Business Model: You Don’t Have One Until Customers Pay You!
If you’re an entrepreneur, there’s a good chance you know what a business model is and have probably already built yours. But are you sure that you’ve spent enough time making sure it covers everything it needs to cover?
The reason we ask this question is because most entrepreneurs don’t spend a reasonable amount of time on designing their business model. Statistically speaking, it’s a vital piece that will help you create a profitable outcome through your efforts. All of the information that you collect about your customers, target market and industry, in general, comes into play.
The Case of Google
Google wasn’t the first search engine. But that’s not important. The thing to remember here is that it was Google’s business model, and not its technology, that set it apart from the competition and made it the giant we know today.
Prior to Google, search engines had the business model of fitting as many banner ads as possible and charging as much as they liked. Google changed it by using simple text ads with targeted keywords for every search.
Build it From the Start
Your business model captures the “what” and most importantly “how” of your startup. It is absolutely critical that you spend time deciding what your business model will be for value capture. Don’t be lazy and copy-paste what’s already going on in the industry. It won’t lead you to become an industry leader.
As businesses scale up and become bigger in terms of operations and customer base, it becomes difficult to change the business model. As a young startup, you have a clear advantage of factoring in on day 1 what your users want.
You Don’t Have a Business Until They Pay You
The much spoken about- Freemium and “we will decide how to make money later” are not really business models because they are often backed by investors’ money. You only have a business model when customers actually pay you.
Free will generally get many people to try your product and reduce the cost of customer acquisition but that is it. You cannot qualify whether those customers will be ready to pay you even a single penny.
A simple example of this is that Instagram was not a sustainable business until Facebook acquired it and made it a part of their advertising assets.
Most Common Examples of a Business Model
One time charge, ongoing maintenance contract: It is the most common type of business model and you probably see this everywhere around you.
Subscription model: This model is getting very popular with time. Although most commonly seen in the software industry, it has gained popularity across sectors now. Popular examples are Evernote and Spotify.
Consumables: Here, the initial product is inexpensive but the consumables are required to be bought time and again, a simple example being Gillette razor and its blades.
Usage-based/pay per use: The more the consumer uses, the more they pay. For example, access to a gaming arena.
Microtransactions: This is a hybrid variant of a one-time charge and pay per use. For example, merchant transactions with Paytm machines.
Upselling addons: This is another hybrid variant- but of consumables and one time charge. The initial product is usually a low margin one (even loss-making) but add-on products usually have a high margin. For example, a mosquito repellent liquid sold for a higher price after selling the initial machine and liquid combo.
Hourly rates: This is primarily based on the human effort involved in the activity. The most famous example is the on-demand services by Urban Company.
Franchise: In this case, others pay you for the right to implement your brand and its standardized supplies. McDonalds works on a franchise model.
Licensing: If you have intellectual property such as design or music, your business model can be based on licensing it out.
Others: There are many others beyond these that use bits of different business models. You don’t need to stick to any one in particular. Feel free to create a combination and invent your own.
Key Things to Capture While Designing Your Business Model
Perceived Value: When you build your product, you focus on the core value you bring to the table for your clients. Use your value proposition analysis and reflect on the worth your end-users will get and any prevalent risk that they might not be able to derive the value from your offerings.
Customer: Customers are central to any business. Just like we mentioned earlier, without a paying customer you essentially don’t have a business. Studying your customers thoroughly can give you valuable insights into their budget, capacity to pay, the preferred method of payment etc. Because the business model shows your strategy to make money, customer information can come in very handy.
Competition: Tracking your competitors and their business model is also useful in narrowing down to yours. You can see the different models bring used in the industry and the ones which seem to be doing better than others. Take inspiration from them but also check if you can gain any advantage by developing a different model.
Sales and Distribution: There are a few businesses that depend on distributors in order to sell products. If you are one such startup, then you have to take into account your distribution channels and partners while also ensuring that they have enough incentives to sell your product. Map out the routes through which your customers can access your offerings.
Bottomline
A business model needs to be holistic in nature and cannot be applied without proper research. All the information you gather about your customers, the market, the competition, etc. will play an integral part in framing your model. Encourage your team to spend time on these factors so that you get it right from the very start. You never know, your business model may turn out to be your biggest competitive advantage!
