When you are starting out with a new business, the term “startup business model” gets thrown out a lot. This happens especially when you are discussing your startups. While you understand the term “startup business model” a lot better later on, when you are starting out, it’s hard to understand what exactly it is, and which one will work best for you and your company.
Before we understand which startup business model works for you best, we need to understand, just what exactly is a business model.
A business model helps you explain which consumer problem your startup will help solve, why your business solution works better than that of your competitors and how big a profit your company can get out of this business.
It also helps you understand who exactly are your customers and who are the ones who are willing to pay the costs for your services.
Here are 6 types of startup business model:
1) Business-to-Business (B2B)
This kind of business consists of all the transactions and dealings between two companies/ businesses.
One of the best examples of B2B business model in India is Alibaba which is a wholesale B2B marketplace. Alibaba offers millions of products in over 40 major categories to its customers which includes consumer electronics, machinery, apparel and many more.
While Alibaba has many competitors like IndiaMART, IndiaTrade and recently launched Amazon Business, it will take some time to dethrone Alibaba in B2B platform as currently is the go-to platform for cross-border trades and helps all businesses be it small, medium or worldwide.
Advantages of B2B business model
a) Market Predictability
Compared to any other business strategies, the B2B business model has better market predictability and more market stability.
b) Better Sales and less competition
This business model also has less competition as compared to the other startup business models and thus, once you build a set of loyal customers, has a higher chance of better sales.
c) Lower Costs
As you are selling in bulk and as there is an effective supply chain management process, this online business model leads to lower costs for the businesses. Further, in most cases, the work is done through automation that eradicates chances of errors and undue expenditure that one faces in other business models.
Disadvantages of B2B business model
a) Limited Market
As compared to any other business model, especially the B2C model, this type of business model has a very limited market base. They depend mostly on volumes than the number of unique customers.
b) Lengthy Decision
Further, the majority of the purchase decisions in B2B businesses involve a long and lengthy process as there are two businesses involved and thus might have multiple stakeholders who need to take a decision and one or the other might raise an issue and thus take time to convince or completely say no.
c) Inverted Structure
As compared to other models, in B2B, consumers hold more power and decision making power than the sellers.
While your competition is limited, your consumers are limited as well and the majority of the times have additional demands like customizations, specifications and other things they want you to do so as to lower price rates, and in the process increase your expenditure.
2) Business-to-Consumer (B2C)
Business-to-consumer or B2C startup business model refers to those businesses that sell their services or products directly to the consumers or people who are the end-users of their product or service.
While there are many examples of B2C companies in India, the best one to look at would be e-commerce portals such as Amazon, Flipkart, and Snapdeal.
All three of the above-mentioned companies serve directly to individual customers and cater to the public and stand out with a brand image and voice.
Advantages of B2C business model
a) Lower Cost
As compared to any other startup business model, B2C has the lowest cost as you communicate and deal directly with the end consumer and thus eliminate the cost that many lose to brokers in between.
b) 24/7 shop and searchability
With the arrival of the digital age and e-commerce sites, the B2C startup business model now has the added advantage of having a “shop” open 24/7 in the form of the online site which also easy to search on the net and app platforms.
c) Sharing information directly with consumers
As compared to other business models, B2C has the added advantage of having direct contact with their end consumers. This enables them to share any information with them easily. In fact, you can also pitch your products directly to them via emails, apps stores etcetera.
Disadvantages of B2C startup business model
When you hear of sites like Flipkart and Amazon, you also hear of things such as online fraud and identity theft. Thus, you not only have to constantly upgrade your security system to keep at top of things, but you also have to take the backlash of even one-off security breach that still takes place despite all the upgrades.
Further. while you can convince people in the cities to trust you, when it comes to smaller towns and villages, it is much harder to get people to trust you than people they meet and greet personally.
b) Limited Interaction
While you can reach out to your consumers directly via app notification, popups, and emails. it is very limited in interaction which people have one on one and which also gives your consumer the option to physically see, smell and touch the products.
As compared to other startup business model, B2C has to deal with a huge competition which is present both online and offline.
While the online platform has made a huge dent in the Indian market, a huge chunk of the market is still controlled by physical shops. These shops act as a broker between B2C businesses and thus make a huge impact.
3) Consumer-to-Consumer (C2C)
Consumer to consumer or C2C business model is when consumers sell directly to consumers and the best and the oldest example for C2C transactions would be the classifieds section of any newspaper.
