Startup Business Models

Startup Business Models

Tech Startup Business Models are how you make money from your product of service. Your Idea is Unique – But Your Business Model Isn’t! There are a group of known business models, key performance indicators, and conversion metrics.

Looking for a Startup Financial Model Template? Go here

What are the Startup Business Models?

After years of pursuing my own ideas and helping other product startups with their ideas, I’ve become more and more convinced that though the startup business idea is/may be unique, the startup business model is seldom unique.

I’ve outlined the business models below and will fill in with more detailed posts for each model over time.

Your business model is defined by who pays you for the service or product you provide. For example, Facebook’s product benefits the consumer, but their primary business now is advertising. So they are in the B2B category for Advertising. Also, Search was moved from B2C to B2B to answer the “who pays” question.

Remember, at launch you get one business model. At scale you can choose multiple models, but you have to survive long enough to get to scale before you get the luxury of having multiple business models.

The target companies here are tech or Internet product startups, not services startups. If you have a service business, only one model below fits your business.

You won’t find SaaS listed below as business models. SaaS is a delivery mode, just like boxed software was a physical delivery. It tends to be used interchangeably with subscription, for B2B or B2C.

Business to Business (B2B) Model – Nine Startup Business Models post.

  1. B2B Commerce – Example Grainger
    1. Grainger is a wholesale supply company with a $15B market cap. This ordering site shifted the expense of ordering from their counter to the customer.
  2. Subscription – Example – detailed post
    1. There are so many great examples now of B2B subscriptions; I wanted to highlight one of the frontrunners in Salesforce. One of the things they did that was masterful was recruited sales people directly (cheap for 5 users or less) who would then expense it back to their company.
  3. Search – Example Google
    1. Google’s model on search wasn’t original (at least according to Yahoo’s lawsuit). The Pay Per Click (PPC) model was the monetization option for search results.
  4. Advertising – Example Facebook
    1. Facebook delivers consumer eyeballs for advertisers. You’ll need at least 1M uniques a month to your site to monetize this way however.
  5. Productize a Service – Example MOZ – detailed post
    1. Services business (Consulting) usually generates 35%+ Gross Margin. Given that pull of profit $, very few companies make the shift from services company to product company.
  6. Marketplace – Example Alibaba
    1. Nearly everyone has used eBay or similar. Alibaba’s IPO and global presence is what people know it for in 2015. But this marketplace was founded in 1999.
  7. Transaction Fees – Example Square
    1. Square launched with a replacement for credit cards like PayPal and take a percentage of every transaction as their payment. They’ve since expanded into Point of Sales (POS) services.
  8. Lead Generation – Example Mint
    1. Consumers are the product to whom Lead Generation companies are selling. They are a business that sells other businesses (consumer) leads. They are paid for the lead, not a transaction. Sometimes this is a great customer experience like Mint, but with others, like Insurance, it’s a bad customer experience.
  9. Combination – Example Uber
    1. Uber is a business that created a marketplace that innovated around transaction fees (the driver doesn’t control the price like an eBay seller).

Some Models that work at Scale

I’ve listed a few other business models that don’t make the list, given the criteria of viable models at launch – vs. scale.

  1. Big Data – Example PatientsLikeMe
    1. This is a great business model but will require capital to get to a scale point where you will have enough data to monetize the data. I’d also include the sensor market or Internet of Things (IoT) market in this category.
  2. Panels – Example Toluna
    1. Surveys of precise groups that can be used as market research is a unique business model, that again requires a level of scale.
  3. Multi-sided Marketplaces – Example Etsy
    1. Like the general marketplace model, you have to build product first into the model. In a multisided marketplace you’ve increased your complexity which will again require time.
  4. Nonprofit – Example Startup Weekend
    1. I have to give a head nod here to UP Global, the parent of Startup Weekend and Startup Next.  The company is a 501(c)(3) that doesn’t make money through its events, but rather through sponsorships. I’ve moved  this off the list because it’s not a business model used by tech companies.

Business to Consumer (B2C) Models – 10 B2C Startup Business Models.

