It is commonly known that one of the most important decisions made during a startup-developing process is creating a stable working business model for a startup. This is what, basically, shapes your business, defines its reputation and stability.
The startup business model choice truly depends on what strategy you choose, targeted client base, your market, etc. But before comparing your business to others’ and using their strategy, take your time to sink into the bit of theory.
How to choose business model for startup
There are certain questions you have to ask yourself for better understanding which direction to take in order to choose startup revenue model. Here they are:
• How much do you think your customers are going to be willing to pay?
• What are they already paying for?
• How do they do that?
• How do you think they would prefer to pay?
• Which revenue exactly comes to you with every revenue stream?
Read also: Mobile App Solutions for Startups
Ten most popular revenue models
Ready with your goals? Then check out these ideas in a case some of them might fit your startup:
1. Free product/service a.k.a “ad-based model”
Must work perfectly for those who already have the broad customer base and/or large investments from outside. Revenue stream comes from advertising services that pay you for clicks or views of their ads placed on your website or in the mobile app. The more customers you have the more revenue you receive.
Advantages: the simplest way to monetize your business, also really easy in use.
Disadvantages: strongly tied to the number of your customers so not recommended as the main income at the start point; people often get annoyed at seeing a lot of banner ads.
Best example: Facebook is free for more than 2 billion of users, main revenue comes from advertising both outside and inside links.
2. Partly free product/service a.k.a “freemium model”
In this model basic services are free, but the wider range of them must be bought by your customer. For example, if your client wants to add premium functions to their account within your product, they must pay for it. Often “paid service” means “higher quality service”, so this model makes sense if your startup is based on intellectual values.
Advantages: gives customers a free look on your product so they can decide if they want to use its full version.
Disadvantages: big investments are needed to ensure customers that after payment they will receive something really important and qualitative, revenue depends on how good are you in convincing your customers to transfer from “free” to “premium” users.
Best example: Coursera provides with totally free educational courses from universities worldwide, but if a student wants to receive a recognized proof of successful passing of the exam, they must pay for this certification.
3. Direct sales
This model is what first comes to every startuper’s mind after they ask themselves a question “how to choose business model for startup?” Effective at the low competition, especially when the product you sell has unique qualities (or looks like it, depends on your marketing skills), this one is one of the most common revenue models. With direct sales, you can set prices from two to four times higher than prime cost, but if you sell “second-hand” products this margin cannot be higher than 10%.
Advantages: with good promotion, the breakeven point can be reached quickly, growing number of customers and nice feedback gives an opportunity to combine this method with another revenue models.
Disadvantages: does not make sense if big competition is present (otherwise requires expensive marketing strategy), sales manager recruitment is needed in most cases.
Best example: NYX (est. $148M of annual revenue reached with the use of the best marketing practices – due to high competition level in the industry).
4. On-demand revenue model
Is often used with specialized businesses, such as problem-solving in IT or handmade production. The main principle is: payment depends on value.
Advantages: mostly low competition level, focus on big clients and their problem-solving.
Disadvantages: feedback dynamics highly influence sales, doesn’t work with products with wide range of analogs.
Best example: Uber is probably the most popular taxi service, ride prices are tied to the distance and class of vehicle.
5. Subscription-based revenue model
This one is the best for web-based or app-based businesses, e.g. domain hosting, media rental services etc. It’s an interesting model where your clients make monthly/yearly payments in exchange for unlimited access to your product or service instead of buying it repeatedly.
Advantages: more stable and growing income, easy customer retention because of attractive initial cost (customers are often attracted to economy and automation of payments).
Disadvantages: fight for customer’s attention makes this revenue model alive – client has to be sure that your product is exactly what they need. No customer support – no money.
Best example: Google Play Music provides the first month for free, but for $9.99 monthly an unlimited access to millions of songs, personal music streaming and access to YouTube Red are available.
Read also: How to Make an App Like Spotify
6. Free product, paid services
In this model, obviously, the product is free, but to use it properly your client has to pay. The range of services can be quite wide: installation, configuration, delivery, or any other additional services. Good choice for enlarging client base, but makes the most profit if used for service-selling business. In that case, product cost is included in marketing expenses.
Advantages: free product is always a good promo technique to get new customers; creates positive buzz among potential clients.
Disadvantages: as said earlier, works better with service-selling business. But even if your company fits this description, later you’ll have to think of new revenue model as this one will exhaust itself.
Best example: Google AdWords has free account access, free mobile application, but running a promo campaign will cost its price.
7. Package revenue model
With this one, your customer can save money on buying a package of products instead of buying them separately. The “cost of a single product in a package is less than cost of a single piece” logic makes clients buy a kit even though they needed something in a single copy. Your task here is to form profitable packages of different products\services minding their compatibility in quality and use (this needs some serious skill).
Advantages: visibly increases your revenue and makes your products look more attractive if you use good-looking design to present your packages.
Disadvantages: you have to work really hard on your products to select some of them in matching packages. Otherwise, packages will be seen as illogical or unattractive.
Best example: Kylie Cosmetics brand loves to pack their products in kits, e.g. one lipstick for $15 versus a kit of six of them for $36.
8. Add-on model
Get more profit selling “basic components” for the low price and more expensive modifications. For this model to work, your product has to be useful on different levels.
Advantages: loyal to clients as they have their choice whether to buy additions or not = stable and growing customer base.
Disadvantages: usually expensive development, testing, documentation, and support for this kind of product.
Best example: Videogames (price of extra content varies, but “legendary” or “rare” stuff usually costs enormously high. But people buy it!).
9. Delayed model
Profit is reached with selling “main item” for prime cost or a bit higher, but consumables create way bigger margin.
Advantages: creates positive impression of customer service, feedback says it all.
Disadvantages: requires lots of seed money, because of being quite a rare decision in startups.
Best example: printers (because no matter how cheap the exact model is, the quality of documents mostly depends on good ink in cartridges which usually costs a lot).
10. Commission-based model
Among other business models of successful companies, this one is supposed to work directly with the main thing: the money. Briefly, your company runs as a middleman between buyers and sellers (or as a broker if we’re talking about the trading platform or e-wallet). Each transaction between them includes the fee for using your platform as a contact place. By the way, this revenue model is the most widely used for startups because of its flexibility.
Advantages: broad area of use, easy to operate after setup.
Disadvantages: needs lots of documentation and is difficult to configure.
Best example: any trading platform or e-wallet (transaction fees on different platforms vary, but the main principle is clear: they have their part of the deal as intermediaries).
Whatever revenue model you choose for the start, keep in mind that customers usually are wary of complicated pricing, so your task is to find perfect prices both for you and your client. This is what the future of your startup truly depends on. Do your research; think through every aspect of what your startup business model choice should be. This article should have told you some ways to do it right, so now, when the most effective startup business model examples were given, you can make it to the top with your new and valuable product.