How to choose the right business model
Of the millions of new startups created in the last year, not all will survive due to the highly competitive nature of the business world. Therefore, it is essential for an entrepreneur to be sure that his idea is innovative, but above all adequate and aligned with the market.
There are many things to consider before deciding to become a startupper. Is there a need or a demand for your product? Is the market already saturated with similar products? Are you also able to manage a business?
You should know that millions of new startups are launched every year around the world. Many of these businesses fail. According to one report, the failure rate is relatively constant across all industries and looks like this:
- 20% fail in the first year
- 30% fail in the second year
- 50% fail in the fifth year
- 70% fail in the tenth year
There are many reasons why companies fail, including poor adaptation to the market, lack of marketing knowledge, financial problems, but above all the absence of a clear business model, i.e. a well-studied strategic plan that can define how you will earn money.
Choosing the right business model for your product or service will help you understand how you will generate profit by satisfying a need and delivering value to your customers.
Business model: what it is and why it matters
Some experts argue that in the beginning it is not necessary for a startup to create a detailed formal business plan, but no one doubts the need for a well-developed business model. In planning a business, the development of its business model comes first because it forms the basis. As a foundation, if it is flawed, it will make your business fragile and you will have to revise the weak elements of your model over time.
In short, a business model can be defined as the way in which companies appropriate the maximum value of the products or services they have created; in practice, it organizes, in the chosen ecosystem, the conceptual process of how revenues minus costs will create profits. This is the key to creating any successful business.
So if it’s a description of how your startup will make a profit, more generally it will be a comprehensive overview of your company’s operations, the customers you will target, what and how you will sell to them, and how all of these different parties relate and support each other.
Your business model is, therefore, the complete picture of how you intend to be successful.
There is more than one way to go to market with the same product and/or service. Your business model will represent its uniqueness, but remember that it is not set in stone in this first phase of planning, nor is it after the launch of your business.
You might be surprised to know that many companies undergo at least one major change in how they make and sell their main idea. Don’t be surprised if you have a similar experience.
The most popular business models
Here are some of the main basic models that can serve as inspiration:
In the add-on business model, while the main offer is competitively priced, numerous extras increase the final price. Ultimately, customers pay more than they initially expected, but benefit from selecting options that meet their specific needs. Airline tickets are a well-known example: Customers pay a low price for a basic ticket, but the overall cost is increased by extra “add-ons” such as credit card fees, food and luggage charges.
In the affiliate business model, the company’s goal lies in supporting other parties in the product market in order to benefit from successful transactions. In this way, the company gains access to a diverse customer base without additional sales and marketing efforts. Affiliates usually operate on the basis of some form of pay-per-sale or pay-per-display system and generally online. A website publisher may, for example, act as an affiliate by including another company’s banner ads on its website in exchange for commissions on “clicks” or “impressions”. In other cases, affiliates are able to market their products on larger networks and pay commission on sales to the hosting website.
The Auction business model is based on participatory pricing: in other words, the price of a product is not determined by the seller alone, but the buyers actively influence the final price of the goods or services. Finding a price starts with a potential buyer offering a certain amount based on their willingness to pay. At the end of the auction, the customer who made the highest bid undertakes to purchase the product or service.
In the Customer Loyalty model, customers are retained and loyalty is achieved by providing value beyond basic products or services. The goal is to develop a relationship with customers and retain them by rewarding them with special offers or discounts. In this way, customers are voluntarily tied to the company, which dissuades them from opting for competing products and services and thus protects the company’s revenues.
In the Direct Selling business model, a company’s products are made available directly by the manufacturer or service provider, rather than through an intermediary channel such as retail outlets.
Bilateral markets facilitate the interaction between two complementary groups to mutual benefit through an intermediary or a platform.
Within the e-commerce business model, traditional products or services are provided through online channels, thus eliminating the overhead associated with managing a physical branch infrastructure. Customers benefit from the online search for products and services, from the ability to compare offers, from the elimination of travel times and costs and from obtaining lower prices. Businesses benefit from searching online for their products and services and the reduction of intermediaries, retail outlets, and traditional non-targeted advertising.
With this business model, customers buy a service or product for a flat rate and then use it as much as they want. The main advantage for them is unlimited consumption with full control of their costs.
The term “freemium” is coined from a combination of “free” and “premium”. As this suggests, the business model provides for the free offer of a basic version of the product or service, while the premium version is made available for an additional payment. The free version of the product is intended to allow the company to establish a large initial customer base, from which it is hoped that a sufficient number of customers will want to upgrade to the premium version at a later time.
The Long Tail business model focuses on selling small quantities of a very wide range of products, as opposed to a “blockbuster” model which offers large quantities of a small range. Although Long Tail offers tighter margins and lower sales volumes of individual products, the profits are significant over the wide range sold over the long term.
