In the new series of articles “Instructions for starting a business”, you will learn step-by-step how to found a company, what you have to consider and how you can avoid mistakes at the start of your entrepreneurial career.
further articles in the series:
Step 1 – Find a business idea
Step 2 – The founding team
Step 3 – Validate a business idea
Step 4 – The business model (current)
A suitable business model (business model) is decisive for whether a company has a solid source of income and can thus survive in the market in the long term. Founders have to ask themselves which business model is actually suitable for their startup and which criteria should be observed. This article gives you detailed information on how to do this.
What is really important for a business model
There are many definitions that describe what a business model actually is and different views of how the term can be interpreted. Some take the term a little broader and include key factors of the company such as customers, user added value, costs, sales and much more. with the creation of the business model. The Business Model Canvas , for example, was developed to take these factors into account and visualize them.
This preoccupation with your own company makes sense, of course, unless you have dealt with it extensively beforehand. As a rule, however, you have already dealt intensively with the most important aspects of the company when selecting the business idea. In the business model, the main thing is to choose the right way to “earn money”, to generate sales. In this article, we are primarily concerned with the earnings model of startups.
Many roads lead to sales
It seems supposedly easy to find a suitable business model: you sell your product / service at a fixed price. But the possibilities that arise in connection with business models are manifold. Depending on the type and business of the company, there could also be subscription models, time allocation models, success models, advertising models, licensing models, franchise models and countless other forms of revenue stream.
The challenge for founders is to find out which type of source of income is most suitable for their own startup and how to choose the right business model for themselves.
How to find the right business model
In order to find the best business model for your own company, you as a founder have to consider many factors. You have to consider what your own products and services actually are, what revenue models there are for them on the market and what business models future customers will accept at all. It could be that the selection of monetization instruments has been drastically reduced or that there are certain standards or usages on the market. In this context, as a founder, you have to ask yourself whether you stick to the realities of the market with the chosen business model or whether you consciously strive for a completely new, innovative, disruptive income model. Both options have advantages and disadvantages and can be better or worse depending on the strategy, the product, the market and the USP of the startup.
In addition, you have to consider the growth aspect of the startup when choosing the business model. Should the company grow sustainably and quickly generate profit or do you go the scalable path, relying on exponential growth and accepting losses in the early years? Depending on this, different business models can have an impact on growth.
Case study: razors and razor blades
A particularly good example to illustrate different business models with an almost identical product are wet razors or manufacturers of razor blades.
When you think of manufacturers of razor blades or wet razors today, you think of one company above all: Gilette. Gilette is the world market leader with a market share of almost 70%.
How did that happen? The inventor of the one-handed razor King Gilette founded a company at the beginning of the 20th century to sell his invention including blades. He offered the razor with 20 replacement blades for 20 dollars – which at the time was almost 1/8 of an average monthly salary and was accordingly an absolute luxury product. In its first fiscal year, Gilette was only able to sell 51 razors and 168 additional blades.
Gilette’s breakthrough came with a change in business model. Gilette gave some of his razors away or sold them at ridiculous prices, making calculated losses. The associated blades were then also sold at expensive prices with a high profit premium. Rumor has it that the blades were and will be sold with profit margins of up to 4,000%.
Since no razor blades from competitors were compatible with the razors given away by Gilette, the owners of the Gilette razors had no choice but to buy Gilette blades. In this way Gilette was able to retain its customers in the long term and make big profits.
Wilkinson Swords, Gilette’s biggest competitor, has been able to gain significant market share over the past 25 years by developing razor blades that were compatible with Gilette’s razors but were much cheaper to buy.
Dollar Shave Club
Another competitor in this market is Dollar Shave Club, founded in 2011. The Dollar Shave Club offers its members a monthly shaving subscription for a fixed price – this includes razors and blades from $ 4 per month. With this business model, the Dollar Shave Club was able to receive 12,000 subscription orders on the first day of sales and add millions of members within a few years. In 2016 the company was bought by Unilever for a purchase price of $ 1 billion.
In spite of almost identical products, these companies pursued very different business models and were ultimately able to all be successful. This confirms something that has long been known in entrepreneurship: implementation is what counts!
Don’t be afraid of the pivot
As soon as you have decided on a business model, that does not mean that it has to be set in stone forever. Changes to the product, in the market or in the competition can mean that you have to change your business model over time in order to continue to exist in the market. In this context, as a founder, you shouldn’t be afraid of trying out new business models, expanding your own business with additional business models or completely “pivotal” and developing a disruptive business model.
In summary, it can be said that there are hundreds of business models and the selection of the right business model depends heavily on your own company, strategy and product. In order to find the right business model, you have to consider many factors and the case study has shown that there are many paths to success.