When it comes to thinking about business models in today’s world, there’s a lot more to it than simply what the business does. While it’s still important to think about the type of business you want to run, be it selling goods, services or information, software, apps or even running a marketplace, it’s also critical that you consider the different strategies out there for monetizing it. This is especially the case if you are seeking funding for your start up, because no matter how awesome your idea is, no investor is going to back you if it isn’t going to make money.
But first let’s start with the basics: business models. For the entrepreneur considering an online business, there are number of options to choose from, each with their pros and cons. You’ll find some of the main types of business models outlined below.
Starting a business selling services is an easy transition for solo operators. Graphic designers, translators, accountants, consultants, tutors and many other professions lend themselves very well to this model. Selling services can also apply to services like web hosting, supplying themes and templates or on-demand entertainment that don’t require ongoing labor, to “middlemen” businesses that provide the services but outsource the work to other people. The big benefit with this model? It is an easy business to get going because in most cases there’s no real infrastructure required. The main disadvantage is your business will be hard to scale if it requires you to do all of the labor to provide the service. This is eliminated however in examples like website hosting or entertainment (think Netflix or Spotify) where you receive recurring subscription fees for minimal labor, and with services like graphic design, your business will grow much larger if you can remove yourself from the labor aspect by hiring other people to do the work.
Selling goods that you make yourself or source from third parties is easier than ever with the growing number of online marketplaces like Amazon, eBay and Etsy. As long as you have a strong market for your product and a good profit margin built into your operations, it’s relatively straightforward to set up an online store. This type of business, however, doesn’t typically offer the highest profit margin and is very labor intensive. Not only do you have to find customers, but you have supply and delivery to worry about as well. If you have a really great product and a sound business model though, don’t let the delivery aspect put you off, as there are many fulfilment services out there that can take care of that side of your business.
Building a Marketplace
Online marketplaces offers a platform where buyers and sellers of goods or services can conduct transactions. These are businesses like Uber, Airbnb, Freelancer and Amazon. People need something (a car ride, a place to sleep, a freelancer or a product) and are connected with people who can provide it (drivers, hosts, freelancers and sellers). The marketplace makes money by taking a percentage of the transaction and/or charging fees. Airbnb for example charges a service fee to the guest when they make a reservation plus a second fee is collected from the host when a booking is complete. Marketplaces offer great scalability and potential profit, however, they are one of the more difficult start ups as it can take a lot of time to build demand.
SaaS & Apps
Software and apps fall into their own category here because they are kind of both goods and services. Many software products are now served as SaaS (Software as a Service) where the software is delivered for a monthly or yearly subscription fee rather than a one-off purchase. Examples of these types of services include Hootsuite (social media scheduling and analytics platform), Dropbox (file hosting service) and Citrix Go To Meeting (web-hosted meeting services).
Apps on the other hand are often free or charge a one-off low cost, although there are a growing number charging subscriptions. Platforms like Instagram and Facebook that are free to the consumer are monetized in other ways, primarily advertising, although there are also other opportunities for revenue like the collection and selling of consumer data. Many lifestyle apps like fitness or music apps offer enough value that consumers are prepared to pay a small fee.
The biggest benefit of SaaS and apps is the potential for scalability and profit. If your tech can fulfill a need or offer a competitive advantage to an established, high demand service, it has high-growth and profit potential. The difficult side of this model is the software itself. Development is time consuming and costly, and it’s also a constant part of the business, either fixing bugs or adding to or optimizing the existing platform
Data & Information
If you have specialized expertise or information that other people need or want, then you have an information selling niche. Many entrepreneurs like Tim Ferris and Jeff Goins built their business empires selling information in the form of e-books and training courses. Other businesses like Skillshare offer a subscription service that allows subscribers to access many different training courses, and then there are straight up data service providers that sell consumer and business information to marketers. This business model offers one of the highest profit margins, there’s virtually no investment cost aside from time (if your expertise is the information being sold), and the opportunity to branch out into other “expert” areas like speaking tours, publishing, endorsements and even product development. Finding your niche here is key and so is building your audience…unless you’re already successful and famous.
The next thing you need to think about once you’ve decided what you’re selling is how to monetize it. Below is a quick list of ways businesses today are approaching their pricing and profit structures.
- Commissions: Rather than charging a set fee for a service, some businesses work on a percentage of sale. This type of model works for everything from marketplace businesses to commission-based direct sales companies like jewelry giant Stella and Dot.
- Subscription Model: While many of the businesses utilizing the subscription model are SaaS or online service offerings, this model is employed for goods as well. Barkbox, Dollar Shave Club and Play! By Sephora for example, all send products each month for a monthly subscription fee.
- Free/Premium Model: This is seen quite frequently now. Many companies offer a free basic service in addition to premium services that members pay for, with the idea being that you’ll try the service risk free and love it so much that you’re prepared to pay for full access with all the bells and whistles. Good examples of this biz model include Later, Hulu, LinkedIn and Livestrong My Plate.
- Auction Model: Sites like eBay and Priceline have been using this model for many years, allowing the buyers to bid on the items they want based on the seller’s terms and conditions. This type of pricing structure generally requires a reserve or minimum bid.
On the next installment of Entrepreneur Life, we’ll begin delving into the ins and outs of starting up your own business. In the meantime, put your business hat on and start thinking about what – and how – your new business venture will come to life.