When starting a business, one of the most important considerations is what type or model of business. Yet a surprising number of entrepreneurs fail to think through their overall business model in the initial stages.
To make this step easier, here are three business models that have proven successful.
Orchestrate buyer and seller interactions
Ebay has deployed this business model with great success. This model is an excellent choice, especially for virtual marketplaces where cost efficiencies may eliminate the need for any brick-and-mortar expenses.
The entrepreneur’s strategy is to bring sellers and buyers to one common platform and facilitate interactions, creating a win-win situation for both. Buyers get instant, easy and cost-free access to either a wide array of products/services (like Ebay or Amazon), or conversely highly vertical niche products (e.g., 1800PetMeds for pet medicines and supplies). This creates an ideal marketplace for transactions to take place.
Take particular note of the niche concept, in which you identify an unserved or underserved market and provide valuable content, services or goods to them. Within the past few years especially, technology has enabled millions of entrepreneurs to embrace this model with little initial risk.
Offer a better price than competitors
With this business model, you offer a better price on a product or service that is in demand by customers. You either build a better mousetrap, or at least one that is different enough to get noticed—and price it attractively.
Typically, services are a better bet here (vs. hard goods), as they involve less capital intensive production and startup costs. Examples include “freemium” models, where prospects and customers enjoy limited features of a product with the opportunity to upgrade to get enhanced features. Another example might be selling a private-labeled product on Amazon, which can cost substantially less to start up and test vs. creating a new product from scratch.
This strategy can capture a substantial market share within a short span of time. This makes it an attractive business model for an entrepreneur trying to break into a marketplace that is already saturated with sellers.
The focus of the entrepreneur should be on assessing the pricing of competitors and undercutting them to such an extent that the new price breaks all sales barriers that might otherwise prevent buyers from switching from a competitor. At the same time, the lower pricing should not be so low as to “break” the enterprise before it gains enough market share and brand recognition to price on par with the market and still retain customers.
Offer a product or service that is invaluable and exclusive
The success of this strategy lies in identifying a product or service that a section of the market cannot do without. Just visit Kickstarter or one of the other crowdfunding platforms, and you’ll see lots of entrepreneurs hoping to strike it rich with their big ideas. It’s easier said than done, but the risk/reward equation is huge.
It is important to ensure the product or service is exclusive in how you present it, and that you have validated there is a clear and sustained demand (such as launching a successful crowdfunding campaign). Since there are no alternatives for buyers to consider, they will be willing to pay a high price for it.
This strategy worked extremely well for Apple, when they launched both the iPod and the iPhone. Ironically, unlike most early-stage entrepreneurs, Apple had deep pockets and could afford to gamble on how much demand they would actually enjoy before going into full-bore production.
With this business model, it is possible to achieve profits even in the initial period following the launch of the business. However, as was the case with Apple and every other seller of “exclusive” goods, lots of competitors will swoop in the minute the new product or category is making money. So it can be difficult to maintain market share and momentum.
Do you like one of the models above best? Or do you have another preferred business model that has worked well for you? Please leave a comment below.
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