Taking the plunge into starting your own business is an exciting but often terrifying endeavor. You might have a great idea, but you don't know how to turn it into something worth money. That's where the idea of a business model comes in..
Introduction: Getting Started with a Startup Idea & Why You Need a Business Model?
A business model can help you form your ideas for who will buy your product, how they will pay for it, and what features they want. It can also help you figure out how much money you need to start up and if the company is worth the investment.
This section will give you everything you need to know about what a business model is and how to make one for your validated startup idea.
What Is A Business Model?
A startup business model describes how a company earns income and profits from its operations. Startups mostly go for highly scalable business models that allow them to operate with few assets,zero heavy investments, and cheap capital expenditures.
A business model is a set of systematic ways to create, deliver and capture value. It is a blueprint for how your company will make money.
In the digital age, the number of businesses that have a clear and well-tested business model is on the decline. This may be because it seems like you don’t need one as long as you have an idea that has gone viral or because people think they can create anything without having to worry about making money.
Importance of a Business Model
A business model aids in a company's consumer base targeting. It helps in the development of marketing plans as well as income and expense projections,taking into account the various business models and clienteles.
In order to learn about the potential accessible targets in the market, you must design a business model. Understanding and choosing the appropriate business model allows companies to better understand the financial contributions they can make in the initial stage of their business.
A person can learn more about a company's products by evaluating its business model, as well as what business tactics it can build to grow and sustain future prospects.
The other benefits of business models include the following:
- A good business model gives a company a competitive advantage and helps them understand its own operations better.
- A powerful business model gives the company a good reputation in the market. Also the owner is well-versed in how to carve out a space for the company.
- Making a good business model from the outset leads to a well-established finance plan, which results in increased cash flows and rapid profit growth.
- A pre-developed startup business plan enhances the organization's financial stability.
Business Model Types
When you look at startups in the market,you will notice that they are categorized into different types. These categories exist because startups in the market can choose to go after different business models. However, not all of these models are necessarily profitable for startup companies.
Some of the most common business models that startups use today are low-risk startup models.
Low Risk/High Reward Model
A low-risk model is one where there is minimal risk involved when starting up the company. These businesses require little capital to get started, have fewer obstacles to entry than other company models, and have high-profit potential, making them an excellent alternative for people who wish to start their own business without risking everything. The best example of this is when a company sells its product with no upfront costs to them or its customers. This can be a team selling consultancy services, freelancing (selling skills), and much more. This type of model works great for people who want to sell products that they think will sell well in the market with very little investment on their part.
High Risk/High Reward Model
The most common business model is the high risk/high reward model, where the entrepreneur invests a lot of time and energy to build something that they hope will be successful. To achieve such a high degree of accomplishment, these people had to take significant risks. After all,successful entrepreneurship is inextricably linked to taking risks. Regardless of how strong your cash flow is or how much effort or time you put in, the end effect might be positive or negative. You must take a risk and be prepared for the physical, financial, and psychological stress that comes with establishing a business and keep believing in yourself and working hard to see the fruit of your efforts.
This is what you typically see with startups like Facebook or Microsoft. These tech giants undertook high risks and invested their time and resources in creating exceptionally unique and highly demanded platforms. Taking risks surely leads to miraculous evolutions in the history of the business world.
Best Startup Models:
There are two different types of best startup models:
- Bootstrapping is when an entrepreneur starts a business with their own time, skills, and resources. This self-funded business does not rely on the support of common financing methods, for example, crowdfunding,investment, or loans from banks.
- Scaling up is when an entrepreneur starts with a small business and then invests in making it bigger. To scale a business means opening the door to more work duties and creating opportunities while remaining cost-effective and meeting your company's demands without suffering or overstretching. It's all about adjusting to the increasing workload, clients,or users, and then delivering.
Perks of Choosing Bootstrap Business Model
- Retaining of Full Ownership: This business model allows the owner to fully own their business with zero shares inequity. Mostly when anyone starts a business based on investors' funding, they ask for a huge share in equity. Thus, they have a say in the decision making too. This is why Bootstrap is ideal in the longer run. The control is in your hand, and you get to do whatever you want.
- Gets rid of the unnecessary burden: When you start a business through a loan or investment, there is a burden on your shoulders to return it. Instead of designing a complete and long-term lasting business model, you work hard and focus more on earning revenue, even if that disturbs the essence of your business. However, with the bootstrap business model, you feel a sense of freedom. You focus more on maintaining the essence of your business and strategically develop ways to increase cash flows.
- Empowers Business Owner: To fully start a business on your own empowers a person. Starting it from scratch and building it to the ground up highly motivates a person to keep going and gain success. We recommend to follow our checklist for starting a business.
Perks of Using a Scaling Business Model
- Creates Efficiency: When a business is ready to expand at the right time, it efficiently brings in more profit for the corporation. They are able to deal with different circumstances while still remaining rigorous.
- Creates Growth Consistency: When the business has grown into a stable state, the owner makes sure to scale it to keep the growth factor consistent. Though it seems like staying in the same state is safe, businesses don't last long if they aren't growing. Scaling a business makes sure growth is gradually increasing with time. The owner makes sure never to stop at some level; he keeps on taking new steps on the ladder while ensuring he doesn't trip at any step.
- Adaptable to Tough Situations: Creating flexibility ensures that the business is able to adapt to tough situations and thrive nonetheless. Businesses not only scale just because of growth; they may have to scale to create new opportunities for income generation. The market is ever-changing, and one cannot totally depend on a single business to maintain sustainability. Scaling your business to another aspect makes your corporation more adaptable to unplanned events. If a part of your business is being disturbed by a change in the market, you can smoothly earn from another domain of your business.
Sizes of Companies and Their Typical Business Models
Different kinds of companies operate at different scales in different industries. Some start-ups are operating in the early stage at the beginning of their life cycle. For example, they may be operating small brick-and-mortar shops but not yet an online store.
Others will start with an online store and grow to include physical stores at a later point, while some might do the opposite. There are also companies that don't have either brick-and-mortar or online stores and focus on other channels like social media only.
A start-up can be a variety of different types, but the most common categories are:
- Business-to-business or B2B,
- Finally, consumers.
Technology startups are focused on developing a new product or service with the aim of disrupting an existing market. Since technology is in popular demand nowadays, tech startups are now focusing more on innovativeness, scalability, and growth.
Business to Business (B2B)
A business to business startup offers a product or service for sale to other businesses. Some B2B firms produce a component of a final product and sell it to distributors, who then sell it to their own customers. Moreover, a business-to-business deal can also occur when a company produces a product used as a component in another company's product. Intel, for example, sells Apple processors for use in the Macbook Pro.
Business to Consumer (B2C)
Business-to-consumer(B2C) refers to the process of selling products and services directly to customers who are the end-users of the company's products or services. Consumer startups sell products and services to consumers.
Some early-stage start-ups will have an initial product or service that they offer for free. they do this to acquire customers and improve the product before taking it live. They may also offer their customers other products and services in addition to their core offerings in order to generate revenue while they build up their main offering.
How to Choose the Perfect Business Model for Your Startup?
It is not easy to decide on what business model to use. That is why there are tools available to help you with this choice.
Business Model Canvas: The canvas is a diagram used to create a visual representation of a startup's business model. A blank canvas can be found online and needs to be filled in with five important components: value proposition, customer segments, key activities, channels, and revenue streams.
St. Gallen Business Model Navigator: This tool can help you pick the best model for your business needs, and it will also provide templates for all models you might need when starting your own company.
If you want to start raising money you should know how to make the most out of your pre-seed funding round.