Pay Per Use
In the Pay Per Use model, the specific use of a service or product by the customer is measured and charged. It is widely used in the consumer media market and attracts customers who want to benefit from the flexibility.
Razor and Blade
In the Razor and Blade business model, the base product is offered at a rock bottom or even free price. The additional products that customers need to use the base product, on the other hand, have a high price and therefore become responsible for generating most of the revenues.
The subscription allows customers to regularly receive products or services. The company signs a contract with its customers, defining the frequency and length of service delivery.
How to create a business model
As you can imagine, obviously there is no business model suitable for all startups and all scenarios, moreover it is unthinkable that it will last forever, given the continuous innovations placed on the market; therefore, it is essential to periodically re-analyze your model and update it.
So, as it is essential to define it in the startup phase, it is equally vital to question it over the years to update it and keep it in step with the future.
Before starting the business model analysis, we suggest you plan a good business strategy that takes into account these four fundamental elements:
Carry out a market analysis for startups
First of all you have to check if your idea actually has a potential outlet market; therefore, searches and analyzes your reference market, through analysis with specialized companies (such as Nielsen, Gartner and Forrester) or through SEO/SEA analysis or through microdata; in this way you will be able to get a photograph of your potential customers; you will then have to apply the TAM, SAM and SOM technique and, finally, make sure that there is a need that your product or service will be able to satisfy by measuring the Product Market Fit.
Analyze the competition
When you want to build a business model that works to approach a specific market, it is essential to know who you will be up against: your future competitors.
Check how many startups are already offering what you want to offer, analyze their business models and measure their success with an accurate analysis of competitors. So ask yourself if you can do better, if you can add more value to the proposal and if there is something that will make your startup unique; consequently create your unique selling proposition, that is the message you choose to represent and that differentiates you from your competitors.
Define the buyer personas
Do you know what is one of the main reasons why startup ideas often fail? Because you don’t treat potential customers like people. And it’s an easy and common mistake to make. Buyer Personas are fictional representations of your ideal customers, based on real data and classified by market segment. When you imagine a composite “person” creating your value propositions you are more likely to create something that is relevant and meaningful to the people you are trying to attract.
Define your Value Proposition
A value proposition, known as a value proposition, is a simple statement that summarizes why a customer should choose your product or service. It represents your promise to a customer or a specific market segment, which is the fundamental reason why they should buy from you. A value proposition should clearly explain how your product or service meets a specific need, communicate the characteristics of its added value, and indicate why it is better than similar products on the market. The ideal value proposition is targeted and appeals to the strongest decision-makers of the customer and should always focus on how they define your value.
The business model canvas
The Business Model Canvas (BMC) is certainly one of the best known strategic tools for conceiving the business model of a startup or analyzing the business model of an established company. It is a visual chart that takes the form of 9 panes focusing on an organization’s value proposition, its customers, its resources and capabilities, its revenues and expenses. The creators of the Business Model Canvas – Alexander Osterwalder and Yves Pigneur – have entered the pantheon of management having been recognized since 2015 as two of the 50 best thinkers in management, according to the Thinkers 50 ranking.
The Business Model Canvas is a strategic management tool for quickly and easily defining and communicating an idea or business concept.
It is a one-page document that works through 9 fundamental elements of a company or product, structuring an idea in a coherent way.
The right side focuses on the customer (external), while the left side of the canvas focuses on the business (internal); both external and internal factors come together around the value proposition, which is the exchange of value between your company and your customer/clients.
The B-PLANNOW BOARD®
In our opinion, the canvases in circulation are now obsolete and outdated, as they do not take into consideration some key elements that could influence the determination of the right, real and innovative business model of your startup; the world changes rapidly and with it the right tools to interpret it!
This is why we have concentrated the experience gained over the years with our customers and transformed the canvas into a work table (board) by creating THE B−PLANNOW BOARD®: our shared visual language made up of 23 elements, 19 of which are fundamental, which really allows you to imagine, describe, share and innovate the business model of your startup.
If it is true that people can only keep a limited number of ideas in their short-term memory, why limit themselves to the few blocks of the Business Model Canvas or the Lean Model Canvas, risking to forget fundamental parts of their business model? That’s why our model is made up of 23 blocks that are the result of years and years of testing and validation.
Unfortunately it cannot be disclosed, being a fundamental asset of our company and an integral part of the one-to-one mentoring that we reserve for the startups we follow.
If you are interested, however, B-PLANNOW® provides you with ad hoc consultancy based on visual thinking meetings to identify company business models and trace the way to identify unexplored ones.
Now all you have to do is contact us, talk to us about your idea and bring it to life together also in work for equity!