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Your Startup’s Business Model: What it is and Why it Matters

Elevate Perspective

Your Startup’s Business Model: What it is and Why it Matters 

 

A business model is a blueprint for how your startup will make money. It outlines what your product or service is, who your customer is and how you will generate revenue. Having a clear and well-thought-out business model is critical for any startup’s success. Without a sound business model, it will be very difficult to attract investors, customers, and talent. 

What Audiences Care About Your Business Model and Why 
  • Investors: Investors provide funding to your startup, but before they do that, they will want to know your business model. Understanding how you plan on making money is critical to their analysis of whether your startup is a good investment and may be the reason you secure a round of funding. 
  • Customers: Before a potential customer decides to make any purchase, they will want to understand your business model. They need to know what your product or service is, how much it will cost them, and what the value proposition is. If they don’t see a clear value proposition, they likely won’t make a purchase.   
  • Talent: Attracting top talent to your startup is essential to its success. These individuals will want to know your business model so they can understand the opportunity they have to make an impact. They will also need to know that there is a path to profitability so that they can have confidence in the long-term prospects of the company. 
Types of Business Models 

There are many different types of business models startups use. The type of business model you choose will depend on the product or service you are selling, your target market, and your overall goals for the company. The type of business model you choose will have a direct impact on your startup’s success so choose one that aligns with your goals, product, and target market. 

We break several of these down into direct and indirect models:  

  • Direct – The consumer pays directly for the product or service. 
    • Product/service sales. This is the most straightforward way to make money. You sell a product or service to consumers or businesses and make a profit from each sales.
    • Licensing. If you have developed a piece of technology or software that others want to use, you can license it to them for a fee. This model is often used by companies that develop patents or other forms of intellectual property. 
    • Subscription. With this model, customers pay a recurring fee to access your content or service. This works well for businesses that offer ongoing services or have a lot of digital content, such as online courses or magazines. 
    • E-commerce. This model involves selling goods and services online. If you have an online store, this is the business model that you’re using. 
  • Indirect – The consumer does not pay directly for the product or service, but indirect costs are incurred.  
    • Affiliate. This model allows you to earn a commission on sales that are generated from referrals. For example, if you have a blog about travel, you could recommend hotels and earn a commission on each booking. 
    • Distribution. With this model, you earn a fee for distributing someone else’s product or service. This is often used by companies that have a large network or reach, such as an app store or website.  
    • Advertising. This model involves selling advertising space on your website or blog. If you have a large audience, this can be a great way to make money.  
    • Transaction Fees. If you facilitate transactions between two parties, you can charge a fee for each transaction. This model is often used by companies that provide payment processing services or marketplaces. 

Note for Life sciences companies: please describe business development strategies when describing your business model (funded through FDA approval, licenses to pharma partners, etc.) 

Other common terms you may hear: 

  • Direct-to-consumer (D2C): Companies produce their products and distribute them via their own channels  
  • Software as a service (Saas): Software is provided on a subscription basis for customers to access and use, typically through a web browser. 
  • Freemium: Users can get a free version of an app or tool but would need to pay for a subscription to access additional features. 
  • Razor and blade: A business model where one item is offered at a low price (or given away) to encourage sales of a complementary item. 
  • Peer-to-peer (P2P): Transactions can be conducted directly between individuals, without the need for a third party. 
How to Create a Business Model That Works for Your Startup

There are four main elements that you need to consider when creating a business model: the value proposition, customer segments, channels and revenue streams. Let’s take a closer look at each one. 

The value proposition is the unique benefit that your product or service offers to consumers. It’s what makes your startup different from all the other businesses out there.  

Customer segments are the groups of people that you are targeting with your product or service. You need to identify who your target market is and what needs they have that you can address.  

Channels are the ways in which you reach your target market. This can include online channels, such as social media or paid advertising, or offline channels, such as brick-and-mortar stores or events.  

Revenue streams are the ways in which you generate revenue and will vary depending on which business model you choose. 

To create a business model that works for your startup, you need to consider all four of the elements listed above and how they work together. Keep in mind that your business model can and should evolve as you learn more about your customers and the market. 

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