What separates successful from unsuccessful startups? Is it their innovative ideas, the way their products fill a market need, or how they distribute their offerings and make money? Is it their founders and teams or the investors and partners backing them?
According to the online course Launching Tech Ventures, it’s all of the above—which also comprise a startup’s business model.
“As an entrepreneur, the onus is on you to construct each element of your startup business model through a process of search and discovery,” says Harvard Business School Senior Lecturer Jeffrey Bussgang, who teaches Launching Tech Ventures. “In parallel, you must evaluate those elements to ensure you’re building a sustainable, valuable company. To do so, each business model element must be aligned.”
To help launch your venture on the right track, here’s a breakdown of a business model’s eight components and five examples to consider.
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A business model is a plan for how your business will succeed. You can define success in terms of finances, product-market fit, sustainable production and distribution, or reaching and converting customers.
In Launching Tech Ventures, Bussgang presents the eight components of a business model using the Diamond-Square framework, coined by HBS Professor Thomas Eisenmann.
The first four facets are internal and operational in nature, and the remaining four encompass the stakeholders involved:
- Customer value proposition (CVP): How will your venture deliver value?
- Go-to-market (GTM) strategy: How will your venture reach customers?
- Profit formula (PF): How will you make money?
- Technology and operations management (T&O): How will you create and maintain your product?
- Founders: Are they a strong fit for the opportunity and business model?
- Team: Do they complement one another? Can you fill any gaps?
- Investors: Who have you assembled to finance your business? Are you all aligned?
- Partners: Who have you selected to aid in your execution? How will they help?
Determining your business model is critical to mapping your direction and goals before launch. All eight components work together to form yours, so it’s crucial to carefully craft each.
“Not all business models are created equal,” Bussgang says in Launching Tech Ventures. “Some business models yield companies that are valued dramatically differently than others.”
The term “business model” often refers to how you deliver your product and drive revenue, or your GTM strategy and PF from the Diamond-Square framework. To decide how to make money and reach end users, here are five business models to consider.
Related: 5 Skills Needed to Launch a Successful Tech Business
5 Examples of Tech Startup Business Models
1. Freemium Model
The freemium model—a portmanteau of the words “free” and “premium”—is popular for directly distributing to your target audience. This model offers one tier of your product for free and charges users for the full or upgraded version.
One tech startup that uses a freemium model is the screen time regulation app One Sec. It pairs with other apps so that, upon opening a particular one, you’re prompted to take a deep breath and receive statistics on how many times you’ve attempted to open it that day, followed by the choice to continue or exit.
One Sec offers one free app pairing. If you’d like to use it for multiple apps, unlock more breathing exercises, and access additional features, you must pay for the premium version.
A freemium model can be effective because it gives users a taste of the product experience before purchase. If they love the free version, they may be inclined to upgrade to the premium one.
The downside is that, sometimes, users are content with the free version and never convert to paying customers. Ensure your premium version offers features your target audience is willing to pay for before committing to a freemium model.
2. Advertisement-Based Model
If you’d rather offer your product for free, an advertisement-based model may be the right fit. Like the freemium model, it delivers your product directly to your end user, but the profit formula differs. With an advertisement-based model, you sell ad space within your product to other businesses to bring in revenue.
This model is effective when your product creates enough value for users that they engage with it despite the presence of ads. Social media apps, such as Facebook and Instagram, are common examples. You can sign up and access all their features, knowing you’ll receive ads.
Another option is to combine the freemium and advertisement-based models—like some streaming platforms do—by offering your product’s free version with ads and the premium version without them.
3. Employee Benefit Model
If your tech startup offers products focused on well-being, the most effective way to reach your end users may be through their employers or insurance providers. In the employee benefit model, your product is free to your end user and paid for by a corporation to offer as a benefit.
For example, caregiver support app ianacare partners with employee assistance programs and human resources teams. Together, they aggregate end users’ resources—including their employee benefits—into the ianacare app so they feel supported personally and professionally.
To sell to employers, ianacare cites several statistics on its website about working caregivers, including the 80 percent who report a loss of productivity at work and the 32 percent who’ve voluntarily left a job to care for a loved one. If an employee benefit model is right for your startup, ensure you communicate why your product will help boost companies’ employee productivity, retention rate, or satisfaction.
In addition to its employee benefit model, ianacare uses a direct distribution method by allowing individuals to download and sign up for the app. Certain features are “locked” and can only be accessed through a partnership with the user’s employer.
In Launching Tech Ventures, Bussgang recommends using a mix of direct and indirect methods to reach your target audience.
“Do you have the right mix of direct and indirect channels to educate, support, and distribute the product to customers in a repeatable and scalable fashion?” Bussgang prompts.
Ask yourself this question when crafting your business model.
4. Intermediation Model
Another business model to consider is intermediation, in which your business acts as the bridge between your product and end user.
For example, travel sites such as Booking.com and Expedia act as intermediaries between you and airlines, hotels, and vehicle rental agencies. You have the option to purchase tickets and book accommodations directly from each provider, but doing so through a site provides the ease of doing everything in one place. It also grants access to potentially greater deals and the convenience of comparing options.
If you can think of a way your venture would add value to the customer experience as an intermediary, consider using this model.
5. Disintermediation Model
The opposite can also make a strong business model. Disintermediation removes a step in the supply chain process to streamline product delivery.
A well-known example of disintermediation is e-commerce giant Amazon, which removes retailers’ transaction and delivery processes, simplifying the experience for the seller and end user.
A disintermediation model is a good fit for scenarios that seem cumbersome or complex. Could your product leverage innovative technology to remove one or more steps in a process? Doing so can create value for you and your end user while driving profit.
Selecting the Right Business Model for Your Tech Company
Your tech startup’s business model is a critical decision that can impact whether it succeeds or fails. When thinking it through, consider how the eight elements impact each other.
“You can’t focus on individual pieces of the model in isolation,” Bussgang says in Launching Tech Ventures. “You need to think about each element—your value proposition, go-to-market strategy, profit formula, and tech and operations management—in a holistic fashion so that you can align them clearly.”
One way to gain the perspective needed to craft your business model is by learning from tech entrepreneurs who came before you.
Launching Tech Ventures features several founders, team members, and investors who offer first-hand insight into the challenges and processes of launching a tech business—from ideation to growth stage.
Are you interested in building the skills to launch a viable, valuable tech startup? Explore Launching Tech Ventures—one of our online entrepreneurship and innovation courses—and download our free guide on how to start your entrepreneurial journey.
