Startup Business Models Overview

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In the previous issue, we've taken a look at the revenue models of most successful tech startups; this time, let's briefly touch on the business models they use.

Just about any revenue model can be a fit with just about any business model we’re about to jump into. Say, you’re launching a Software-as-a-Service company. Do you sell to businesses, or regular people? Or a bit of both, sort of?

B2B

The former would be referred to as a B2B, or Business-to-Business model. Whatever your product is, and whether it’s digital or physical, as the name implies, this is when your company sells its products exclusively (or, at least, overwhelmingly) to other businesses, not individuals.

For instance, Salesforce, Oracle, SAP, IBM, Mailchimp, and such. The range of product prices is wide, but is usually a direct representation of some kind of more-or-less calculable return-on-investment, or ROI, the buying business gets from the purchase. It could be an increase in operational efficiencies, the ability to stay in business or get more competitive, and many other things.

Here, the sales cycles are comparatively long - a sale can often take days, weeks, or even months - but the purchase price should correspond to this sales velocity. In other words, if you’re selling $10 B2B subscriptions, you can’t afford to have a high-touch - i.e., lots of demos for the prospective customer, back-and-forth emails, and so on - and lengthy sales process, it needs to be easy and fast.

If you’re selling $600,000/year cloud cybersecurity software like Palo Alto Networks, on the other hand, you better expect each of these sales to take months and a lot of effort; but it will be worth it.

B2C

Then, there’s B2C, or Business-to-Consumer, sometimes also referred to as D2C, or Direct-to-Consumer, which is sort of the opposite of B2B, and implies mainly selling your company’s goods to individuals, and not other businesses.

This category includes Netflix, Walmart, Alibaba, Canva, Grammarly, and others. Here, prices tend to be on the low end, as actual people, and not organizations, must be able to afford these purchases.

Acquiring a new customer must be as effortless and lower-cost, as well as lower-effort, process as possible, as your Customer Acquisition Cost (CAC) needs to have a great ratio to the customer's expected Lifetime Value, or LTV, for your business model to be sustainable.

In other words, you can’t afford to spend 2 weeks and $500 in advertising to get a person to buy your $20/month subscription they are expected to keep for 4 months, the economics just won't work out even at scale. So, optimize, optimize, optimize.

Other Models

There’s also C2C, or Consumer-to-Consumer, which is a business model where customers trade with each other using some business, usually a SaaS marketplace, as a facilitator. You know - eBay, Craigslist, Kijiji, that sort of thing. These are usually low-cost and use a variety of ways to generate revenue, including selling advertising spots, charging listing fees and transaction fees, and so on, but the keyword here is “volume”.

Finally, there’s funky stuff like B2B2C, which is a bit of both, in a way?

I wouldn’t recommend jumping into this as a first-time founder, unless you know exactly what you’re doing, but under this model, two businesses provide complimentary goods or services to the same group of customers together. For example, Amazon sells its e-Commerce store hosting capabilities to other businesses and its quick delivery services to the individual customers who purchase through their marketplace.

In Closing

All that said, I would suggest starting with a combination of a single revenue model and a single business model in your startup.

You can expand into additional ones later - why divert your team’s attention now and introduce more moving pieces to your go-to-market process? You need focus. You’re a B2B SaaS. Or a B2C SaaS. Or a C2C Marketplace, and so on; pick one and stick to it until you find product-market fit.