How to Choose the Right Business Model for Your Startup
So, you’ve got a big idea for a business and you’ve started researching the market you want to approach.
What’s next? How do we take this seed of an idea and nurture it into a credible business?
That’s what we’ll tackle in this article where we begin refining your idea into something that can make money. There’s more to starting a business than just coming up with a product or service you can sell.
The way you approach generating revenue from your business idea will have different ramifications on the structure of your business and the costs that come with it. Your ‘business model’ is a description of the approach you choose.
Finding the right business model, a business model that can make a profit deserves careful attention and is a key component to launching a successful startup.
What is a business model and why do I need one?
In short, a business model is a description of how your company will go about making a profit.
More broadly, it is a complete overview of the operations of a business, the customers you’ll be approaching, what and how you’ll sell to them and how all these different parts interrelate and support each other.
Your business model is the complete picture of how you intend to succeed.
There is more than one way to go to market with the same product. Your business model is not set in stone at this stage of planning, nor is it after you launch your business.
You may be surprised to hear that many businesses go through at least one major change in the way they productise and sell their core idea. Don’t be surprised if you have a similar experience.
That’s because at the moment you’ll only have a theory about how you’ll make money.
Over the next few articles, we’ll work on building this theory out into something you can then go and test.
For now, be ready to adapt and change.
It might turn out that your initial approach simply can’t generate the volume of sales required to support the operations of the business you start planning. Customers can love a product but if the numbers just don’t work out then it won’t matter. It’s important to learn this early before you spend time scaling up a business that simply doesn’t work at a foundational level.
This means you’ll also need to start honing in on the financials surrounding your business idea soon. How much will it actually cost to produce, supply and deliver your product on the scale required to make enough profit?
We’re getting ahead of ourselves a little bit here but once you’ve chosen an approach, you’ll need to start playing with the numbers either in a spreadsheet or in Brixx.
To calculate the success of your business model you’ll need to know:
- Your pricing strategy (read the next article)
- Your methods for reaching your target market that will generate the sales volume you need (we’ll get to this later in the 90 day challenge)
- How much it will cost to create, supply and market your product
Once you’ve developed your business idea further with more research and testing, you’ll have all the information you will need to truly assess your business model.
Right now, we don’t have a business model at all yet! So, let’s get started.
Coming up with several business concepts
Imagine you are a farmer.
(To any farmers reading this…let’s say this is a farmer from a children’s book – I know it’s more complicated than this!)
You are taking your product to the local market to sell; it seems a simple enough proposition. But the way in which you package your product makes a big difference to who is likely to buy it, and also to the time and energy you need to expend in preparing your product.
Here are some options you might consider:
- Take livestock to the market and sell the livestock.
- Sell the meat at the market.
- Make pies and sell the pies at the market.
- Start an online business selling shares in a particular animal that you are rearing.
- Don’t go to the market at all but sell the meat to restaurants and pie shops directly.
- Start your own pie shop as a side business to sell your own produce.
- Sell frozen meat and frozen pies online directly to consumers.
- Sell the farm and use your love of pies and knowledge of quality produce to start a dedicated pie business.
You can see that every concept here begins with the same starting point but the selling model radically changes the entire shape of the business. At the moment I’m calling them ‘concepts’ because until you get more information they are just that. They don’t tell the full story of how your business operates so are not yet the complete business model.
Whatever your idea is, the way you decide to express that idea as a business will have both requirements and consequences.
Let’s take a look at some industry examples to help the ideation process.
Standard Industry Business Model Examples
There are many different business models – and probably some that haven’t been discovered yet!
You can find many more by internet searching for your business type + “business models” online. Eg. Coffee shop business models, Retail business models, software business models etc
Industry example: Dell, Boeing, Apparel. Manufacturers take raw materials and use them to create a product. Even if those raw materials are products in themselves, as is the case for computer manufacturers, for example.
Industry example: Avon, commission-based recruitment or sales, door-to-door selling. Salespeople sell products or services directly to consumers or businesses, generating revenue for the salespeople in the process, usually working on behalf of a parent company.
Industry example: Walmart, grocers, butchers, toy shops. Retailers buy from wholesalers or distributors and sell directly to consumers.
