Entrepreneurs most of the times get puzzled when it comes to defining a firm startup business model and revenue model. Startup business models describe the rationale of how the startup creates, delivers and captures value. Quite surprisingly, many business owners often overlook this very important aspect of starting a business and get into a catch-22 situation later on.
For the startup, it is very important to understand the difference between a business model and a revenue model. It is crucial to decide a solid startup business model right upfront while you are at the idea or seed stage. You may then focus on building the product and creating user engagement followed by marketing strategy. Of course, revenue model can be changed later on as well if your initial focus for a couple of years is completely on scale (users) and not on revenue. But that will require angel or venture funding backup as you can’t survive for long without cash.
Mainly when it comes to revenue models, it can easily be categorized as one of the following three segments:
- Membership Plans or Subscriptions
- Advertisement
- Commission
- Direct Sales
However, if we further bifurcate these categories, we can have the following business models that you want to choose from. We will try to understand these startup business models based upon the revenue generation strategies here, for convenience:
- Marketplace
- Advertising
- Affiliate
- Subscription
- Merchant
- Manufacturer/Direct Selling
- On Demand
Let us discuss each of these startup business models in detail.
In this post, we'll cover:
- 1 Widely Used Startup Business Models
- 1.1 Marketplace startup business model
- 1.2 Why Marketplace based Business Model is good for startups?
- 1.3 Advertising – Ad based Startup Business Model
- 1.4 Affiliate Business Model for Startups
- 1.5 Subscription based Startup Business Model (Membership Plans)
- 1.6 Merchant Business Model
- 1.7 Direct Selling Business Model for Startups
- 1.8 On Demand Startup Business Models
- 1.9 ‘Uber for X’ startup business models
Widely Used Startup Business Models
Marketplace startup business model
Market-makers: Marketplaces bring buyers and sellers together and facilitate transactions. Some of the biggest internet companies and successful startups have marketplace business model. E.g. eBay, Upwork (Elance), Uber, Airbnb, Paypal, Alibaba, Amazon, Kickstarter etc. They are not involved in direct selling, instead they let their platform run as a marketplace. Revenue generation is normally through commissions or membership plans for marketplace based business models.
Types of Marketplace Business Model
Marketplaces are one of the hot business models most startups prefer going with. This is primary due to it’s ease of doing business and win-win situation that it creates for all stakeholders involved. Marketplace business model often collides with sharing economy business model, peer-to-peer (P2P) business model, auction and reverse auction business model segments.
- Sharing Economy Business Model
- Peer-to-peer (P2P) Marketplace Business Model
- Crowdfunding or Crowdlending Marketplace
- Business-to-Business (B2B) Marketplace
- Business-to-Customer (B2C) Marketplace
- Customer-to-Customer (C2C) Marketplace
- Auction Business Model (Forward Auction)
- Reverse Auction Business Model
Airbnb is based on P2P sharing economy marketplace model while Uber is mainly based on peer-to-peer economy business model. The difference mainly lies in whether the model lets users to share assets or not; technically, whether it has a single dashboard or separate dashboard for both user types – buyers and sellers.
Uber, for example, has separate apps for drivers/partners and riders/users and doesn’t allow each other to switch roles. A driver cannot book a ride him/herself and a rider cannot start driving from the same app/dashboard. Wherein, if you are having a vacation rental startup, you may want to consider providing common (single) dashboard to your users, so that a host can also book another vacation or bed-and-breakfast property somewhere else if he/she him/herself plans to visit another city and wants to rent a BNB, despite him/her being a host.
P2P Lending Business Model
P2P lending or crowdfunding business models have also emerged since the inception of Kickstarter, a FinTech startup. Other prominent P2P crowdfunding and P2P lending startups are LendingClub, Indiegogo. Ulule etc.
In P2P lending and crowdfunding business model, the person who seeks funding is called the project creator or fundraiser. Fundraiser posts his/her funding requirement which gets fulfilled by a pool of investors called backers and thus making it a crowdfunding model. The marketplace platform owner typically takes commission on transactions as it’s revenue model.
How is Auction Business Model different from Reverse Auction?
Auction is where users compete with each other by placing their bids in order to obtain goods or services. The difference between ordinary auction and reverse auction is based upon who (which user type) places the bid.
In ordinary auction (also called ‘forward auction’) buyers compete with each other by placing their bids in order to obtain goods or services for increasingly higher prices.
In reverse auction, the sellers compete with each other by placing their bids in order to obtain goods or services, and prices will typically decrease as sellers underbid each other. So, for ordinary auctions, the product/good or service gets sold for the highest price and in reverse auction, usually, it gets sold for the cheapest price.
eBay has auction based business model wherein Upwork has reverse auction model.
Understanding the difference between B2B, B2C and C2C Marketplace Business Models
Alibaba has B2B marketplace business model where businesses (sellers) sign up to list their products for sell and other interested businesses (buyers) sign up to interact and establish contact for the purchase. Purchases and payments may not necessarily happen online within the platform. While payments are not facilitated on Alibaba.com, the Alibaba group started Aliexpress to allow payments facilitation.
