A business model, at the heart of any business, is a strategy for operating a business. It describes how a company will generate value for its customers and takes into account many considerations, such as identifying customers, their problems and ways to solve their problems. Even a lemonade stand needs one; you need to get lemonades to produce the product, find a way to store the lemons, somehow deliver them to your lemonade stand…
(This is different from a revenue model, which describes how a company makes money. A company may have multiple revenue streams but typically has only one business model.)
While many startup founders tend to decide on their business model and forms of monetization later in the game, I think founders should make these decisions ahead of time. Founders need to have a business model in mind for an MVP. Without one, you won’t know what to offer to your customers and how to build your business.
To inspire you, here are a few interesting examples of business models that are applicable to tech startups:
A marketplace connects two parties of a transaction, typically making money on each transaction. It’s different from a traditional brokerage business model, because a marketplace allows both parties to search for each other rather than offering a service to find a buyer or seller.
This is a very popular model among startups. I personally think that it’s one of the hardest types of businesses to start and run. Essentially, in this model, you need to double your efforts because you have two parties to attract to the platform. Let’s say you’re building a freelancing site for designers. In order for your product to be viable, there should be enough skilled designers on the platform to complete newly created jobs, and there should be enough customers to purchase design services. You can’t just attract one type of person. You need both, which means you have to have a very sophisticated marketing strategy.
The benefit of this business model is that it’s all about marketing and attracting people. All you need to provide is a platform for people to connect. Of course, you still need to dedicate time to making sure that the experiences of both your buyers and sellers on this platform are positive.
The most famous example of a marketplace is Amazon — they allow other sellers to use their platform to sell goods. Another example would be Zillow, which connects homeowners with people who want to buy or rent their properties.
In this model, a company aggregates the information on goods or service providers in a certain space and then offers their services under its own name. An example of an aggregator would be Uber or Airbnb, where individual drivers or homeowners don’t operate as separate companies but instead use an aggregator as a platform. Another big difference between an aggregator and a marketplace is that since every service provider operates under an aggregator’s name, there is a standardized quality of service and pricing.
An aggregator is a mix between a traditional service business and a marketplace — on one hand, you still don’t need to provide the service on your own, but on the other hand, you need to ensure quality and vet the service providers you work with more thoroughly than a marketplace does.
An aggregator is also responsible for payments and disputes, which is optional for a marketplace.
This model is often confused with the marketplace model. The key difference is that a marketplace doesn’t own the goods and properties that are offered on their platform, nor do they employ people offering the services. On the contrary, the electric scooter startup Bird actually owns (or rents, I’m not sure) the scooters they offer for short-term usage. Similarly, WeWork owns the properties they offer for lease. This business model requires more upfront investment, but you also get more revenue because you don’t have to pay a premium to the owner or service provider that you work with.
Plus, the on-demand model requires fewer marketing efforts because you don’t need to market to owners and service providers like a marketplace needs to.
Reverse auction is a variation on the marketplace model. But instead of sellers offering their services to buyers, it’s buyers who create requests for something they need. Most of the time, these are job board companies, like Upwork or Taskrabbit, where people post jobs they need to be done, and contractors bid on the jobs and compete with each other.
This business model has all of the pros and cons of a marketplace, and it makes price-sensitive buyers feel good because they typically get great deals this way.
Crowdsourcing is about generating value based on the efforts of a crowd. Wikipedia, Facebook and Instagram are great examples because they heavily rely on their users to create content that attracts others toward the platform. Same with Pinterest and LinkedIn — it’s the users who make these companies valuable.
Crowdsourcing businesses heavily benefit from the network effect. The more users on the platform creating content, the more valuable the platform, and the faster it grows. Each individual participant takes part in promoting the service and inviting others to join in.
Traditional software product
While this business model is pretty standard, I still want to mention it because it’s one of the most common business models for tech startups. You build a software product solving a certain problem for customers — either by creating a convenient interface, by providing information in a new, unusual way or by automating processes. Sometimes, products combine multiple approaches, but in the end, it’s still software people can use.
Software has been around for many years, and the internet opened a whole new way of promoting and distributing software. Now, you don’t need to think of it as other goods — a lot of products can be distributed and accessed right from your website or installed on your customer’s phone. This makes building software products very attractive from a business standpoint because of its scalability.
Originally published on Medium