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It’s a Great Idea, But How Does It Make Money?

Posted on the 28 February 2011 by Martin Zwilling @StartupPro

Strengthen-Your-Business-ModelFor survival, the objective of every business should be to bring in revenues which exceed their costs. Even non-profits have to do this to cover overhead costs, unless they rely totally on donations. Yet I continue to see business plans, or even talk to founders, and can’t find the specifics of the business model anywhere.

As Guy Kawasaki says in his book “The Art of the Start,” if you can’t describe your business model in ten words or less, you don’t have a business model. Avoid whatever business jargon is currently hip, like strategic, mission-critical, world-class, synergistic, first-mover, or scalable. Try something like, “the product costs $X, and we sell it for $Y.”

Guy also says and I agree that the smart approach is to copy somebody else. You can innovate in technology, markets, and customers, but inventing a new business model is a bad bet. Try to relate your business model to one that’s already successful and understood. Here is a summary of a half-dozen of the most common models:

  • Facebook model. This is the most often attempted and failed business model today on the Internet – all the services are free, and you make money off the online advertising. This model only works once you have exceeded about one million page-views per month, and spent maybe $50 million to get there.
  • eCommerce model. This was one of the first Internet business models, per Amazon.com, and still a popular one today. It’s the electronic version of a catalog and shopping cart, and today rarely involves any stock of product. Products are usually drop-shipped directly by the manufacturer.
  • Shopkeeper model. This is the most traditional and successful approach in use for centuries. It implies setting up a store in a location where potential customers are likely to be, with products and services on display, being sold at some multiple of cost to cover the overhead and realize a profit.
  • Bricks-and-clicks model. This is a hybrid of the shopkeeper and eCommerce models, in which a company integrates both offline (bricks) and online (clicks) presences. It is also known as click-and-mortar, as well as bricks, clicks and flips, with flips referring to catalogs. It’s great for big companies like Wal-Mart, but I don’t recommend it for startups.
  • Razor-and-blades model. This one has been around for many years now, and is sometimes called the “bait and hook model” or the "tied products model". The premise is offering a basic product at a very low cost, often at a loss (the "bait"), then charging compensatory recurring amounts for refills or associated products or services (the "hook"). I’m sure you can think of many examples.
  • Subscription or licensing model. Here a customer must pay a contracted price to have access to the product or service on a periodic basis (monthly, yearly, or seasonal). The model works online, offline, through magazines, newspapers, and television. The advantage is recurring revenue without finding new customers.

There are many more, with descriptive names like the auction model, direct sales model, value-added reseller model, multi-level marketing model, and the freemium model. Take a look at Wikipedia if you want more details.

The point I am making is – pick one and provide specifics in your business plan. Define clearly who is your customer, what will the customer pay for, how much will he pay, and how much do you expect it to cost for that revenue.

Then as investors, we can argue other equally important parts of the model, like how big is the opportunity, how fast it’s growing, and who are the competitors. Don’t let your business plan be tossed before you are in the game. What are the ten words that define your business model?

Marty Zwilling


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