Industry example: Nestle and Unilever are examples of huge businesses that include distribution as part of their business model. Distributors generally sell to other businesses instead of directly to consumers and also handle transportation of goods between locations. Distributors often act as intermediaries between manufacturers and retailers.
Industry example: Newspapers, Google, Facebook, YouTube stars. Any business who gets people’s attention can sell space, virtual or real, to other businesses to advertise in.
Razor / Razorblade
Industry example: Xerox, Gillette. Once a customer has purchased a non-disposable razor they will need to buy a steady supply of replacement blades. The initial sale may make a loss (it may cost you more than it sold for) but further sales of refills or replacement parts generate a steady stream of income at little cost.
Industry example: Netflix, Audible, Amazon Prime, Magazines, many business-to-business software companies. Subscriptions entail frequent ongoing payments in return for continued service, or continuous delivery of goods at a discounted rate.
Industry example: McDonalds, Molly Maid, Athena, BNI, Travel Counsellors. Franchises are businesses that provide entrepreneurs and other businesses everything they need to become a part of the franchise, from branding to uniforms to supplies, along with support and guidance in return for a fee. This allows the franchise to grow rapidly in size, while rewarding the franchisees who develop the business.
Industry example: LinkedIn, mobile games. Offer a good product or service for free, but encourage paid upgrades to either increase how useful the product or service is or get rid of some detriment (like adverts).
Bricks and clicks
Industry example: Clothing stores, department stores. Having both a physical and online shop gives the business more than one way to contact and market to customers, and give customers more choice in terms of product availability and in how they go about their shopping.
Industry example: IT reseller, travel agent. Selling a complete package solution made of different products, with added support thrown in. Value-added resellers take an already existing product or service and re-sell it but with their own twist or benefits included.
Start generating your own business concepts
The first step to finding the right business model is to get down as many variations on your business ideas as you can.
It doesn’t matter if some of these ideas look like ‘bad’ ideas – list them out anyway. It’s good to go through an evaluation process like this, even with ideas that you initially disfavour. In the future, you may be better equipped to utilise them in your business.
Some of the business concepts that you come up with here are going to fit nicely with the market research you have done. But even slight variations in how you bring your business idea to the market could mean you need to take a step back into the market research activities from earlier in the process.
For example, a consultancy business might look at two methods of selling their knowledge and experience to other businesses:
- Selling an online webinar course, either live or recorded
- Face to face meetings with clients, tailored to their business
Online webinars might be able to deliver to a high volume of customers but the experience will be less bespoke for each viewer so the price will have to be significantly lower.
Face to face meetings will be more time-consuming. You won’t be able to take on many customers at once but the value to the customer will be higher so the price you charge should be higher too.
The costs and focus of the business infrastructure will be completely different too. Online webinars will have a huge focus on a great website that pulls in a lot of potential customers and drives them toward signing up for webinar courses. The face to face meetings business model might require far more time spent on networking, organising meetings and building long-lasting relationships.
The product is the same in both cases but the business model radically changes the way your business operates and the type of customers you go after.
As you might have guessed by now, market research never really ends when you are planning a business.
Can your business model make a profit?
Let’s look at the factors you need to understand in order to calculate whether your business model is a profitable approach. You need to know:
- The price of your product or services (your pricing strategy)
- The cost of selling these products or services (materials, payment fees etc)
- The cost of marketing your products (marketing campaigns, advertising etc)
- The cost of operating your business (rent, subscriptions, utilities etc)
- The cost of employing your staff (salaries, contactors, employee benefits etc)
- The initial setup costs of your business (equipment purchases, website setup etc)
The business model you choose will influence all of these points and you’ll need to ensure the numbers work in your financial plan. If you’ve already started working on your projections in Brixx then you’ll already have some early numbers on your estimated monthly costs and perhaps a basic estimate of the revenue you must make each month.
Understanding, at this point, whether you need to make 100 sales per month to break even or 1,000 per month will drastically affect the way you think about your eventual marketing techniques. You’ll refine this further in the next article where we go through different pricing strategies. This is a crucial aspect of your business model so these two articles work hand in hand.