B2B? C2C? VC-Backed? Read on to Have These and Other Business Models Explained.
Sooner or later, every young business needs to begin putting money in the bank -- and there are five business models your startup can use in its pursuit of bringing in revenue. The one (or more) you choose will depend largely on the product or service you’re providing, but all five monetization models have their advantages and disadvantages.
Here’s a primer to help you consider which model(s) might make sense for your startup to pursue -- and to know what you’re getting into.
1. Existing on Venture Capital (VC) -- aka OPM (Other People’s Money)
Aside from this not being a “real” business model in the traditional sense of a company making its money by providing a good or service to customers in exchange for compensation, it’s not necessarily a bad one. The list of prominent OPM addicts has included Instagram, Twitter, Skype, Hotmail and many more successes that had no business earnings and relied fully on venture capital for years.
Advantages: With venture capital paying the bills, you can concentrate on making a great product and don’t have to think about selling it, pricing it, converting free users to paid users, etc. This model requires hyper-speed growth, though, which usually requires whatever you’re offering to be free.
Disadvantages: Very few startups can succeed this way. Raising capital is a tough process, and investor patience with a lack of profits doesn’t last forever. There’s a long list of really great free services that ended, because they couldn’t show fast enough user growth to keep raising money.
2. Business-to-consumer (B2C)
This is the most widespread offline business model: selling to consumers. Specific tactics include direct sales, subscriptions, group deals and special offers.
Advantages: Unlike the VC-based model, here you’re building a traditional business, developing clients who find value in what you offer and pay you for it.
Disadvantages: When what you offer isn’t free, the work of winning and retaining customers becomes a complicated balancing act between growth, product and profitability. It’s especially hard for startups when they must start converting free users into paid ones -- just look at Ning, Flickr and other services that experienced plummeting traffic and a shrinking user base when making this tricky transition.
3. Business-to-business (B2B)
The art of selling to businesses includes methods like subscription services, licensing, one-off sales and packaged sales.
Advantages: Investors often love the B2B model, because there’s a clearer correlation between B2B companies having early successes also having longer-term viability.
Disadvantages: B2B sales are more difficult to achieve, have a longer sales cycle and come with higher stakes for both buyer and seller. It’s certainly harder to persuade a business to invest in a (oftentimes very expensive) product or service than it is to convince a consumer to buy something they really want.
4. Consumer-to-consumer (C2C)
In this model, the startup provides a platform where people sell their products or services to others. Think of Etsy, Airbnb, Wanelo, Depositphotos and others that create marketplaces where individuals and small or large businesses buy and sell from each other.
Advantages: C2C marketplaces are self-propelling and grow with viral speed. Sellers on these marketplaces actively promote their virtual store at the same time promoting the marketplace business itself.
Disadvantages: Scaling up a marketplace is a particularly significant hurdle and requires vision to accurately foresee its potential as a sustainable one. Attracting the critical mass to make a marketplace self-propelling isn’t going to happen without stellar business development abilities.
5. Advertising revenue
Under this model, consumers usually enjoy a free service while supporting the business with their eyeballs -- i.e., by being exposed to paid ads. Companies like Facebook, Google and Contacts+ are examples of free, ad-supported services.
Advantages: Much like in the VC-based model, there’s no need to convert users into paying customers.
Disadvantages: It’s easy to go too far with ads and annoy users enough that they leave. This happened with MySpace. Aggressive advertising causing a big drop in its traffic, and it’s never hard to find people threatening to leave Facebook or any particular service like this for the same reasons.
As an entrepreneur, it’s necessary to understand these models -- you may even need to use multiple at once or transition between them as markets change. If you do have an investor-backed startup, you may be able to rely on those advisors for knowledge on executing the finer points of these models. Money is the lifeblood of a business regardless of its stage, and the important thing is to start the revenue flowing -- and keep it going.
Igor Shoifot is Investment Partner at TMT Investments, a venture capital firm focused on high-growth, internet-based companies across a variety of B2B and B2C sectors. TMT Investments is traded on the AIM market of the London Stock Exchange. Igor lives in San Francisco.