In the world of startups and small businesses, a solid foundation is essential for any company. This foundation is built based on the choice of an excellent business model, a plan that describes how your enterprise generates, delivers, and captures value. Choosing the right opportunities can be the difference between steady growth and falling behind.
Why Does the Business Model Matter?
According to research by IBM and Oxford study, 90% of startups fail within the first 5 years. One of the major causes of such a high failure rate is having a wrong or non-sustainable business model.
A good business model allows your startup business to fulfill real customer needs, create sustainable revenues based on this, and adapt to market requirements, creating a suitable framework for long-term development and profit-making.
Different Models of Running a Business
Here’s a breakdown of some different types of business models that have proven popular among startups and SMEs:
- Subscription Model: It is a business model in which customers make regular, periodic payments to access a given product or a service. Some traditional business models are subscription models, which favor SaaS companies, streaming services, and fitness studios.
Some examples of the subscription model are YouTube and Netflix, where the subscription model creates customer loyalty and a constant inflow of money.
- Netflix: Founded in 1997, Netflix is one of the first companies in the world that apply the subscription video-on-demand business model; Its overall revenue in 2023 was $31.61 billion with more than 238 million paid subscribers worldwide.
- Spotify: This giant in the music streaming business did €12.7 billion in revenue in 2023, primarily through its 210 million paying customers.
- Adobe Creative Cloud: Adobe published its revenue in 2023 which was $17.61 billion, mainly derived from the subscription-based Creative Cloud. The subscription economy itself is predicted to grow in 2024 to more than $1 trillion, evidencing its popularity.
- Freemium Model: This model offers a simple version of a product or a service at no cost but access to a wider range of services at a charge. Free premiums have proved to be beneficial for developing a vast number of users, who are willing to overpay for value-added services. A good business model example belonging to the freemium strategy is Spotify.
- Spotify: Apart from the paid subscription service, the company makes its profits from its ads that target the free users. This was made possible by the freemium strategy because by 2023, Spotify got €3.5 billion from advertisement.
- Dropbox: This file-sharing service which operates on the freemium business model generated $2.33 billion in sales in the year 2023 due to millions of people who pay for extra space.
- Marketplace Model: Considering it to be a middleman between buyers and sellers, the marketplace business model gets a cut from every sale that goes through the platform. Amazon and IndiaMart are perfect examples of companies using this model, as they retail virtually anything from toys, food, and personal items to fashion and even home services.
- GeM Portal: GeM, proposed and implemented by the Government of India, is an online platform for public procurement through which the buyers can purchase products and services from the sellers registered with the GeM. Various organization procurement procedures have been made effective, many expenses have been cut short, and there is more accountability. In more than about fifty-two months or four years and four months, GeM enabled the worth of transactions to cross over rupees four lakh crore and the total registered sellers and service providers count cross above seventy thousand.
- Amazon: Third-party Marketplace Gross Merchandise (GMV), excluding the services provided by the firm, is another key driver that reached $332 billion of sales in 2023, combined with Prime Memberships, which is making Amazon remain as the world’s largest e-commerce marketplace.
- Etsy: Focusing on niche and customizable products, Etsy’s marketplace approach generated $2.8 billion of revenue in 2023, with continuous growth from commissions.
- Advertising-Based Model: This model is commonly used by websites, especially social media platforms and news sites, where users spend significant time engaging with content and clicking ads, generating revenue through increased ad exposure.
- Meta (Facebook and Instagram): This easily distinguishably advertising-focused platform rakes in $117.1 billion in revenues in the year 2023 making it a perfect example of this model (Annual Report).
- Google: By way of ads as Google Ads and YouTube ads, which mainly contribute to the company’s revenue, it realized $224 billion in 2023 (Being).
- Direct Sales Model: This is a slightly more traditional business model whereby the company focuses on selling the goods or services directly to consumers either through the company-employed salespeople or through company-owned web stores.
- Apple: Although well known for innovation, the company’s direct selling approach played a part in its staggering global revenue of $394 billion in 2023, from direct selling via stores such as Apple Stores and Apple’s Website, among others.
- Nike: Nike’s total revenues in 2023 stood at $51.2 billion; however, the direct sales approach of delivering its products reached $22 billion (Source).
The kind of model you should adopt depends on a good and well-thought-out business model generation strategy, the right definition and understanding of your value proposition and your target market, and consideration of your limitations.
Business Model Innovation
The business environment is constantly evolving, presenting companies with shifts in the ways they operate and deliver products and services. Here are some new business models that have emerged and brought major changes in several industries in recent years:
- Circular Business Model: This model focuses on resource utilization and wastage minimization, an area that is becoming increasingly important to environmentally sensitive businesses.
An excellent example of the circular business model application is IKEA. It has also practised sustainability to an extent, for instance, by selling recyclable furniture and urging clients to return used furniture for resale or for recycling. IKEA also sources renewable materials and has a policy of making products that are designed to have a longer life span than they are actually expected to be used for.
- Digital Business Model: As technology has continued to evolve, different ways of doing business online have emerged in many industries. Since the introduction of internet-based transport services like Uber and Ola , transportation has become easier and more flexible than traditional taxis.
- Franchise Business Model: The franchise business model enables fast growth by taking advantage of the brand and operating system, which it already has in place. The McDonald’s and KFC types of franchises are perfect examples of how a business can achieve growth through scalability franchising.
Choosing the Right Model for Your Business
Selecting the right business model for a start-up requires consideration of several factors:
| Factor | Description | Importance | Considerations |
| Target Audience | Identifying and understanding the customers beyond demographics and understanding their needs. | Helps to improve and work the business model out. | Customers’ preferences, habits, influences, and pay preferences. |
| Value proposition | Show the unique value of your product. | It needs to attract customers and serve their needs. | We need to work better than our competitors to stay relevant in the market. |
| Cost Structure | Understand all the costings of the business. | Analyse if the business model is profitable and sustainable. | Fixed and variable cost analyses. |
| Scalability | Understand the possibility of the business model to grow. | Be sure that this model serves without compromising the quality when the demand increases. | Need to be adaptable for any changes, like technology, infrastructure, and resources. |
Conclusion
Hence, choosing the right business model among many is necessary for success. It is necessary to solve the current problems prevailing in businesses to grow and develop. Indifi understands this point and has designed a range of financial products to help you scale to your desired new business models.
We offer a flexible line of credit to ensure you have the necessary funds for emergency needs in your business model innovation. We’re committed to being your partners in sustainable success.
FAQs
- What are the biggest challenges startups face when choosing a business model?
Startups often struggle to clearly define their target market and value proposition, which can lead to selecting a model that doesn’t match customers’ demands or fails to generate sustainable revenue.
- How can I test the workability of my business model?
To test if your business model works, create a basic version of your product. This allows you to get feedback from potential customers. Early testing helps confirm your model and improve your product or service before launching fully.
- Is it possible to change my business model after launching?
Absolutely! The business environment is ever-changing, and successful companies often adopt new business models or adjust their strategies to meet evolving market demands.