Amazon has B2C marketplace business model wherein vendors sign up and list their goods for sell and end-users who are consumers sign up in order to purchase them.
C2C is symmetric to P2P wherein end-users connect with other end-users to engage and do business.
Why Marketplace based Business Model is good for startups?
Primary reason why marketplace business model works for startups is due to it’s capability of supporting inventory lite business model. It is also called zero waste as it has zero inventory and almost zero to little overhead. You can literally run your startup virtually without any office space, warehouse or sales office. Both the sellers and buyers sign up and meet on your online marketplace platform and conduct business there. Alibaba’s immense popularity was mainly credited to the high demand of Chinese products in the rest of the world. And it being a marketplace where it did not have the burden of having any inventory at all.
Inventory cost is a significant factor and consumes a lot of startup working capital for e-commerce startups. However, it becomes almost zero or negligible in marketplace based business models.
Amazon is another big company that has marketplace based business model although no longer inventory-lite. New startups generally tend to copy popular business models of other successful startups. It drives its demand from the majority of successful startups today in the digital segment that are marketplaces.
Advertising – Ad based Startup Business Model
Ad based business model is the most obvious and popular of all business models for any startup and the most time consuming one as well to get any reasonable traction. Startups with this business model would be providing content and services mixed with advertising messages in the form of banner ads. E.g. Google, Monster, Indeed, Yahoo! and most of the classified sites such as Craigslist, OLX, Letgo, Gumtree.
Most of the content driven websites, apps and portals work on this business model and revenue strategy. While it is easy nowadays to partner with popular ad networks such as Google Ads and integrate ads into your web pages, startups must note that it is not easy to get a steady revenue stream as it might seem. Creating and curating content is one part of the business while attracting relevant traffic to your site and keeping them with you is another.
As per a research, more than 98% of startups with this strategy shut down within first 2 years due to insufficient cash flow. So, the odds are not in the favor of this easiest business model based on advertisements. But, if you know your way around and have a niche market or product to focus on, advertising based startup business model can become your cash cow.
Affiliate Business Model for Startups
The affiliate business model provides purchase opportunities wherever people may be surfing. It does this by offering financial incentives (in the form of a percentage of revenue – commission) to affiliated partner sites. E.g. Amazon affiliate program. Commissions could be based on clicks, called as cost per click (CPC), impressions known as cost per thousand impressions (CPM) or it could directly be based on an action like a sale, known as cost per action/acquisition (CPA) or cost per lead (CPL).
Interestingly, there are affiliate marketplaces as well such as Commission Junction (CJ), JVZoo and Clickbank which provide a marketplace based approach to publishers (website owners/webmasters) and advertisers to meet and facilitate transactions.
Subscription based Startup Business Model (Membership Plans)
Subscription business model is a startup business model where the user pays a charge to use the service. Traditionally, subscription business model was pioneered by newspapers and magazines. Users are charged a periodic – daily, monthly or annual – fee to subscribe to a service. This is also called pay-as-you-go model. E.g. Spotify, Netflix, LinkedIn, Techlist, SoundCloud. Conceptually easier among all startup business models since you will not have to deal with any 3rd party for any payment facilitation, but, in most cases, it slows down your growth as you are asking your direct users to make a payment before they can use your website’s service. You will have to sacrifice on growth if you implement this startup business model during inception.
Subscription business models can be further classified into the following:
- Premium Subscription Model
- Freemium Business Model
Netflix revolutionized the way we watch TV wherein it brought video content to be delivered over the internet through it’s easy-to-use mobile app and charged users a monthly subscription fee to watch the shows. Spotify did the same Netflix model to music by allowing users to listen to songs through it’s mobile app for a monthly subscription fee.
Skillshare, an EdTech startup, initially started where consumers would buy educational content for a one time fee but later on pivoted to a premium subscription model wherein the users would get unlimited access to all the content for a monthly subscription fee. Since the monthly subscription fee is far less than a one time payment, this model worked very well for Skillshare. The key for subscription business model would be in getting a good volume of users willing to sign up for the subscription as typically the fee would be much low on the basis of unit economics.
Freemium Subscription Business Model
Freemium business model is a startup business model wherein primary features or services are available for free to the users and a subscription fee is levied for some premium features or services. It is derived by combining ‘free’ and ‘premium’. LinkedIn is popularly running on freemium subscription model wherein the users sign up to use most of the features of the platform, but some VIP features would require them to go for a periodic subscription.
I would suggest to have a free membership plan initially, if your financials can support that, similar to what WhatsApp is doing, like 1st year free, and then start charging though they haven’t yet as of date. This is a good idea if you firmly believe in your product and think that once people get used to it, they will come back and keep using it even at a cost.
However, if you don’t want to take such a long risk and think that you will lose on some potential revenue meanwhile by completely allowing free access, what you can do instead is to have multiple membership subscription plans wherein you limit access to your site features based upon membership plan selection. e.g. free, basic, premium wherein you would charge some periodic amount on basic and premium membership plans.
