What is the key factor to consider when launching a new startup?
Is it a business idea? Or cutting-edge technology?
Is it a well-thought and documented business strategy? Or good market research?
An innovative idea is the most important thing to consider to launch a new venture. Obviously, without a business idea, there’s no business at all. Technology, yes! You can’t avoid that.
Market research you cannot ignore. Business strategy comes later.
But, two things we didn’t mention are –
A good business plan, and
A good business model.
We do understand what a business plan means. It is a well-documented business goal, objectives, mission, and vision, with proper methods and time-frames to achieve them.
But, what we do need to understand is –
What does a business model signify?
According to Investopedia, “a business model represents how a company does business.”
As per Wikipedia, a business model refers to “the rationale of how an organization creates, delivers, and captures value, in economic, social, cultural or other contexts.”
To help you better understand the technical jargon, a business model, in simple words, is nothing more than a structure that companies follow to sell their products/services to customers and make money.
And the business model is a crucial factor to consider while launching your startup.
If your business doesn’t follow a proper model, your company will lose out on opportunities to make money.
How to sell your idea/product/service?
How do we address customers’ pain points?
How to add value to your customers?
How to generate revenue?
Finding answers to the many ‘hows’ is important.
If you don’t know which channel to pursue to make money and add value to your customers, then you are not ready to launch your business in the first place.
Maybe, you should return to the classroom and start afresh.
And, for a business model to work, constant change and innovation are needed.
A business model can never be a one-size-fits-all framework applied to any business or should remain constant throughout the business’s life cycle.
There should be enough room for change.
That’s because the market is constantly changing so are the consumer preferences. As a result, a business model best suited for a retailer might not be ideal for an OTT platform.
Take, for example, Amazon.
This company started as an online bookstore. Its business model was different. Amazon has entered other sectors, from selling groceries to streaming Emmy-award-winning television series.
Do you think Amazon’s business model remained consistent? No, that has undergone many changes too. The company is continuously innovating its business model, keeping in mind the perspective of Amazon’s consumers.
It is not relying on one revenue stream or customer segment. Instead, Amazon is always thinking, ‘what next?’ And, its business model is changing in accordance with that ‘what next’ solution.
This is what we call business model innovation.
So, your venture should not only have a proper business model, but it should have enough room for innovation and change to fit that model with the present circumstances.
This is how Amazon emerged as a one-stop store-for-all today.
And, when we talk about business model innovation, we have to draw your attention to yet another factor –
The pandemic has changed the dynamics of how companies did business yesterday.
Most are forced to change their business models to survive the trying times. If your business is not flexible enough to adapt quickly to the changes and evolve accordingly, then your business can genuinely suffer.
It would help if you learned much from how Amazon has evolved over the years.
Let us focus on understanding the business models you can consider and how you can innovate them as and when required.
Different Types of Business Models
There are many different types of business models you can choose from. But, you have to understand which model best suits your business goals.
And, as we said, they can’t be a one-size-fits-all, so if you are planning to expand your business to different horizons, you should consider more than one type of business model.
Then, innovate that model to match your objectives. Correct?
Now that the pandemic has started a new normal of making money virtually, our first business model should be –
#1: Subscription Model
The pandemic plays a significant role in popularising the various OTT platforms. Now, it’s more than Netflix and Amazon Prime.
But, one thing that is common among all these platforms is that they follow a subscription model.
You all are pretty familiar with the term ‘subscription.’
The monthly subscription you pay to enjoy ad-free binging on Netflix, Amazon Prime, or some other platform.
Yes! We are referring to the fees you are spending every month. That’s what we call a Subscription Business Model.
Gaming applications or dating ones also follow the same model to make money.
You subscribe, you pay, and you enjoy their services unhindered. The same model can also be applied to brick-and-mortar businesses.
Yes! The pandemic forced many traditional brick-and-mortar businesses to try a subscription model to generate revenue. Most importantly, retailers opt for the same to reach out to their customers with boxes of curated items for a monthly fee of $10-$30.
Amazon did it and bought its innovation along the way.
Its Wardrope Boxed Apparel Service was one-of-a-kind that charges no upfront fees and allows customers to take a week to decide and pay for those they want. The subscription model is neither monthly nor recurring.
On the other hand, Amazon’s Prime Book Box Kids follows a monthly or every two or three months subscription model.
Amazon used the same subscription model and innovated it to suit its business objectives. And that innovation became a success.
Next up on the list is –
#2: Freemium Model
The name does give an idea.
Yes! This model ensures customers get some services free of cost.
Online SaaS businesses follow this model and are responsible for popularising Freemium as a business model.
What does it signify?
It signifies a model wherein a software company provides free access to the users to some of its proprietary tools like applications. But, the same model withholds the right from the end-users to access premium features for which the company charges a subscription fee.
Now, there’s a 50-50 chance of whether or not the end-users will subscribe to access those extra features.
We have often come across game applications where we can play the game to a certain level for free. But, to access the advanced levels or use premium features, you need to subscribe to monthly or yearly charges.
