With dozens of online business models to choose from, you might feel overwhelmed and unsure of which to use for your startup. We’ve lightened the burden by breaking down a few popular models and why you should try them.
Whichever model you choose, weigh the pros and cons and decide how much time, energy, and money you want to invest in your startup. Remember: Your first model might not work out. Don’t be afraid to experiment until you find the best fit – and good luck!
If You Have the Time and Energy: Product as a Service
Service-based online business models work great if you can invest time and effort into a startup but are short on cash. Many product-driven startups spend money on restocking inventory and attracting new customers, but models like product-as-a-service (PaaS) allow you to cut some of those costs.
Save on Expenses
With PaaS, you sell customers the product benefit, not the product itself. Take a pedal boat business at your local lake. Rather than selling tourists a pedal boat, you sell them the experience of pedaling on the water. They enjoy a scenic ride and you can recycle boats for the next customer. Once you’ve paid for your first batch of boats, you don’t need to buy any more for a long time (until they’re beyond repair, for example).
Other PaaS business models offer a subscription service. Companies like Blue Apron and Hello Fresh provide daily or weekly boxes of ingredients that customers turn into delicious meals. You can also create different-priced tiers for your service and earn recurring monthly income.
To grow that income, split your sales campaigns between new and existing customers, emphasizing the latter. While you always want to attract new customers, it’s expensive to do so, and your current relationships will likely be of more value in the long term.
For example, you can encourage a customer who rents a cheap car from you once a month to rent a more expensive one. They’re more likely to upgrade to a higher-paying tier than new customers renting from you once for a smaller fee.
You can also run most of these models from home or a small commercial premises, saving on overheads. Your upfront expenses include incorporation and insurance fees, the initial cost of buying or building your product, and the cost of delivering the product to your customers.
Prepare for Long, Tiring Hours
PaaS might be a low-cost business model, but you’ll spend long hours building customer relationships. Customers rely on your product to create value1. If they can’t access that value, or you struggle to provide it, you must address the problem with your business plan.
Expect to make repairs, adjust features based on consumer feedback, and add exclusive benefits for high-tier subscribers. But also focus on building trust between your brand and your customers. The more they trust you to provide this service, the likelier they are to pay bigger subscription fees.
Is PaaS the Online Business Model For You?
Product-as-a-service is the online business model for founders willing to invest more time than dollars. It’s a more hands-on model that can be difficult to juggle with a day job or other commitments. But if you put in the hours to build and market your product well, your return on investment will reflect that effort.
If You Know How to Code: Software as a Service
By the end of 2022, 80 percent of companies will rely on a software as a service (SaaS) product2. Jumping into this market could result in huge returns for your business, especially if you serve a market need or solve a problem. But building a sophisticated software application means adding a member to your team who’s well-versed in coding, which doesn’t always come cheap.
Do You Know Someone Who Can Code?
Whether SaaS is the best online business model for you will depend on who develops your software. If you can code, you’ll face different challenges from those who have to hire developers.
Hiring developers can get pricey depending on where you’re based. The median salary for a US developer ranges from $110,000 to $300,0003.
For a similar investment, you could hire three coders from South and Central America4. Look into hiring contractors too – since they don’t qualify for benefits or require payroll taxes, you could save up to 30 percent on what you’d pay for a full-time employee5.
Coding the software yourself saves cash but costs more of your time. Regular maintenance and software updates won’t happen on their own, so set aside time to fulfill those demands while balancing other responsibilities.
Another advantage of building the software yourself is that you can quickly ship improvements. It can be difficult to explain exactly what you want to outside developers. But if you know how to code, you’ll better execute your vision.
Develop Your Software With Customers
When you debut a SaaS product, it doesn’t have to be perfect. Instead, launch a free minimum viable product (MVP) and open the floor to consumer feedback. Then iterate your software over time. Once you offer enough value, you can start charging for your product.
This “freemium” model allows customers to try the basic version of your software so they feel compelled to subscribe for more benefits on a higher tier. PaaS businesses run freemium and other subscription models as well, but SaaS has the advantage of a quick feedback loop to draw subscribers in more frequently.
