The business model is the backbone of your startup.
The business model can be split up into two parts. The first part pertains to your product or service, its design, make, & manufacturing. While the other part is concerned with selling it, the marketing, finances and basically your revenue plan. In simple terms, business model is how you make money.
Why is a business model so important?
Imagine a sea voyage without a compass, that is what a startup is without a business plan. You may achieve things but in the long run, its a dead investment because you would be wandering aimlessly, with no end goal.
Business plan is essential for startups as it helps founders to breakdown their vision into realistic bits with potential to succeed. Start small, they say. Whereas the vision is like a big encompassing concept which sums up everything, business model is breaking down your end goals to achievable bits.
Sometimes, or most times, the bigger picture seems too good for us to question anything. And founders, like the idealistic and optimistic creatures they are, tend to go with the flow believing it will all work out. But, unfortunately, it does not always work out. While creating a business plan, founders must ask some hard and real questions which in turn help them avoid big mistakes they could have possibly made in the future.
A business plan can also be used, later to track progress of the startup. To check whether the startup is right on track or not. Founders set benchmarks and key performance metrics that they can come to later, throughout their journey.
We can go on and on about the importance of business models, good business models, but it will still not be enough. You do not want the backbone of your startup to be weak.
Some popular business models:
One of the most popular business models is the marketplace. The startup becomes the marketplace, which, essentially, means that the startup connects supply and demand. The startup is just the connecting platform. The biggest advantage of this business model is that the risk is minimum as there are no overhead costs involved and no inventory.
For example, Amazon connects buyers and sellers.
This business model is quite similar to the marketplace and the two are often confused. The concept it the same, the startup provides a platform but the difference is that all sellers operate under the aggregator’s brand. This means standardized quality as the aggregator is the main brand. Uber and Careem are examples of aggregators.
You must have a few subscriptions, right? Netflix? That’s exactly what this business model is. The customers pay for a product or service over a longer period of time. It could be monthly subscriptions or yearly. This is ideal for software or application-based startups
This is a very clever business model where the startup offers their main product/service as free but their revenue is earned from complementary products that go with the main offering. MailChimp is an example of a successful freemium.
Also known as hook & bait could arguably be passed as the most common business model as it is very broad and quite a few business models can be counted as under its umbrella. It offers a lack of restrictions. A startup can offer any kind of product/service and promote it through any marketing channel. But the main idea is that the product/service is offered for a cheap price (bait) and then complementary services are offered (hook) which compels customers to buy more and more. For example, like ink cartridges for printers.
A Robust Business Plan
The business model has a simple formula:
LTV – CAC = $$
The LTV is the Lifetime value of a customer, which is the total money the customer pays you. The CAC is the cost of acquisition of customer or how much you spend on the customer, for example, through marketing activities. The LTV should always be greater than the CAC for a successful business plan.
Elements of a robust business plan includes being safe from threats like replication by competitors, holdup power by suppliers or other agents, slack in organization and the effect of substitution.
The significance of a business plan cannot be stressed further. Messing up in this stage can get your startup in hot water. This is also the stage where founder tend to look for mentorship. Join an accelerator program or reach out to mentors that you know but never shy away from help because you are going to need it.