Building a startup is making your idea come true. But there’s more to that. As a startup founder you also have to create a roadmap to make money, survive the market competition and get investments to run it.
So at some point in startup development, as a founder you should answer the most focal question – how will my business make money? The best way to answer this question is to choose the business model for your startup.
While we list all the possible startup business models here, do note that every business is unique and typically has a mix of 1-3 of these business models over a period of time. Here we go!
Examples of Startup Business Models
Marketplace
A Marketplace business model refers to a business that operates a platform connecting buyers and sellers and charges a transaction fee for each transaction. The cost of running the platform is relatively low, and there is reduced risk since it focuses on connecting supply and demand rather than dealing with inventory.
Examples of companies utilizing this business model include Amazon and Uber.
Sponsorship
The sponsorship business model involves generating revenue from sponsors, allowing users to access the product or service for free. This model attracts a large user base by offering free products or services and monetizes through unobtrusive ads or logo placements.
Examples of companies using this model include YouTube, Gmail, and various sports associations.
Franchise
The franchise business model entails franchisees paying royalties to a master franchise in exchange for using the brand, operational support, and access to know-how. This model enables rapid growth without requiring significant capital investment. Additionally, local franchisees’ knowledge helps adapt the business to different environments.
B2B SaaS businesses like Talkwalker and retail businesses such as fast food chains and fitness centers commonly utilize this model.
Reseller
The reseller business model involves a business outsourcing product sales to reselling agents. This model reduces inventory risk for the business and requires fewer salespeople, leading to cost savings in terms of human resources.
Examples of companies using this model include website hosting companies like GoDaddy and multi-level marketing companies like Avon.
White Labelling/Private Labelling
The white labelling/private labelling business model allows agents to use their own branding while relying on another company’s products or services. This model reduces the risk of damaging the agent’s brand and enables the company to focus on product development or manufacturing.
OEM manufacturers like Foxconn and SaaS companies like GoDaddy and Talkwalker commonly employ this model.
Disintermediation
The disintermediation business model, also known as cutting out the middleman, eliminates intermediaries between businesses and end-users. By removing the middleman, businesses can reduce costs for the end-users, gain a competitive advantage, and reach customers directly.
Manufacturers like Dell, Tesla, and Xiaomi, as well as wholesalers like Walmart and Alibaba, utilize this model.
Subscription
The subscription business model involves selling products or services on a recurring subscription basis rather than as one-time purchases. This model provides stable, recurring cash flows for the business and caters to customers who prefer paying in smaller increments.
Examples of companies using this model include SaaS companies like Salesforce and media companies like Spotify.
Leasing
The leasing business model focuses on renting out costly assets at high margins. This model allows customers who cannot afford to purchase expensive assets like homes, cars, or jets to access them through leasing.
Companies like GoCar (car leasing) and various timeshare companies employ this model.
Pre-order
The pre-order business model involves selling products before they are made or delivered, allowing businesses to generate cash flow upfront. By knowing the demand ahead of time, businesses can order exact materials from suppliers. This model provides a competitive advantage by securing sales before the product is available.
Examples of companies using this model include manufacturers like Tesla and businesses offering custom-made goods such as online jewelry and flower businesses.
Pay-Per-Use
The pay-per-use business model, also known as the pay-as-you-go model, collects payment from users based on their usage over time. Customers appreciate paying only when they use the product or service, making it easier to acquire customers. Companies using a credit-based pay-per-use system benefit from upfront cash payments and eliminate the need for regular upgrades.
Telcos with phone credit systems and platforms like Spotify are examples of this model.
Freemium
The freemium business model offers a basic product or service for free, enticing users to sign up and become familiar with the offering. Once users are “hooked,” the model monetizes by offering premium features or upgrades for a fee.
Examples include Gmail for Businesses (Google Apps) and Adobe PDF Reader.
Bait and Hook
The bait and hook business model, also known as the hub and spoke or razor blade model, involves selling a necessary product or service at a low cost or for free and generating revenue from complementary products or future upsells. The initial product serves as the “bait,” attracting customers with a low entry point, while the complementary products or upsells act as the “hook” to generate revenue.
Examples of this model include consumable products like razors and blades and SaaS companies like GoDaddy and Apple.
Reverse Auction
The reverse auction business model facilitates trades by allowing sellers to competitively bid on offering products or services to buyers. The business earns a commission on each transaction. This model attracts buyers first to entice sellers who are under pressure to make sales.
Service marketplaces like Freelancer.com and Elance.com are examples of this model.
Monopoly
While not a distinct business model itself, the monopoly model refers to a company cornering the market and raising prices to maximize profitability. By controlling the majority of the market, the company limits customer choice and sets prices as high as customers are willing to pay.
Luxottica, which owns brands like Oakley and Ray-Ban, is an example of this model.
The Below mentioned are not really business models but can be great business strategies:
Bundling
Bundling is more of a value-add strategy that stimulates additional sales by combining products or services. It is not a revenue-generating model itself.
Cell Phone
Charging different rates for different levels of service is primarily a pricing strategy, and most telcos operate based on a subscription business model.
Crowdsourcing
Crowdsourcing, involving contributions from a group of people to access content or services, is not a standalone revenue generation model. Platforms like Wikipedia rely on the sponsorship business model for funding.
Fractionalization
Fractionalization is a strategy to reduce the cost of ownership, such as in the case of private jet ownership. Netjets and other time-share businesses operate based on the leasing business model.
Low-touch
Low-touch refers to a pricing strategy and does not directly generate revenue. Companies like Walmart, selling products at lower prices, align more with a wholesale disintermediation business model.
Product as a Service
Product as a service can be seen as a fractionalization strategy, such as short-term car leasing by Zipcar, which operates based on the leasing business model.
Standardization
Standardizing a product or service does not directly generate revenue but can be a strategy to streamline operations and improve efficiency.
User Communities
User communities are not a business model but a strategy for user acquisition and engagement. Angie’s List, for example, operates based on the sponsorship business model.
Besides these business models, startups usually venture into these strategies also:
- On-Demand Offering services on-demand is a great business strategy but not a revenue model itself. Companies like Uber operate based on the marketplace business model.
- SaaS (Software as a Service) SaaS primarily describes what companies sell (software) and how they deliver it (regular updates, web-based), and many SaaS companies generate revenue through the subscription business model.
- O2O (Online to Offline) O2O is a strategy to reduce delivery costs and enhance the user experience. It is not a standalone revenue model. Domino’s Pizza’s “self-pick up” strategy aligns with a combination of the marketplace and subscription business models
Choosing the right business model and strategies can make or break your startup. So choose with careful consideration by taking in to accounts all the factors like – product market fit, demography, geography, laws, regulations, funding, etc.