Is SaaS the Online Business Model For You?
If you can pay for development or do it yourself, SaaS might be the business model for you. As you perfect your product, you can grow revenue quickly by subscribing customers to free plans and upgrading them later.
Whether you develop the software or pay a dev team to do it, always listen to customer feedback and add improvements to your product roadmap.
If You Can Take Fierce Competition: Ecommerce
Nine years ago, ecommerce made up only six percent of total retail sales in the US. But by 2025, expect it to cover nearly a quarter of US purchases6.
After the pandemic turned people to online shopping, more founders began building ecommerce companies6. Your business, too, could fit into a booming market – but expect lots of competition.
Keep Up or Get Left Behind
Shopify, one of the largest ecommerce platforms, reports that as many as 12 to 14 million ecommerce sites exist worldwide7. To ensure your business doesn’t get lost among them, you’ll need to carve out market share with a well-planned and executed marketing strategy.
Focus on keyword research and other SEO practices to increase your website traffic. While it might take a while to see results, it’ll pay off once you rise to the top of search engine results pages (SERPs). And when your visitors arrive, wow them with a memorable and personable brand. People buy from people, not faceless corporate entities, so humanize your marketing as much as possible.
When you advertise your product, prioritize its benefit to your consumers. Highlight what you do better than your competitors too.
Reach Customers (And Their Cash) Around the Clock
Unlike a brick-and-mortar store, you can sell your product or service 24 hours a day, seven days a week. You can also reach a global audience, expanding your business’s presence to new markets.
But pay attention to where most of your purchases come from. Every time someone buys from your site, analyze their buying behaviors to later influence your target market.
Aside from marketing, your main costs to run an ecommerce business are supply and distribution. Models like dropshipping have lowered those costs, with manufacturers able to ship your product directly to the consumer after they order it. You don’t have to stock an unknown amount of inventory but can sell each unit individually as the orders come in8.
Depending on your product and target audience, you can operate as a D2C (direct to consumer), a B2B (business to business), or B2B2C (business to business to consumer) business. Consider who your product or service most benefits and where you think you can earn the most profit before deciding on a type of ecommerce business.
Is Ecommerce the Online Business Model For You?
Ecommerce is the business model for founders with a flair for marketing. But earning a profit requires building your brand online to reach as many people as possible. Once you reach your target audience, the ecommerce model makes it simple to get your products out of the warehouse and into consumers’ hands.
Choose Wisely
Now that you’ve learned about the advantages and disadvantages of each online business model, you can gauge the best fit for you. See how your goals and abilities translate to these models, testing the variables for each one. And once you’ve launched your business, assess how this model holds up against the market. Stay open to the other options so your business can evolve with market needs.
Sources
1https://www.consultancy.eu/news/7350/as-a-service-business-models-what-it-is-and-its-benefits
2https://ascendixtech.com/number-saas-companies-statistics/#:~:text=The%20Number%20of%20SaaS%20Companies%20%7C%20SaaS%20Statistics%202022,in%20the%20marketing%20space%20alone.
3 https://builtin.com/salaries/dev-engineer/senior-software-engineer
4https://bootstrappers.com/moving-home-and-reconnecting-with-friends-helped-this-founder-build-a-2-4-million-arr-recruiting-startup/
5https://smallbusiness.chron.com/costs-employee-vs-independent-contractor-1077.html
6https://www.statista.com/statistics/379112/e-commerce-share-of-retail-sales-in-us/
7https://www.shopify.com/research/future-of-commerce/future-of-ecommerce
8https://www.bigcommerce.com/blog/dropshipping/#dropshipping-for-beginners-faqs
The content on this site is not intended to provide legal, financial or M&A advice. It is for information purposes only, and any links provided are for your convenience. Please seek the services of an M&A professional before entering into any M&A transaction. It is not Acquire’s intention to solicit or interfere with any established relationship you may have with any M&A professional.
