Tell me what kind of startup you are and I’ll tell you your business model

One of the main challenges facing entrepreneurs is choosing their business model. Although there are a few exceptions where a startup is set up and does not grow through a monetization method (Twitter, Facebook, Pinterest or Snapchat), in most cases entrepreneurs are more or less clear from the outset how they want to make money. This decision is important and can mark the development and life of a technology startup or company.

There are many business models and these are of a varied nature. Some are a better fit to a certain type of startup than others, so it is sometimes easy to associate certain kinds of companies with specific monetization methods. In this entry we discuss five business models that are normally associated with a particular type of startup.

Advertising

Advertising has been and will be one of the main monetization methods for products and services that manage to build up a critical mass of users. We are talking about companies like Google, Facebook, LinkedIn, Yahoo or Twitter that have millions of users worldwide and, thanks to the amount of information that these companies have on their users, may be attractive for brands and advertisers.

In the field of advertising as a business model, the following scenario uses arises: companies are set up without a clear monetization method but accumulate a lot of users as they grow. These users generate massive amounts of data and information that, when analyzed, can be "sold" to the brands so they can offer ads. Small-scale advertising (or with a limited number of users) is not really useful, so this type of business model is usually applied to those companies that have the so-called "network effect ".

The advertising landscape has changed substantially with the expansion of smartphones and many would argue that this cannot be perfectly transferred to the small screens that most of the population carries in their pockets today. However, the cases of Facebook or Twitter seem to show that advertising can also be a valid business model in cell phones.

Subscriptions

One of the business models that investors and entrepreneurs like most. Premium subscriptions for a service or product have a number of significant advantages; the main one being that subscriptions entail recurring revenue that repeat every certain amount of time (every month, every year, every week, etc.), so entrepreneurs can predict their revenues in a given period of time with a certain amount of reliability.

Companies that provide Software as a Service (SaaS) to their customers often use this type of system, just like companies like Spotify or Netflix that offer access to an extensive catalog of music content and film in exchange for a monthly subscription.

Another feature of these software and services companies is the use of freemium plans, which comes from the combination of the words free and premium. Freemium consists of providing a service to users free of charge so they can find out how it works and its features, in addition to providing a premium service (more complete with greater capability). Such systems are used by many companies like Spotify and Hulu and have become the "goose that lays the golden eggs" for many startups and entrepreneurs.

In-app purchases

When the first mobile apps stores (iTunes App Store and Google Play) appeared there were two broad categories: free apps and premium apps. Developers interested in monetizing their apps through the "easiest" route opted for the second alternative, typically charging 99 cents when they were downloaded.

However, this model has an important drawback. This is charged once and it is not repeated for each user. That is one of the reasons for the rise of in-app purchases in recent years that have become one of the main monetization methods for apps. In-app purchases are usually associated with free apps and entail offering additional items (items in the case of mobile gaming, stickers in the case of instant messaging, etc.) for a small amount of money.

Unlike with what happened with premium apps, users buy these extra products on numerous occasions and thus provide an important revenue stream for developers. Such is its importance that according to PC Magazine in 2017 in-app purchases will account for 47% of total revenues of the developers in the Apple App Store.

eCommerce

Selling products is probably one of the oldest business models in both the online and offline environment. It consists of selling something to someone by applying a margin on the purchase price; this margin (usually expressed as a percentage) becomes one of the most important metrics for companies in the field of eCommerce.

This monetization method is used by dozens of technology companies and startups, from giants such as Amazon to smaller ones such as the Spanish company Demartina. It presents a major drawback, which is that the margins in this business are usually very small, so companies need to sell a lot of products (or fewer products but at higher prices) for the activity to be profitable.

With eCommerce on the rise in our country (Forrester estimated that the sector will generate revenues of 9.1 billion dollars in Spain in 2017) it is a business model to consider.

Transactions

This monetization method is often associated with financial services. Companies like PayPal, Square and Stripe were designed and developed based on the same principle: we process millions of transactions every day and we are left with a small percentage of each, usually between 0.5 and 3 percent. This business model is therefore very similar to the eCommerce business model as to make it profitable, it is necessary to process tens of millions of transactions.

Within this category we can distinguish several sectors. On the one hand we have companies like Square that facilitate transactions in the offline world (and on cell phones); on the other hand we have giants like PayPal or Stripe that are relevant in the online payments we make to buy products and services; and finally we have the case of companies like the Spanish firm Kantox or TransferWise that facilitate the exchange of currency by applying lower fees than traditional banks.

In all these cases companies apply small fees that, by processing millions of transactions, represent a significant volume of business.