Merchant Business Model
Wholesalers and retailers of goods and services. Sales may be made based on list prices or through auction. E.g Amazon.com. This startup business model, however, requires you to either store or facilitate inventories and your success will have high reliance on how good you are at supply chain management. If your project budget is good enough, you can let your product and technology take care of most of this similar to how Amazon is doing it. Having the right product here upfront is essential and then you’ve got to make sure it is scalable and robust.
Direct Selling Business Model for Startups
A company that creates a product or service to reach buyers directly and thereby compress the distribution channel, normally has a direct selling business model. E.g. Dell Computers (Dell Inc.). There are a lot of traditional shops setting up their own e-commerce websites in order to sell their own line of inventory.
Direct sales pioneers such as Amway and Avon understand the importance of this business model and the immense opportunity that it has. Direct sales accounted for US$183 billion sales worldwide in 2016 and there are 107 million direct sellers, according to WFDSA (World Federation of Direct Selling Associations).
Chloe + Isabel
Chloe + Isabel is a new age direct selling startup that is empowering students and entrepreneurs to work from home. It is a social retail startup that designs, produces, and directly markets fashion jewelry. Interested sellers or merchandisers can sign up and create their own online store to sell their jewelry and earn a 30% commission utilizing the startup’s technology infrastructure. The startup has seen incredible success using direct selling model, and increased loyalty of its sellers (who are also its customers).
Direct sales business model for startups is perfect for today’s economy where people are more willing than ever to supplement their income, and seek new career paths, while not having a conventional job. Unlike Baby boomers, Millennials are more inclined to become their own boss and the rise of freelancers is a current proof of this trend. With unemployment still high, and more companies offering supplemental income opportunities, this model continues to rise in popularity. Social media allows sellers to reach more people than ever, increasing their success as merchandisers, and bringing in higher revenues for the company.
While direct sales is the business model for the direct selling startups, for it’s resellers, commission becomes the natural business model.
On Demand Startup Business Models
The utility or on-demand startup business model is based on metering usage, or a “pay as you go” approach. E.g. Consultancy, accounting work, contractual services, web and design development work etc. fall under this business model.
Uber is the pioneer in shaping up the on demand economy and has taken the on demand industry by storm. On demand Startups like Uber, Instacart, UrbanClap, UrbanLadder, Handy etc. provide stead contracted work for consumers who want to become solo-preneurs. Solo-preneurs are freelancers confused with entrepreneurs. Startups like Uber, Olacabs, Lyft, Oyorooms etc. are marketing on this very concept that they are creating new entrepreneurs in their respective industry verticals, such as transportation and hospitality.
‘Uber for X’ startup business models
Uber for X concept emerged following the tremendous reception Uber enjoyed after it’s inception. Startups such as Handy, UrbanClap, UrbanLadder, YourMechanic, Postmates and, now defunct, HomeJoy provide handyman, on demand delivery and household services at a moments notice, servicing a need for consumers that was not previously available. Washio provides the same on demand services for dry cleaning and laundry sector.
The rise of on demand startup business model has opened up the doors for a horde of ‘user for x‘ startups in different niches such as:
- Food & Beverage Service (similar to Munchery, Zesty, Doordash, Drizly)
- Grocery Delivery (similar to Instacart, HelloFresh)
- Home Service (similar to Handy, Taskrabbit, HomeJoy, Exec, UrbanSitter, UrbanLadder)
- Taxi Service/On Demand Transportation (similar to Uber, Lyft, Ola, Grab, Careem, Curb)
- Ride Sharing Service (similar to RideJoy, SideCar, BlaBlaCar)
- Laundry Service (similar to Washio, Cleanly)
- Travel & Hospitality (similar to AirBNB, Hotel Tonight, OYORooms)
- Beauty & Health (similar to GlamSquad, Unwind Me, Zeel)
- Dog Care Taking Service (similar to Wag, Rover)
- Logistics Service (similar to Doorman, zipments, shyp)
Check out our on demand services for more details on on demand startups and on demand app development.
So, what do you think about this article? Did we cover the vertical you were interested into or are we missing out on something? Share your thoughts in the comment below.
This is full of some really useful information and has helped give me clarity into my own business model! Thanks for your help.
After reading your article I was amazed. I know that you explain it very well. And I hope that other readers will also experience how I feel after reading your article. Thanks for this amazing article. I generally read your articles with a lot of enthusiasm because of its content. Also, recently I have also written on the same niche could your please share your views on it here: Digital Startups Hub.
Found this really interesting, thanks for sharing!
Yes, I do agree with Mari Smith, this is a great, insightful post on business models. Very useful. Thank you, Kunal!
Hi Kunal,
Please what category of business models does dropshipping fall into
I am a business consultant and do professional training on business strategies and branding. I must say,this is the best post I have come across on startup business models. Great work, Kunal!
Hey Mari, thanks, really appreciate your comment. Keep reading!