What is a business model?

A business model basically explains how you plan to make money in your startup. There are generally 3 classes of business models:

Transactional - you are paid for product sales or services rendered. Some examples:

  • You make toothpaste, and a consumer just bought a tube of it for $3 at the local drug store. When someone buys a tube of toothpaste, the drugstore makes money off the consumer, and you make money because the toothpaste you distributed wholesale to the drug store network had a "sell through" (i.e. a consumer left the point of sales with a tube of your toothpaste). This is common for sales of tangible goods, services like landscaping and snow removal and so forth.
  • You are a vacation booking service, and a guest just booked a $300 stay at a host's lakeside vacation home. When the customer pays the host, you may charge the guest some percentage of their booking fee, and you may also charge the host a small percentage for each successful transaction. This is common for marketplace businesses where they facilitate two sides of some market to do business.

Subscription - customers sign up for a long term relationship and they pay you every month. Some examples:

  • You provide a streaming service for music or video for $15 per month.  The customer signs up to pay either month to month, or they sign up for a longer period for a small discount. This money is paid to you regardless of whether the customer ever uses the service. This is the fundamental way Software as a Service (SaaS) companies extract value from their customers. Another example is in older desktop software business models, where customers pay up front for a named license, they sometimes also offer a subscription service for free upgrades, but this business model has been largely phased out in favor of a SaaS business model (for example, Adobe Creative Suite switched to a SaaS model even though their software all need to be installed locally on a Windows or a Mac).
  • You provide regular maintenance service in the field for an industrial robot in your factory. The customer signs up for a 3 year field service contract. In return you send staff to check on the robot, make sure everything is in good working order, and performs preventative maintenance. You will also have staff on call 24/7 to travel to the site to fix any sudden failures within a 24 hour period. This is common for industrial equipment.

Ad based - You allow other people to advertise on your website or app and you are paid each time anyone clicks.

  • You are a TV network. You sell advertising spots in 60 or 120 second increments to people who want to advertise their product, service, or political messages on TV.
  • You are Google or Facebook. As of 2020, these two companies are the current giants in ad networks, because of the sheer volume of people who visit their properties.


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