If you are one of the people who has thought of seeking professional freedom, then you are not alone. A lot of us dream of breaking free from the 9-5 grind and becoming our own boss. As a matter of fact, we live at an age where it has never been easier to start a new venture. Conversely though, it has never been more difficult to survive the fierce competition and scale-up.
According to SBA (Small Business Association), over 20% of startups fail in their first year. And the number increases to a staggering 50% when you look at the first five years of operation. It is surprising though, especially when you look at the passion and energy with which people start their own businesses.
So, then the question arises, why do these startups actually fail? There are various reasons that come into play. Some of this includes execution, market demand, competition, etc. But one of the factors that spells the success or failure of a startup pretty early on, is its business model.
And what exactly is a business model? A business model is essentially your strategic plan which defines what problem your startup is trying to solve. And why your solution to the problem is better than the solution provided by your competitors.
In today’s blog, we will talk about 5 business models that have a proven record of success in startups.
1. REVERSE AUCTION BUSINESS MODEL
Let’s start with the reverse auction business model. As the name suggests, a reverse auction is one in which the roles of the buyers and sellers are reversed. In this business model, the sellers compete to win the customers and as a result, the prices tend to decrease.
The significance of the reverse auction model is that the buyers name their price for a certain product. And the winner is the vendor that can provide the product or service to the buyer at their asking price while still maintaining profit.
An example of the reverse auction model is Priceline. The company specializes in travel services. It was actually the first company that was based on the reverse auction model.
So how does the Priceline business model function? On certain occasions when the hotel (or motel/resort) bookings are less than anticipated. These hotels list special offers on Priceline and pay the company a small commission.
The auction has one vital attribute though. It is that you would be the sole participant. This means that the customers offer their cost for lodging in a certain community. The website then gives confidential deals from resorts, motels, and hostels that are tailored specifically for them.
The reverse auction model is a complete win-win system for the B2C market. This makes it possible to get massive profits on the percent of purchases.
Other companies that use this business model include FedBid, MyHammer, etc.
2. MARKET SHARE BUSINESS MODEL
This business model is laser-focused on acquiring market share as much as possible. It is for this reason, that if you look at some of the biggest companies today, they were recording losses during their initial years. That is because most of these companies were focusing more on gaining market share than making actual profit. One of the prime examples of this business model is Amazon.
So how it works is, you target a huge market. You sell a product at the most affordable cost with fast delivery and excellent support. This will help you gain consumer trust and, hence get you market share. As the business develops, you expand the product lineup, negotiate volume discounts with vendors, spend money on technology to accelerate up customer-response time, and cut waste from the procedures.
The goal of the business model is to penetrate the market. Once you establish yourself, you leverage your market share and slowly shift your focus towards profit. It is a long-term business model with a great risk factor, but the pay-off is equally great. No wonder that Amazon, the biggest eCommerce giant today, was based on this business model.
3. THE FRANCHISE BUSINESS MODEL
The next time you pull up to a drive-thru, you may not know it, but you are part of a franchise business model. So, what do I mean by this?
On one side, you have a company that is doing well and wants to expand. The problem is that the company does not want to run all those locations. They do not have enough regional awareness and are not familiar enough with those places. Or perhaps, they do not have enough money to expand in the region. So ideally, what they want is someone with local knowledge or some cash to run the business for them.
On the other side, you have someone who wants to start a business. Someone who knows the local market well. And finally, they have got some cash to invest. The two sides are a very good match for each other, and this is the basis of the franchise business model. So they partner up. Where the local person uses the franchise brand and popularity to establish themselves. And the franchise gets a chunk of the profit. The prime examples of this business model are franchises like McDonald’s, KFC, etc.
It is for this reason that people argue companies like McDonald’s are actually real estate companies and not just a fast-food chain.
4. MARKETPLACE BUSINESS MODEL
A marketplace is a platform that allows the selling and trading of other people’s goods or services. In essence, the marketplace business model is a sort of a mediator arrangement between the consumer and the provider. The profit is usually earned through commissions, membership fees, listing fees, lead fees, ads, etc.
Conventionally, there are three types of marketplaces i.e. goods, services, and then a hybrid style arrangement. There are countless successful examples that come into mind while thinking about the marketplace business model. Say, for instance, eBay, Airbnb, Amazon, etc.
Say we focus on Airbnb, for example, is the most prominent online platform for setting, hunting, and short-term leasing of private homes worldwide. The system enables individuals to position their extra space in listings and get extra income in the form of rents.
On the other hand, Airbnb permits travelers to reserve exceptional dwellings at locations of their choice, saving them money. And what is more is that it also allows them to interact with local people which sometimes turns into a bond that is remembered for a long time. In the case of Airbnb, the revenue comes from the commissions from hosts as Airbnb bills a set cost of 10% on hosts for each reservation through the platform.
5. FREEMIUM MODEL
The essence of the freemium company design (free + premium) is that users obtain access to basic functions free of cost, but to obtain advanced ones they need to pay an extra month-to-month fee.
The freemium applications are incredibly popular today. LinkedIn is the best example for this type of business model. If you are a user of LinkedIn, then you know precisely what I’m speaking about.
Linked-in is amongst the best examples of a prosperous freemium version. The free version lets users produce and maintain professional profiles, while the premium version offers all solutions that can be divided into two large groups: Networking, profile, job search, and Statistics / Analytics.
This business design makes it feasible to scale up early-stage start-ups, drawing in individuals without costly ad campaigns. It’s simple for consumers to start with a product. Also, the “one-month test duration” or the “Refund Assurance” is a much higher obstacle for new users to determine to make use of an item than a “Free” statement.
Various other firms that utilize this business design: Vimeo, Dropbox, Hulu, and Match.com.
TOO LONG DIDN’T READ (TL;DR)
One of the biggest decisions a person makes in their entrepreneurial journey is deciding their business model. A business model is one of the factors that spells the success or failure of a startup pretty early on. The Small Business Association says that more than 50% of startups fail in the first five years of operation. In order to be one of the 50% of startups that become successful after five years, choosing a promising business model is ever more critical.
In the meantime, there are some business models that have a statistically higher rate of success when it comes to success. Some of this includes, reverse auction where buyers set the price and then the sellers compete to see who best fits the requirements. The other model is to be laser-focused on gaining the market share, by selling products as cheap as possible (sometimes even at a loss), and then convert the gained market share to your advantage with time.
Similarly, another successful business model is the franchise model. In this case, an international brand partners up with a local merchant and establishes a mutually beneficial relationship. Marketplace is another business platform that serves as a mediator between the vendors and consumers. And finally, the freemium model is there which allows people to try their basic functions for free and then charging them for premium services.