I want to give credit here for a two-part post in TechCrunch Tear Down by Steven Carpenter that was the best resource for B2C in 2010, post here that details some of the metrics and models. I’ve updated the models based on the funded companies research.

Also, note that New Media as a category isn’t really a business model because it no one is paying at least until they get to a scale model. However, it’s also the most compelling model if you have the market traction.

  1. New Media – Example Twitter
    1. This model is actually the “no model required” model. If you have a business that acquires users via virality or K-factor, you don’t really need to start with a business model. But for the rest of us mortals, you’ll need to choose one model from the list that follows.
  2. Gaming – Example King
    1. When the app store launched, the model for games was the $0.99-$4.99 per download. This model was quickly replaced with in-app sales. Likely the world’s best business model – sell virtual stuff for real money!
  3. B2C Commerce – Example Amazon
    1. Amazon may not have been first, but it’s clearly the biggest e-commerce site on the web. They now sell some of their own products, but its start was in books, a product that was the same, regardless of where you purchased the product.
  4. Subscription – Example Netflix
    1. Netflix cracked the code on subscription for consumers. No freemium, just subscribe.
  5. Subscription – Freemium/Premium Example Spotify
    1. Spotify is a great example of free to paid version of subscriptions. The reason freemium subscription isn’t listed in B2B is that, usually, Business customers won’t purchase a de-featured product.
  6. Marketplace – Example eBay
    1. Ah, eBay! You have sellers (they came first) and buyers; they find each other and transact on your website. It’s a brilliant and really hard business – because you have to build both sides of the market at the same time.
  7. Transaction Fees – Example AirBnB
    1. I love AirBnB, they created underutilized inventory – vacant rooms and your house – and made it easy to book and transact over the web. For creating a market, they charge a transaction fee.
  8. Lead Generation – Example Groupon
    1. This one is super close to Mint, listed as B2B above, but the benefit is more tangible to the consumer vs. the business in this circumstance.
  9. Hardware – Example Jawbone
    1. Hardware is the classic example of retail pricing less cost of goods sold. It’s great to see sites like Kickstarter (transaction fee) helping launch more hardware companies by providing pre-paid purchases.
  10. Rental – Example Chegg
    1. Chegg was a great idea of taking something that was ridiculously expensive in the physical (text books) and making them available as a rental.

What about B2B2C or B2G?

Finally, here are a few of the more complex and niches examples.

Business to Business to Consumer (B2B2C) is the model that LinkedIn uses now at SCALE. That isn’t the model they started with, however. They started with the New Media model and, with a significant base of customers, started to monetize by selling access (subscriptions) to recruiters.

Business to Government (B2G) is where a business sells to the government. A dot-com survivor, Onvia is an example of this type of business.

Do you have questions about your business model? Think that I’ve missed one (or more)? Leave me a reply on the form below.

2 Replies to “Startup Business Models”

  1. Dave, I like these lists. They’re helpful for thinking about business model options.

    Three of the B2B models in your list seem quite similar: search, advertising, and lead generation. They’re all basically connecting businesses with potential customers, right? They mostly differ in the flavor of the lead. Google leads are rich in intent, but low in customer identity. Facebook leads are richer in demographics, but low in intent. Mint leads are rich in customer identity, but variable in intent (maybe the customer asked about a specific product or maybe not). It’s fair to distinguish these models because the core businesses operate differently to optimize their product. I wouldn’t want to overcomplicate the list by making it a hierarchy, but it can be worthwhile to point out similarities.

    1. hey Stuart, you’re correct, they are very similar. And you’re very right about intent of search vs advertising. The differences are in the Key Performance Metrics (KPIs) you’ll want to track, for example, Cost per Thousand (CPM) rate and Cost per Lead (CPL). In the case of CPM you’re charging the customer for delivering the advertisement regardless of the outcome, it will be established in your “rate card”. For CPL the value is in completing the form. In that way, the pricing can be very different.

      Thanks for the note.

Leave a Reply

Your email address will not be published. Required fields are marked *