the business plan and shows how you will obtain that as the world changes; these should be constantly changing as well for your company.
The Business Model formula provides a structured approach to visualizing, designing, and evaluating the various elements of a business model, ensuring alignment and coherence between the different components.
This formula provides startups and established firms with a standard tool to develop, experiment on, and perfect their business models for long-term sustainability.
