What business model is right for your next venture?
As I speak with entrepreneurs, a common question that comes up is what is the right business model. Know that there are many different flavors out there; within each you can be successful or not. Most important is finding the right market with authentic demand and building a great team to tackle it. But as for business models, here are a few examples of different types of models that are common.
Subscription - think Netflix or any service where you pay $X/month or software that is $X/user/month. This is a simple model that is great for creating recurring revenue streams that help businesses grow and scale. If you have loyal, passionate customers, their subscription revenue can often grow over time (net revenue retention) as well as you spend minimal sales time re-signing new contracts every year.
Freemium - think Calendly or a service that has a free basic version anyone can use, and then has premium versions for more advanced features and capabilities. This allows anyone to test the product and create some virality, as well as upgrade options for the nicer features and advanced needs of certain customers.
Advertising - think YouTube or anything that may be free to consumers, but makes their money on revenue from advertisements. These business models can be easier to get users, but at some point need to figure out the monetization strategy. If you build a strong user base, that opens up many different options for revenue.
Marketplace - think Airbnb or any service that has a marketplace connecting folks on different sides. These have massive upside and defensive moats if you get it right, but are super challenging to figure out which side comes first, who pays for it, and how you get enough scale to matter.
Services - think Deloitte or any consulting or professional services firm that starts with great people/relationships, and then builds their business by attaching people to projects to solve problems. These models can often blend with software models whereby some percentage of the business is software/recurring revenue and some percentage is professional services.
Transactional - think a FinTech or data business model whereby they make $X per every transaction that goes through the system or every data element you purchase. These can act like subscription models, but can have more variability in revenue given how the underlying market volume changes.
Premium - think Ritz Carlton or any high end brand or service. The entire product and value proposition is around delivering premium products and services. It will be the highest price point, but for the target customers the experience is far better than the average service and people will pay more for that.
Low cost - think Walmart or any service that focuses on having a lower cost business model that can be achieved through any combination of design, scale, or focus. The lower cost model allows them to in turn offer lower prices. Be wary of “low price” models that don’t have the lower cost model behind it to support in the long run.
Razor blade - aptly named, it’s the concept of selling the razor for cheap, and then making money on the razor blades. These models get you hooked, and then once hooked keep making money on the required replenishments/upgrades that are necessary to use the product.
There are other business models and variants as well and some of these above can be combined, but it is important to think through the right business model given the problem you are solving and what it takes to deliver your solution. Know that each business model has different implications for growth/scaling, margins, and valuations.