Be it when you are auctioning a product or selling it via OLX in recent time. In both these cases its the customer – not a business – selling goods or services to another customer and that too directly.
Advantages of C2C business model
a) The main advantage of C2C business is that sellers and buyers are reachable and the transaction is mutual and effortless.
b) Is possible for one customer to be a seller as well as a buyer
Disadvantages of C2C startup business model
a) The biggest disadvantage of C2C is a lack of quality control and no guarantee that the good is worth the money paid. This not only makes the consumer apprehensive but also is disastrous for any business reputation.
b) While selling via C2C, you cannot be guaranteed that you will get the payment the consumer offered. Parties many times stop cooperating after a transaction is completed and thereby can lead to improper shipping and exploitation of product.
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4) Subscription Based
The subscription-based business model is typically provided by software companies and/or app-based businesses. Here, they offer their product as a one-off purchase, and in return companies using their service enjoy recurring revenue in forms of monthly or annual payments.
The best and biggest example for this is service like Netflix and Hotstar who build a contract with different companies like HBO and offer their shows to end consumers in return for subscription fees.
Advantages of the subscription-based model
a) The biggest advantage is that it is easier as compared to some other models and huge customer acquisition and retention.
b) The business model also provides regular income. Instead of asking for a substantial up-front investment, they give the option of buying decision to the end consumers at a relatively low initial cost. This retains them for longer. This also gets people to invest Rs.500 per month for 12 months than investing Rs. 5000 on the spot.
Disadvantages of the subscription-based model
a) The biggest drawback is that you need a very large customer base to continuously pull in substantial revenue and to start the business.
b) While consumer retention is higher, the one who leaves early also leads to a substantial loss if you look at the revenue they would have otherwise given in the long run.
5) On-Demand Business model
The on-demand business model is one of the most recent forms of the business model which was largely birthed out of our need for instant gratification or answer.
Today, we want all the information immediately and just a click away.
Companies that have recognized this behaviour pattern are thus offering a myriad of different services on-demand to make a profit out of this need.
The biggest example of this is Airbnb, Ola, and Trivago. They provide all the information about tickets and hotel rooms instantly. Hence, people are able to book a room or flight without even physically looking at them.
Advantages of On-Demand Business model
a) The main advantage of this model is the ease of use and convenience that it offers consumers. The peace of mind they get at having a place booked for them even before they have reached the city makes it quite appealing to customers.
b) By utilizing new technology, this business model is much lower in cost as it relies mostly on freelancers. The operating costs of this business are also much lower as it doesn’t require a physical place with regards to consumer’s request and works mostly on web or app.
Disadvantages of On-Demand startup business model
a) Its advantage also works as its biggest disadvantage. On-demand business model mostly depends on freelancers and their behaviour and screwups also affect your reputation and business.
b) The lack of physical presence also makes it harder for consumers to trust you and thus unless they have that need, they really approach you for your services regularly.
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6) Freemium business model
Freemium business model applies a clever strategy of drawing the customers to their service with a free product along with making certain features exclusively available to premium users.
The biggest example of this is many gaming apps, one example being Dream 11. It provides players to not only compete against each other but also gain profit or money when they invest money into their app.
Advantages of the freemium business model
a) The biggest appeal of the freemium business model is that the customers can see and experience your service for free first and then make a call. This makes them more inclined to trust you and check out what you have to offer.
b) You also get to decide what you want to offer as free and what as paid service. This lets you offer them a basic game first and an additional advantage only at the cost of some money. This gives you total control of your services and makes consumers aware of what they can and cannot have and thus tempt them towards the have nots.
Disadvantages of the freemium business model
a) You need to be extremely persuasive to be able to convince your consumers that the advantages of upgrading to a premium user have more advantage than being a freemium customer.
b) While many customers are ready to pay for your service to get the added advantage, there are many more that are ready to wait and get that advantage a week or month later than actually pay for it. These consumers sometimes even convince premium consumers that it is not worth it and get them back to not paying.
While each of these startup business models has its own advantages and disadvantages, keep in mind that choosing the right business model for your startup is a process and you will not figure it overnight.
You also need to research and research well to know what is the best business model for your startup. Keep all the options, pros and cons in front of you to know if they would make the business successful and profitable.
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