Once you’ve got your great idea for a business there are many different ways of developing your ideas into a business model that actually makes money. You need to figure out who is willing to pay for what. And of those that are willing to pay – how, when and how often are they willing to pay? Sometimes the model that works the best is not he most obvious, so it’s important to consider all possibilities. To further complicate matters in the internet era, will the rise of free or freemium models affect your business plans? Here, we’ll review a few popular business models to give you food for thought while refining your startup’s business model.
Traditional transaction-based business models are still valid whether your startup is going to be online or in a physical store. Your customers purchase goods from you – simple! Typically you’ll either have a store that sells a variety of different products – so you will aggregate from different manufacturers at the retail end or you’ll manufacture the product and sell to distributors who will then sell on to the retailers. These models exist both for ecommerce and for traditional shops. Although, online it’s easier to do several different model simultaneously because the cost of websites and online transaction software is so cheap. For instance, you could sell your products through Amazon or, if it is content, through a platform like iTunes or Google Play while also selling the product through your own site.
But this simple transaction model can become much more complex. Take Freebie Marketing where one product is given away or sold at a low price in order to sell a repeat item at a high margin. Examples of this include razors and razor blades, printers and ink and so on. In many ways this modification of a traditional transactional model is actually quite close to a subscription model as consumers must routinely buy new blades, printer cartridges etc. Other companies are taking the step to an actual subscription model in a bid to undercut the existing manufacturers. Two companies that do this in the razor blade space are the Dollar Shave Club in the US and Razwar in Europe. As a side note, check out The Dollar Shave Club’s hilarious promo video on their site. Their models both undercut the big manufacturers because they use quirky cheaper social media and web marketing instead of expensive traditional marketing strategies and they also engage consumers through an actual subscription so they are assured repeat businesses.
Other web-based subscription models include the software-as-a-service (SaaS) model that employed by many cloud computing and app companies. They take care of storing the data, updating the software and in return customers pay a monthly fee. Many SaaS vendors employ a freemium model too. Freemium comes in a variety of different forms:
- Features – free for bare bones service; pay for full feature list
- Time – free trial typically 14 -30 days
- Usage – Free for small usage pay for larger volumes, Dropbox is one example
- Cross Product – one product for free, add-on products paid for or different version of the product are free while others are pay for, for instance a free desktop version and pay for mobile access
However the buzz over freemium models has switched from positive to negative. Although it is possible to build a large user base however the premium uptake can be very low. This can make the business unsustainable if the cost of providing the service for the free users is more than the revenue generated by the premium users.
Other companies have taken their SaaS businesses down the completely free route using a service supported by advertising methodology. Wave Accounting is one such SaaS provider that offers free web based accountancy software by charging advertisers for space on the site.
There are many different models to support a content business. For niche high value content a subscription model is often used. For instance, financial data and analysis – Bloomberg, Capital IQ etc – charge vast subscription fees for access to their data and analytics of financial transactions and company data. However, at the other end of the spectrum consumers often feel that content should be free. Businesses have turned to content supported by advertising models to support their business. This model is employed effectively by the Huffington Post and rating and review sites like Yelp.
Another derivation of content support by advertising is content supported by sponsorship. Sponsors pay for exclusive publicity rights to media, events and websites.
A similar model is the use of lead generation and affiliate marketing. When a product is sold the original website that generated the lead is paid a percentage of the eventual transaction value. Many tech blogs employ this method, but it can undermine customer confidence as it becomes unclear if products are being hyped because they are actually good or because the writer has a financial interest in future transactions.
Renting/Purchasing Content is employed in the media industry such as iTunes and Netflix. Not that much different than your traditional movie or music store. Although the modern twist is to sell the hardware on which to view or listen to your purchases and use the content as a low margin lure. Apple has the iPod and iPad whereas Amazon has devised the Kindle where customers can view eBooks.
Crowdsourcing utlises the power of groups to make products cheaper or to drive volume to sell products. Daily deal and flash sale sites such as Groupon and Gilt Groupe use a high volume of sales to get retailers to offer lower prices. On the other side sites like Quirky take products from small individual inventors and offer them to their market.
The traditional brokerage or commission based business model where sellers are connected to buys through the broker have been around for a long time. Think, insurance brokers and travel agents. This model also extends to new web businesses like Ebay, Airbnb, and Expedia.