Among tech startups, competition takes place not just for survival in the market but also for the investor’s attention. It’s essential to understand that the components of this competition touch not only product, service, and technologies, but a business model as well.
The concept of a business model has begun to take shape in the late ‘90s and is still being shaped. No wonder that till now there is no generally accepted definition, not to mention classification. That’s the reason why startups often mistake business models with revenue models in their Investor Decks, forget about business model essential elements in live presentations on fundraising events, and confuse answering questions.
The article will lead startups through definitions, frameworks, and accepted classifications to form a general understanding of the concept of a business model.
Business Model Elements and Frameworks
Early definitions describe the business model as architecture and summarize what a business model is made of and are close to frameworks. Still, such an approach doesn’t go deep into the essence. There are other approaches, such as strategic, operational, economical, role-related, etc. For example, in a book “Business Model Generation” by Alexander Osterwalder and Yves Pigneur, the following definition can be found “A business model describes the rationale of how an organization creates, delivers, and captures value.”
Compositional elements describe what a business model is made-off. They can be visualized or described as building blocks (Osterwalder & Pigneur, 2010), components (Pateli & Giaglis, 2004), questions (Morris et al., 2005), or functions (Chesbrough & Rosenbloom, 2002). In practice, to describe the business model of a tech startup, it’s helpful to take advantage of frameworks.
The most well-known and widely used framework is the Business Model Canvas (Osterwalder & Pigneur, 2010). The Canvas is a follow up of the Business Model Ontology (Osterwalder, 2004). The elements are grouped into blocks and represent the further info:
Who are the most important customers?
What value is delivered? What problem/problems are solved? Which needs are satisfied? What bundles of products and services are offered to each Segment?
Channels (Communication, Distribution & Sales)
Through which Channels different Segments want to be reached? How are they reached now? How are Channels integrated? Which ones work best? Which ones are the most cost-efficient? How are they combined with customer routines?
What type of relationship does each of our Segments expect to be established and maintained? Which ones have been established? How costly are they? How are they integrated with the rest of the business model?
For what are customers really willing to pay? For what do they currently pay? How are they currently paying? How would they prefer to pay? How much does each Stream contribute to in the grand total?
What Resources do Value Propositions require? Distribution Channels? Relationships? Revenue Streams?
What Activities do Value Propositions require? Distribution Channels? Relationships?
Who are Partners? Who are Suppliers? Which Resources are acquired from partners? Which Activities do partners perform?
What are the most important costs inherent in a business model? Which Resources are the most expensive? Which Activities are the most expensive?
Describing these blocks, you describe your business model.
One more popular canvas is Lean (2010) created by Ash Maurya. It was developed on the basis of the Business Model Canvas. The Lean Canvas is more actionable and entrepreneur-focused. It primarily focuses on startup factors such as uncertainty and risk.
It’s essential to add that the concept of a Minimum Viable Project has become pretty popular lately and can be considered as one of the most significant trends for startups.
You can get any or both business model templates, as well as a ready Pitch Deck template, product demo, and consultation in one of the startup service packages.
Often, in the Pitch Decks, startups mistake a revenue model for a business model that is just a constituent of a startup business model.
So, what is a revenue model, then? Does this model describe the ways of getting the profit by a company? Here are some of them:
- Transaction (One-time sale of goods/products or services).
- Project (One-time project).
- Recurring (Payment for access to a product or service in installments – usually monthly or yearly).
- Service (Payments for time or expertise).
- Freemium (Offers a subset of product features for free. Tries to convert free clients to paying ones).
- Marketplace, platform (Platform or marketplace to connect buyers and producers).
- And many others.
Types of business models for startups
To Business model classification, there are different approaches. A good selective overview ordered by year and the author can be found in “Conceptualising Business Models: Definitions, Frameworks, and Classifications” by Erwin Fielt.
Some of the authors didn’t aim to create a comprehensive classification and focused on specific niches to make it more precise. As there’s no commonly accepted classification and approaches to them also differ much, there’s no significant benefit from associating with your tech startup business model to a specific category. It’s better to describe it with the help of canvas and show it to your potential investors. It’ll help to build an understanding of how your business will function to avoid confusion and misunderstanding.
If you still need to know different business models for startups, it’s a good idea to study the book “Business Models: 55 Best Templates” by Oliver Gassmann, Karolin Frankenberger, Michaela Csik. The book is based on the working paper, University of St.Gallen, one of the Top 10 leading business schools in Europe according to the Financial Times. They analyzed 250 business models that had been applied in different industries within the last 25 years and worked out 55 best templates. It’s possible to combine these templates to create a unique and competitive business model for a tech startup. Here are the steps to take:
- Doing the competitive analysis, research for the competitors’ business models widely used in the market. This will save time from reinventing the wheel.
- Study 55 templates and try to innovate your own new business model. Mind that the templates can be applied to every element of a business model.
- In a nutshell, the business model components are the four cornerstones: Customers, Proposition, Value Chain, Revenue model.
- Select the business model idea that seems good to you.
- Implement, analyze, and improve what works and change what doesn’t. Feel free to resort to such an opportunity as MVP development for a startup (Minimum Viable Product). To navigate yourself better in a sea of opportunities, it will be useful to read about how to find a developer for a startup.
So, why is a business model important for startups? Because it may provide a more significant competitive advantage in the market than a product or technology. Unfortunately, there’s no commonly accepted definition of the essence, not speaking of components and classification. Often, startups mistake a revenue model (that is just one of the components of a startup business model) for a business model itself. Other components of a business model, according to different authors may vary, but you may accept that they are Customers, Proposition and Value Chain. Choosing or constructing the most competitive business model, developing a product, and planning its promotion are difficult tasks, If you can’t handle them all, you can apply for IT services for startups to get serious support in it.