Objective
An important pre-requisite to developing a start-up venture is to figure out the underlying structure of the business, e.g. how to make money, how to build revenue streams, who your customers are, how to serve your customers, and how to monetize your work. You can consider several alternatives for this. As one example, you may create a product and sell to generate a revenue stream. Or you may give away a service and make money from advertising. Or you may design a market where buyers and sellers meet and take a small cut of every transaction. On this page, you can explore several business models to figure out which fits your start-up venture. The answer is rarely a perfect one. You can weigh different options, translate these to your specific situation, and talk with mentors to develop a viable business model for your venture.
Terminology
In the start-up ecosystem, you will hear different terms that you will need to differentiate and use, such as the following:
- Business Model: Appropriate for identifying how you will serve market needs, and engage with customers - communicated with a label to describe the monetization strategy (~2 pages) - this page.
- Business Model Canvas: Appropriate for explaining, graphically, several key elements such as channels, resources, activities - useful for discussion
- See also: Lean Canvas (Business Model Canvas tailored for Start-ups). (~1 page, following a template).
- Business Plan: Appropriate to describe several elements for stakeholders and investors, and align your team. A well-specified business plan will often run between 20 to 40 pages (a broad estimate).
Navigating Business Model Alternatives
Choosing a business model is an important decision because it allows you to monetize your idea. We are rarely privy to these conversations among founders. We only get to see the final outcome. But - this is a decision that sets up everything, your value proposition, the operations, the monetization strategy, customer segments and much more. Consider the lemonade stand as an example:
Core Business Model
- Product-Based Model
- Selling a physical product (fresh lemonade) directly to customers and generate revenue from individual sales.
- Example: A simple stand where a customer pays $1 for a cup of lemonade.
Potential Variations
- Subscription-Based Model:
- Offer customers a weekly or monthly "Lemonade Pass" for unlimited or discounted refills.
- Example: Customers pay $10/month for a daily cup of lemonade.
- Freemium Model:
- Give away free samples to attract customers and upsell premium lemonade flavors or sizes.
- Example: Customers pay for premium lemonade (flavored or organic lemonade).
- Advertising-Based Model:
- Sell ad space on the lemonade stand
- Example: A local store places a sign at the back of the lemonade stand. Customers get lemonade free.
A student team (entrepreneurs) will have consider several business models that they can use to conceptualize and refine their approach to delivering value, generating revenue, and scaling their ventures. Here are some commonly recognized clusters of business models:
| Business Model | Description | Examples |
|---|---|---|
| Product-based Models | Creating and selling digital products | Direct-to-Consumer (DTC) (e.g., Warby Parker), Manufacturing and Distribution (e.g., traditional retail or wholesale), Customization or Made-to-Order (e.g., Nike By You) |
| Service-based Models | Providing a service rather than a tangible product | Consulting or Freelance Services (e.g., McKinsey & Co., Fiverr), Subscription Services (e.g., Peloton, beauty box services), On-Demand Services (e.g., Uber, TaskRabbit) |
| Subscription-Based Models | Charging customers regularly (e.g. monthly or annually) | Software as a Service (e.g., Slack, Adobe Creative Cloud), Streaming Platforms (e.g., Netflix, Spotify), Membership Models (e.g., gym memberships, Costco) |
| Platform-based Models | Creating a platform to connect two or more groups | Marketplaces (e.g., Amazon, Airbnb), Content Platforms (e.g., YouTube, Medium), Ecosystem Enablers (e.g., Shopify, App Store) |
| Marketplace Models | Facilitating transactions without holding inventory | B2C (e.g., Etsy, eBay), B2B (e.g., Alibaba), P2P (e.g., Craigslist, Turo) |
| Freemium Models | Offering a free product/service while monetizing premium features or tiers | Software (e.g., Zoom, Grammarly), Content Platforms (e.g., Spotify with ads, YouTube Premium) |
| Franchise Models | Allowing others to operate under your brand and business model | Fast Food Chains (e.g., McDonald’s, Subway), Service Franchises (e.g., Anytime Fitness) |
| Advertising-Based Models | Generating revenue through ads shown to users | Social Media Platforms (e.g., Facebook, Instagram), Search Engines (e.g., Google), Media Outlets (e.g., Buzzfeed, free newspapers) |
| Licensing Models | Monetizing intellectual property or technology by granting usage rights | Entertainment (e.g., Disney licensing characters), Technology Patents (e.g., Qualcomm’s 5G technology) |
| Aggregator Models | Building a network of service providers or content producers under a brand | Online Travel Aggregators (e.g., Expedia), Food Delivery Apps (e.g., DoorDash, Zomato) |
| Social Enterprise Models | Blending profit goals with social impact | Buy One, Give One (e.g., TOMS Shoes), Impact Funds (e.g., Acumen Fund), Nonprofit Generating Revenue Streams (e.g., Goodwill) |
| Hybrid Models | Combining multiple business models to create a unique value proposition | Amazon (Marketplace + Prime Subscription + Direct to consumer via AmazonBasics), Tesla (Sales + Licensing + Energy-as-a-Service) |
Other business models may include:
- Dropship Model: Retailer sells products that are shipped to consumers directly from a third party (e.g. Amazon third party sellers).
- Affiliate Marketing: Earn commissions by promoting other companies’ products (e.g. Amazon Affiliate).
- Peer-to-Peer (P2P) Model: Enables direct exchange of services or goods between individuals (e.g. AirBnB).
- Value-Added Reseller (VAR) Model: Products (e.g. software) are bundled with additional services (e.g. implementation) before resale.
- Pay-Per-Use Model: Customers pay based on the usage (e.g. an hour of use) of a service or product (e.g. excavator for mining).
- Asset-Sharing Model: Customers share an asset such as data storage or office business (e.g. WeWork)
- Data Monetization Model: Businesses that collect large datasets offer insights for marketing and health.
Selected Resources
- Investopedia: https://www.investopedia.com/terms/b/businessmodel.asp
- Business Model Navigator at BMI Lab: https://businessmodelnavigator.com/explore
- Ovans, A. 2015. What is a Business Model. Harvard Business Review. https://hbr.org/2015/01/what-is-a-business-model
- Strategyzer. 2024. The toolkit to design a disruptive company. https://www.strategyzer.com/business-models-the-toolkit-to-design-a-disruptive-company (See also Business Model Canvas)
This page is a summary of important considerations and jump-off point for additional exploration, not a comprehensive reference.