Understanding the financial dynamics that underpin your business is a crucial part of being a successful startup founder. When you think “business model,” don’t fall into the trap of thinking just about the money flowing into the business. In the broadest possible sense, your “business model” is every advantage you have, every asset you can leverage, and everything you do to get customers, serve them well, and generate revenue.
Read Business Model Generation by Osterwalder and Pigneur (John Wiley and Sons, 2010) and create a business model canvas (BMC) for your company to understand the full depth of how your business operates. It’s usually easiest to create your first BMC as part of a workshop, so see if there’s anyone near you facilitating those soon.
At the very least, your business model should comprise of your cost of acquiring customers (CAC) and the amount of money you generate from each customer over their lifetime—or lifetime value (LTV).
A path to a business model
For a lot of venture-backed companies, optimizing for revenue too early comes at the cost of growth. In other words, if you try to pull out all the stops to generate cash from your customers too soon, you’ll probably stunt the customer growth of the company, which is a contraindicator for how well you’re doing. I usually advise my clients that they should think about how to get a large number of customers before they worry too much about exactly how much money they are going to make. The main reason for that, from a storytelling point of view, is that you can benchmark revenue-generating companies, and they start to look a lot like growth-stage companies. Counterintuitive as that might be, you don’t want to step into growth stage too early.
As much as you don’t want to optimize for revenue too soon, you do need to have a clear plan in place for how your company is going to shift gears into generating revenue. That’s where your business model will come in.
When it comes to cash, there are a vast number of approaches you can take, and it’s a good idea to consider them in some detail. As a consumer, you’re used to certain types of transactions already, but don’t be fooled into thinking that those are the only options you have available to you.
There’s no business without cash
You can sell a product for cash (Casper mattresses is a good example). Subscription models work great (Native deodorants is an example of this in the world of physical products; Netflix is an excellent example of subscription-based entertainment. Stitch Fix is another variant). There are also hybrid models, where you sell a product and attach a subscription. Peloton and its exercise bikes fit into this category. You may also be familiar with advertising models, as exemplified by Facebook, Instagram, and news websites.
Some companies have found great success with “freemium” models—where the basic version of the service is available for free, but that you pay in order to get the full version. For example, Spotify has a free tier that includes adverts. If you don’t want the adverts, you can become a subscriber.
Affiliate revenue is another possibility—executed fantastically by the Wirecutter.com website. Wirecutter commissions experts to write best-in-class reviews of certain groups of products, such as best Wi-Fi, best vacuum cleaner, or best slow cooker. The site links to Amazon and other retailers using an “affiliate link.” For every item that is sold after you click a link, they get a percentage of the revenue.
Marketplace business models are complicated, but—as I mentioned elsewhere in this book—can be fantastically lucrative. Because you’re a middleman, you typically don’t have to keep inventory or run warehouses, which makes it much cheaper to operate the business than if you were an online retailer. The downside is that you need to build both the supply side (people selling stuff) and the demand side (people buying stuff) at the same time. eBay and Airbnb are the most prominent examples. In the “sharing economy,” there are several other good examples. Postmates is a platform between drivers and restaurants. Uber is a marketplace of sorts, matching cars to passengers who need a ride. Lugg matches van and pickup owners with people needing to move house, and many more.
In the business-to-business realm, there are many other business models in play as well. Licensing is one approach; franchising is another. In the world of solar, you might come across “power purchase agreements”—where the solar power installation company will install solar panels on your home for “free” in exchange for getting some of the solar power generated. In automotive, some car manufacturers are offering all-inclusive rental plans, including insurance, maintenance, and often with free swaps when you get bored of your car.
It’s also possible to do partnerships or co-sales. You may develop a piece of technology that is a natural fit for a certain product, for example, and then agree with the manufacturer of that product to bundle your product with theirs. Akrapovič is one example of this—the company makes high-end after-market motorcycle exhaust systems. On some high-end sports motorcycles, you can order the bikes from the manufacturer with an Akrapovič exhaust already fitted. It makes sense for the consumer—it means you don’t have to discard a perfectly fine exhaust to upgrade it. It helps the manufacturer generate a bit more cash per motorcycle sold, and it helps the exhaust company create extra sales. A sign of a great business mind is whether you’re able to identify how your company can help other companies in a win-win situation.
Whatever business models you end up with, it’s crucial that you have a firm grasp of the dynamics in yours—and to show how your company could start generating revenue—as in Figure 12-1.
I give BeerSub.com a C+ for this slide. It’s not uncommon to include a slide for pricing models, if they are particularly complicated, but in this case, the pricing and business models are both relatively straightforward. This slide is at the very upper limit of how much text I’m comfortable with on a slide—I would probably recommend splitting this part of the deck into two different slides or leave the pricing model off the slide altogether. Image Source: breakingthewalls/stock.adobe.com
Weaving the narrative
In your pitch, it’s important to be able to tell a solid, coherent narrative of your business plan. Where do customers come from? What does it cost (in terms of effort and cash) to acquire those customers? What would it take to increase your customer base at ten times your current rate? Similarly, how will you be generating revenue from your customers? What are the opportunities to increase your lifetime value per customer?
Having a separate slide for your business model isn’t appropriate on all slide decks—but if you’re planning on doing something unusual, definitely consider including it. I usually recommend having a business model slide in the appendix, at least; if you don’t use it, at least you’ve made it so you have clarity and can explain how it all comes together. If you do need it, well, flick to the back of your presentation, and there you are!