Decoding business model for startups!

Business model plays a critical role for entrepreneurs in their goal of revenue generation and wealth creation. It shows how the business can make money. In my previous article on Business Model, I have cited the key points which would help your startup in creating, delivering and harnessing value. If you have missed the article, here’s the link: WHAT TO CONSIDER WHILE FRAMING YOUR BUSINESS MODEL!.?

I will try to give a brief outline of some of the most adopted business models, in this edition of ACUITY. While selecting, the best way to think of metrics is how you plan to charge your users or customers and which of the business models your startup idea would fit in.

Transactional Business Model

Example - WISE, stripe, coinbase, PayPal, Brax

Key points:

• Usually fintech and payments businesses adopt this. They facilitate transactions and take a percentage as cut.
• Gross Transaction Volume (GTV) is the Total Payments Volume (TPV) that flows through the platform
• Remember GTV is not your Net Revenue.
• Your startup’s revenue is what goes to your bank account i.e., your cut. Since, it’s a portion of transaction volume that you make it's called net revenue.
• Often a low fee is charged for high volume.
• To ensure consistent revenue from high repeat usage tracking User Retention?i.e., percentage of Month-1 customers that make a purchase in Month-2, Month-3, and so on is important.
• If a client stops using your platform you need to check if that client has gone out of business. If not how that client is doing business and who is processing their payments. This information would help you take timely corrective action.
• It would be good for your business if you have lock in or high switching costs with your product.

?SaaS (Software as a Service)

Business Model

Example - Adobe, Zoom, Slack

Key points:

• The cloud-based software subscriptions are usually sold to businesses, mostly on annual contracts basis.
• Since Monthly Recurring Revenue (MRR)?or?Annual Recurring Revenue (ARR) mode is adopted in this model, you have the benefits of recurring revenue.
• However, non-recurring revenue can also occur.
• Growth, which is measured weekly or monthly, is driven by direct sales and self-serve acquisition channels or both.
• For Net Revenue Retention a?percentage of recurring revenue is retained from previous period.
• It’s important to keep a check on costs to acquire a new customer (CAC).
• Recurring revenue makes it harder for people to leave and you can also get lock-in by having customer data on your platform too that all go away if they stop paying you.

Subscription-based Business Model

Example: amazonprime, NETFLIX, classpass, slack

Key points:

• Product or service sold on a recurring basis to consumers
• Usually sold to consumers, often on payment of monthly or yearly recurring subscription fee.
• You measure Monthly Recurring Revenue (MRR) i.e., how much you are making monthly as well as the Annual Recurring Revenue (ARR).
• Keep track of whether your early adopters are continuing using it.
• Measure Growth Rate weekly or monthly.
• Growth is driven by scalable and self-serve acquisition channels.

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Enterprise Business Model

Example: SAP, salesforce, workday

Key points:

• If your startup sells software or services, under written contract, to a large enterprise then you fall under this category.
• Business often begins with paid pilots or Letter of Intent (LoI)
• Annual Contract Value (ACV) is?Total Contract Value / No. of years
• You should not consider the ACV as your revenue. You can recognize that as revenue only when you have delivered the service.
• Here growth is driven by direct sales.
• The buyer is not always the end user. So, a sales cycle is usually long, with many gatekeepers.

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Usage-based Business Model

Example: aws, twilio, algolia

Key points:

• It’s a pay-as-you-go model based on consumption in a given period
• It is based on usage-based revenue and not recurring revenue.
• Keep track of Revenue Retention i.e., percentage of revenue from previous month’s customers in current month
• Revenue - Cost of Goods Sold (COGS) is your Gross Margin
• Here, you can charge per API request, no. of records, data usage, etc
• Your startup grows with number of customers.

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E-commerce Business Model

Example: amazon, WARBY PARKER, THE HOME DEPOT

Key points:

• You make the products or source the products but ultimately it's your brand and the customer purchases it online from your brand.
• There’s no recurring revenue or no subscription fee.
• You need to track a component’s monthly growth rate and the monthly revenue.
• From Day-1 track your Gross Margin because you either make the product or are sourcing it and branding it under your startup’s name so it's important to understand your cost to get the product and whether you are making some profit on a per product basis
• Ensure that you are able to make money on a per transaction basis.
• If you are not adding customer processing costs, payment processing costs and shipping cost to the product cost your pricing method would be incorrect.
• For success your user acquisition and operations/unit economics should be par excellence.

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Marketplaces Business Model

Example: Airbnb, Etsy, DOORDASH, Fiverr, eBay, amazon

Key points:

• It is a type of e-commerce platform where service/product information is provided by third-party sellers and the platform-owner takes a cut as percentage of the transaction.
• Here, the service/product seeker goes to your platform selects a provider books the service/product.
• Gross Merchandise Value (GMV) is not your Net Revenue. Fee charged for transactions is your Net Revenue.
• Since volume of consumers matters therefore it's important for you to track your monthly growth rate in a compounded way.
• Monitor your users’ behaviour through the pattern of their search or research even when they are not actually buying.
• Put in retention metrics in accordance with how you want your users to behave to measure if your business is doing well and you are observing what you want to see from your users.
• You need to scale supply and demand in sync. Network effects at scale would drive exponential growth for your startup.

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Advertising Business Model

Example: Face book, twitter, reddit, snapchat

Key points:

• Primary monetization model is companies make money from advertisers making advertisements there
• Here customer is the advertiser, not the end user.
• Remember Registered Users is a vanity metric.
• You should track Daily Active Users (DAU) i.e.,?unique users active in a 24-hour period as well as Monthly Active Users (MAU) i.e., unique users active in a 28-day period
• Monitor User Retention by percentage of active users on Day-1, Day-7, Day-30, etc.
• CPM (Cost Per Thousand)?or?CPC (Cost Per Click) is important

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Hardtech/Biotech/Moonshot

Business Models

Example: Pfizer, cruise, BOOM

Key points:

• These are characterized by long time horizon with lots of technical risks.
• It often takes years to get to a live product because of technical and/or regulatory risks
• Impressive technical milestones in line with long-term vision or experimental data can help in de-risking.
• Here use of Letters of Intent (LOIs) i.e., non-binding contracts indicating interest to purchase is prevalent.
• Revenue generation is often a long-term affair, so signed LOIs are usually considered as show of customer interest.

There are several other types of business models, such as Freemium (example: iCloud, Google Drive, slack); Franchisee (example: KFC, McDonald’s, Subway) and Razor-razorblade (example: Gillet razor & blade, HP Printer & Cartridge).

While selecting your business model you should keep the following in mind:

• Try for generating recurring revenue
• Have high retention
• Scaling with software/platform may be more helpful than with people
• Focus on continually innovating on your product
• Increasing network of users would give your business a multiplier effect.

Adopt a business model that is proven and familiar to your customers. However, with your business model you should also try to change the game, rewrite the rules and be as disruptive as your technology or process. Leverage value and your capabilities of really exceptional (CORE) to multiply your business.

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I am an Entrepreneurship Educator and a Startup Mentor.

You can follow me at: www.dhirubhai.net/in/debasish-bhattacharyya-mentor-enabler-strategy-innovation

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