How often do you quit playing the game because of the high subscription fee?
This model is best suited to generate good revenue for other online applications like LinkedIn, MailChimp, and Skype. These applications garner a strong group of loyal and professional users. They are willing to pay the amount to enjoy the advanced features.
Now, what innovation you can add to this model depends entirely on the type of business you are doing.
#3: Adding Value with Bundling Model
Ah! Who doesn’t enjoy a value meal of three for one?
Zomato does that all the time.
Did you know that was a business model Zomato followed? Or were you too busy enjoying the box meals?
Well! The bundling business model allows ventures like Zomato to sell two or more products as a single unit and charge customers a price usually lower than the price charged for selling the products separately.
This is probably one of the best ways to add value to your customers and keep them happy with your services.
And, yes! Customers are happy to get three items for the price of one.
Even though the profit margin might shrink for giving away goodies for less a price, this model does help businesses to clear their inventories off items that are harder to sell.
Burger King is one such burger giant that follows a bundling business model.
However, such a model is not restricted to food outlets only. IT companies like Adobe Creative Suite and AT&T follow the same model to do their business.
#4: Razor Blade Business Model
Now, the traditional razor-blade business model implies companies offering initial purchases for a lower price with the understanding that customers will continue their purchases for a higher price.
On the contrary, the new razor-blade model allows companies to offer goodies at a higher price and then push smaller items at a lower price.
This is what we call a reverse razor-blade business model.
It starts with the sale of high-margin products, followed by the promotion of low-margin complementary products.
Consider Apple’s business model for once!
The company has adopted the reverse razor-blade model to perfection.
Once customers purchase high-margin Apple products like iPhone or MacBook, the company pushes other additional items at a lower rate than the high-margin goods.
#5: Franchise Business Model
Franchising as a business model is not a new term, of course.
All the food outlets in Asian countries like India survive on the Franchise business model.
Starbucks, Domino’s, Subway, McDonald’s, and the UPS Stores are good examples of how a franchise model runs.
The franchise owners adapt or purchase another already established and successfully running venture’s ownership stake. The franchise holder will adopt the same business strategy, use the same distribution channel, offer the same items as the Franchisor and earn a certain percentage of the revenue.
It creates a win-win situation for both the franchisee and the Franchisor.
This business model can spare the Franchisor from incurring hefty operational costs of running its business chain in other locations or countries.
Instead, the franchisor makes a good profit by collecting licensing fees and enjoying a portion of the revenue generated from each franchise.
#6: Crowdsourcing Business Model
Crowdsourcing as a business model is fairing well in the new normal.
It always fared well even before the pandemic made its appearance in the world. But, the current tumultuous economy is giving a boost to the model.
If you are wondering what the crowdsourcing business model is, consider the examples of Wikipedia, YouTube, and IMDb. Try to figure out how these platforms make money.
These types of online platforms do not invest money in hiring talents. Instead, they make money by tapping into the vast network of skills and influencers on the world wide web.
Moving forward, the next in line is –
#7: One-For-Charity-Others-For-Sale Business Model
As the name suggests, this business model involves some charity and generates revenue by selling other products or services.
For a better understanding, consider the examples of TOMS, SoapBox, Smile Squared, and Warby Parker.
All of these ventures follow this model, which is popularly termed social entrepreneurship.
The model allows companies and customers to get their hands dirty (not literally meant) in philanthropic work. Companies donate one item to a charitable cause for every purchased item.
There are other types of business models; describing each of them will be equivalent to writing an entire book.
We must understand that all these business models are designed to help companies make money. But, if these exact ventures fail to understand the change in the direction of the wind and change their direction accordingly, none of them will survive for long.
Why is Innovation Needed?
You cannot follow one business model throughout.
Many companies do. But, if you want your business to grow like Amazon, you must expand your horizons and try new business models to fit the changing tides.
We call business model innovation – something we already spoke about earlier in the article.
To better understand why innovation is needed, let’s cite the example of Kodak.
Kodak once accounted for 90% of film and 85% of camera sales in the US. It was a giant, for sure! It defined an Industry, just like Coca-Cola, synonymous with the cola soft drink market.
But that was before digital cameras and smartphones entered the market.
Many still wonder could Kodak’s end have been averted.
Of course, it could have been if Kodak had transitioned to digitalization on time and changed its business model. But, the company was hesitant to adapt to the inevitable change even when the company’s engineer, Steven Sasson, created the first digital camera.
Kodak missed the business opportunity which could have changed its fate. Because the management feared a shift to digitalization could make its existing products irrelevant and impact its revenue.
The management overlooked and ignored the first move that could have saved Kodak from its ultimate demise. And that ultimately led Kodak to file for bankruptcy later.
The Bottomline is…
Companies need to innovate and evolve with the constant change in the market. Amazon is doing it and so do others.
You must understand which business model will help you kick off your new idea and which will help you adapt to the new normal.
And, you have to change accordingly.
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