Now it’s time to figure out which business model to use for your startup. In this article, we’ll talk about each of the ten business models, with current examples of popular companies that use them.
These business models don’t necessarily have to be just for startups, but can be utilized by other businesses looking to pivot and take a different approach.
Business models are different than pricing models, because pricing models reflect actual numbers. Business models show the method in which you sell your product or service.
However, we provide advice at the bottom of the post on pricing because a lot of companies, and startups in particular, are doing it wrong. And obviously both business models and pricing models go hand-in-hand.
The 10 startup business models we’ll cover are:
- Software as a service (SaaS)
- Usage/Utility-based subscription
- User-based subscription
- Freemium business model
- Ad-based business model
- Time-based subscription
- Enterprise sales
- Marketplace with percentage-based Fees
- Marketplace model with flat fees
- Single-payment products
1) Software as a Service Subscription (SaaS)
Software as a service subscription models are the most popular business models out there.
Often, each tier of the subscription has more features as it gets more expensive.
A model like this can be harder to implement technologically, and requires a more established product, usually, or more skilled developers who can tie feature-usage to plans.
However, you can also just have two tiers where one is more basic and the second has more goodies. An example of this is the service, Ship by Product Hunt, a service which lets you launch and promote your startup on their website, which ties specific features to different plans.
2) Usage/Utility-Based Subscription
Usage/Utility-based business models are based on usage by the consumer. There are several tiers of prices based on how much of their service or product is being used. Often, it will trigger to the next tier when a threshold is met.
One example of this Amazon Web Services. You pay for what you use and that’s it.
As usage increases, so will the price.
That’s mainly because there’s a higher demand on their servers as usage goes up.
They use this type of pricing because it usually works well for both the user and the seller.
3) Subscription as a Service (SaaS)
This is a very simple business model where a user subscribes for a given period of time to the service. It can be monthly, yearly, or a different amount of time.
There are many services we see out there, such as Calend.ly, which charges a small amount of money per user. To achieve meaningful results with a pricing model such as this, you’ll usually need to have a significant user-base of paying customers. The key to your success with this is achieving high-volume.
However, there can be subscriptions that are more expensive per month. In this case, less volume is needed to achieve the same financial milestones for your startup.
4) Freemium
Freemium business models allow you to use the product for free but if you want to unlock premium features via in-app purchases.
Interestingly, Calend.ly and Slack have this business model, as well, in combination with a single user-based approach. Many people use it for free until they need to unlock specific features and if they are hooked on your product, they will usually buy it.
5) Advertising
Advertising can be a good business model when you have millions to billions of visitors and/or users.
A lot of news and blog-based websites have this approach. They’re typical of a business model that works with high-volume traffic. This is very similar to an affiliate business model.
They’re not much different, but regular ads are more targeted because of cookies, while affiliate ads are chosen by the site owner.
However, Google and Facebook both have advertising-based business models.
They collect data on their users and use that to better target and sell to them.
The unfortunate thing about this business model is that ads suck to see all the time – well, usually.
Most people don’t like ads, but if they’re well placed, they can be less of an eye-sore and more effective.
However, in my opinion, ads suck even more when there are tons of ads of all different types on ONE page and it may have popups and auto-playing videos and whatnot.
This model doesn’t lend itself well to a positive user experience for most people.
A startup should take pride in providing the best user experience to its users.
So be aware of ad placements with regard to user experience.
Forbes, Inc, and Entrepreneur both provide such poor user experiences because they have ads like this.
Thankfully, I use ad blockers.
Another type of pricing model involving ads is to remove those ads in favor of a premium subscription and ad-free experience.
Other newspaper companies like the New York Times use this business model because right now, it’s the only one they can successfully implement digitally. However, profit margins are usually pretty low for this.
6) Time-Based Subscription Model
You can use a time-based model with 1 month, 3 months, 6 months, and annual plans. It’s usually the most expensive on the 1-month plan (cost per month) and it’s often some percentage cheaper for each tier.
This is one of the simplest types of pricing models to produce and requires very little programming to create.
Similarly, you can create a lifetime membership as well. A plan like this is usually the cost of the annual membership times three or four and often times there’s a discount on that price.
An example of this is used by both Match.com and StartupDevKit‘s subscriptions.
7) B2B Enterprise
The enterprise business model allows you to sell a greater quantity and charge less money for companies who wish to buy from you because you’d sell it in bulk.
This type of business model works for physical products and digital products/services/memberships and usually is used for enterprise sales by selling bulk licenses of software or hardware products to large companies.
In addition, we see companies offer this option accompanied with the option for single purchases by consumers (B2C).
