Business model
A business model is a simple plan that explains how a startup makes money by creating, delivering, and capturing value.[1] It acts like a roadmap for founders, showing how their idea can turn into a sustainable business. For first-time founders without a business background, think of a business model as the "how" behind a company: how it offers something valuable to customers, how it reaches those customers, and how it earns revenue while managing costs.
Overview
A business model describes the core elements of a startup’s operations. It answers key questions like:
- What problem does the startup solve, or what value does it provide?
- Who are the customers?
- How will the startup deliver its product or service?
- How will it make money?
- What are the main costs, and how will they be managed?
Unlike a detailed business plan, a business model is a high-level, simplified view of how the startup works. It’s often visualized using tools like the Business Model Canvas, a template that helps founders map out their business idea clearly.[2]
Importance for Startups
For startups, a clear business model is critical because it helps founders test whether their idea can work in the real world. Startups operate in environments of high uncertainty, so a well-defined business model helps them focus on creating a unique product or service with the potential for rapid growth.[3] It also attracts investors, who want to see how the startup will generate revenue and scale. A business model isn’t set in stone—it can evolve as the startup grows or as market needs change. For example, many startups pivot to a new business model if their original plan doesn’t work.[4]
Key Components
A business model typically includes the following parts, which are easy to understand even for beginners:
Value Proposition
The Value proposition is what makes a startup’s product or service special. It’s the reason customers choose it over competitors. For example, a startup might offer a cheaper, faster, or more convenient solution to a problem. A strong value proposition answers, “Why should customers care?”[1]
Customer Segments
This defines who the startup serves—its target customers. A startup might focus on a specific group, like young professionals, small businesses, or tech enthusiasts. Understanding customers helps tailor the product and marketing.[2]
Revenue Streams
This explains how the startup makes money. Common revenue models for startups include:
- Subscription: Customers pay regularly (e.g., Netflix or Spotify).
- Freemium: Basic services are free, but premium features cost extra (e.g., Dropbox).
- One-time sales: Selling a product once (e.g., a gadget).
- Advertising: Earning money through ads (e.g., Google).[5]
Channels
Channels are how a startup reaches its customers. This could be through a website, an app, social media like X, or physical stores. For example, a startup might sell directly online or partner with retailers.[2]
Cost Structure
This covers the main costs of running the startup, like product development, marketing, or hiring staff. Startups often aim to keep costs low to stay competitive, especially in the early stages.[4]
Key Activities
These are the most important things a startup does to make its business model work, like building the product, marketing, or customer support. For tech startups, this might include software development or data analysis.[2]
Key Resources
Resources are what the startup needs to operate, such as technology, a team, or funding. For example, a tech startup might rely on skilled programmers or cloud servers.[2]
Key Partnerships
Startups often work with others to succeed, like suppliers, distributors, or partners. For instance, a startup might partner with a payment processor like Stripe to handle transactions.[2]
Types of Business Models for Startups
Startups can choose from many business models, depending on their goals and industry. Here are some common ones:
- E-commerce: Selling products online (e.g., Amazon).
- Marketplace: Connecting buyers and sellers (e.g., Airbnb or Uber).
- Software as a Service (SaaS): Offering software through subscriptions (e.g., Salesforce).
- Freemium: Free basic services with paid upgrades (e.g., Slack).[5]
Each model has pros and cons. For example, a freemium model can attract users quickly but may take time to generate revenue. A marketplace model can scale fast but requires balancing supply and demand.[5]
Examples
- Wikipedia: A non-profit model funded by donations, offering free access to knowledge. Its business model relies on crowdsourced content and small donations from millions of users.[6][7]
- Dropbox: Uses a freemium model, offering free cloud storage with paid upgrades for more space or features.[5]
- Uber: A marketplace model connecting drivers and riders, earning a percentage of each ride.[5]
Creating a Business Model
First-time founders can use tools like the Business Model Canvas to design their business model. This tool breaks down the components above into a single visual chart, making it easier to see how everything fits together.[2] Founders should: 1. Identify a problem or need in the market. 2. Define the value they offer. 3. Choose a revenue model that fits their customers. 4. Test the model with real customers and adjust based on feedback.
Challenges
Startups face challenges in building a business model, such as:
- Finding a model that balances revenue and customer satisfaction.
- Competing with established companies.
- Scaling quickly while keeping costs low.
- Adapting to changing market trends or customer needs.[4]
Recent Trends
Recent news highlights how business models are evolving:
- Digital transformation: Many startups use technology to create new models, like AI-powered services or blockchain-based platforms.[3]
- Sustainability: Some startups focus on green business models, prioritizing environmental impact.[8]
- Global growth: Startups aim for rapid, global expansion, often using scalable models like SaaS or marketplaces.[9]
See Also
References
- ↑ 1.0 1.1 Buteau, Antoine (2017-07-23). "Business Model: What it is and What it is not". Medium. The PNR. Retrieved 2025-06-30.
- ↑ 2.0 2.1 2.2 2.3 2.4 2.5 2.6 "Business Model Canvas Template". Corporate Finance Institute. Corporate Finance Institute. 2023-04-16. Retrieved 2025-06-30.
{{cite web}}: Text "A Guide to Business Planning" ignored (help) - ↑ 3.0 3.1 Foss, Nicolai J.; Saebi, Tina (2022-02-15). "Inside the black box: How business model innovation contributes to digital start-up performance". ScienceDirect. Elsevier. Retrieved 2025-06-30.
- ↑ 4.0 4.1 4.2 Balboni, Bernardo; Bortoluzzi, Guido; Pugliese, Roberto (2019-09-09). "The Business Model of Start-Up—Structure and Consequences". MDPI. Multidisciplinary Digital Publishing Institute. Retrieved 2025-06-30.
- ↑ 5.0 5.1 5.2 5.3 5.4 Cote, Catherine (2023-07-20). "5 Business Models to Consider When Starting a Tech Company". Harvard Business School Online. Harvard Business School. Retrieved 2025-06-30.
- ↑ "Wikipedia's business model: Why the website often appeals for funds". Business Standard. Business Standard Private Ltd. 2022-06-26. Retrieved 2025-06-30.
- ↑ Mishra, Anubhav (2024-09-24). "Wikipedia's Business Model: Nonprofit or Quietly Prosperous?". YourStory. YourStory Media. Retrieved 2025-06-30.
- ↑ Schaltegger, Stefan; Lüdeke-Freund, Florian; Hansen, Erik G. (2018-02-27). "Business Model Innovation to Create and Capture Resource Value in Future Circular Material Chains". MDPI. Multidisciplinary Digital Publishing Institute. Retrieved 2025-06-30.
- ↑ Andreassen, Tor W.; Lervik-Olsen, Line (2021-08-14). "Business model innovation: a review of the process-based literature". Journal of Management and Governance. Springer. Retrieved 2025-06-30.