8) Marketplace with Percentage-Based Fees
This type of pricing model enables marketplace-based startups to make money when their customers do, by using a percentage-based fee.
Think of PayPal or eBay who have percentage-based fee pricing models. They were once startups, too, so it’s not just for big companies.
They’ve implemented and used pretty much the same pricing strategy since they’ve started. And while they both took a while to become profitable, they became very profitable once that happened for each of them.
In addition, there are other startups who use this model with their SaaS solutions. So let’s say your startup wants to use certain software to help them achieve more sales. This software uses a percentage-based fee to make their startup money. So when a startup makes a sale, the company with that software will get a percentage of money from the sale.
9) Marketplaces with Flat Fees
Marketplaces are listing-based with fees. This business model works when you use listing-based fees to make money from sellers when items are being put up for sale in your marketplace.
However, this isn’t limited to just items that are being sold. It can also be used by online marketplaces selling human services and making money from each service listing via a fee.
Companies like Amazon use this, but Amazon also combines that with a monthly subscription fee for professional sellers who want to sell more than 40 items a month.
10) Single-Payment Product
Single-payment products are products that you buy once. There are no subscriptions for them.
Single-payment products can work as a business model, but you’ve got to have a great product or service that people like enough to re-buy if you want your business to be sustainable. And the pricing has to be set fairly to make a good entrance into a market for mass-adoption as an introductory offer. After mass-adoption, then prices will usually go up a bit because the product will have gained a foothold into the market.
However, a single-payment product doesn’t have to be digital or technology-based. It could be disposable items or consumable products.
Examples of non-tech products:
- Cleaning products like Swiffer dusting cloths, vacuum bags, laundry detergent, disinfecting wipes, soaps, etc.
- Plastic food storage containers are another example of products that consumers have to re-buy once they break, get thrown out, or are gifted to others.
- New types of food products
- Books
- Toys
On the other hand, this can be a product that is digital or hardware-based. New iterations of the product can be created to get people to re-buy after a few years. Often, businesses will have multiple product-lines so that they don’t have to rely on just one. This increases their chances of survival and enables them to increase overall profit margins for the company.
Books are another example of a single-payment product that can be sold, whether physically or digitally.
Examples of tech-based products:
- Microsoft used this business model for Microsoft Office before they went to Office 365.
- Apple does this with their products by making everything proprietary and by making it difficult to update old hardware with new updates so you have to buy newer products of theirs, assuming you want to continue using Apple.
- Our smartphones. Every two years, many of us have to upgrade because the hardware becomes out of date for the programs that are on it within two to three years.
- Video games
- Headphones
Advice on Setting Prices
When you’re looking to sell your product or service, you don’t want to have the lowest price as your biggest selling point. Your product or service needs to be better than your competition to show a competitive advantage.
Moreover, pricing is counter-intuitive.
Non-marketers often think that the product with the cheaper price and with similar features is the better one to buy. And yes, some will buy that cheaper product.
However, psychologically, most people equate pricing with quality and worth. So the higher the price, the higher the quality, and the more valuable it’s worth.
Moreover, having the cheapest price can actually harm you, especially if that’s your only differentiating factor between you and the competition.
Some interesting advice I’ve heard from startup founders Steli Efti and Hiten Shah, who host The Startup Chat Podcast, is to triple whatever price that you initially think you’re going to sell your product/service for. This may work for digital products or services if there’s high demand. But it’s not always the best way to go.
Your pricing needs to reflect two things:
- Company sustainability – can it sustain your company and provide ample profit to grow if you gain a solid market share?
- What will the customer pay for it? You’ve got to find this out when you’re doing potential customer interviews and ask them how much they’d pay. It will help if you have a few price points to suggest, as well.
I also recommend checking out this post from Sumo on How to Price a Product: A Scientific 3-Step Guide (With Calculator).
Keep the above lessons in mind as you price out your product or service and develop your pricing strategy.
Conclusion
When deciding upon startup business models, it’s important to recognize what is the best way for you to make money consistently over time with profit margins of, ideally, 40% or more. Usually that is a form of a subscription business model or a combination of that and other business models. But some startups just don’t have that kind of product to utilize that model. So you’ve got to work with what you’ve got.
It’s also important to recognize how your startup can sustainably grow with that business model. Pricing affects that too. So ideally, you should have already talked with your target customers when validating your startup idea to find out what how much they would pay for your product/service. Or, you are planning to do that.
Once you have good information from lots of people about how much they would pay, then you can play around with the business models here and see what your financial projections look like. When doing that, you’re going to want to look 6 months, 12 months, and even two years into the future so you can see your estimated gross revenue.
What business model for your startup are you using or planning to use and why? Share your thoughts in the comments below!
