Disruption The Startup Mantra

Today, startups are the “talk of the town”, with everyone showing a keen interest, whether it is an entrepreneur, investor or the general public. With the so called success stories of recent startups, many people are jumping onto the band wagon and looking at ways of replicating these successes with their own startups. While reviewing some of these stories, I wondered what business models these startups began with and whether it can be replicated effectively by others.

Twenty years back, who would have imagined that something like advertising would be a major source of income for a business whose primary product was logistics services or information exchange? This is where a business model comes in handy as it helps determine the sources of income. If you are an entrepreneur or planning to become one, do you have a business model in place? If not, I would recommend that you put together one, as the axiom goes, “better late than never”.

Investopedia defines business model as .The plan implemented by a company to generate revenue and make a profit from operations. The model includes the components and functions of the business, as well as the revenues it generates and the expenses it incurs. In other words, how you plan to make money or in startup jargon “monetize”.

How do you go about planning a business model? Looking at how the established startups are behaving, this maybe is the “million dollar question”. There are numerous models that can be used for your business. All you require to do is work out which one(s) will be the best for your business. To start you off, here are some established models that you can evaluate.

Marketplace or Demand Aggregation model:
Create a virtual marketplace where sellers can display their products and buyers can select what they want to purchase. Your role is limited to providing a platform where suppliers and buyers can come together. You can run the business with zero inventories and very low overheads as the sellers service the orders directly from their own warehouses. You get paid for each transaction that takes place on the virtual marketplace. This model is practiced by online giants like Amazon and eBay.

Freemium model:
This model combines some free services with some paid services. Various services including job portals and social networks have successfully adopted this model. Anyone can register at the portal site and get to use some basic features without being charged for it. The portal offers various premium features that registered users can avail of by paying a fee. Linkedin and Naukri.com have been using this model quite extensively.

Virtual Goods model:
Virtual goods are products or services that can be used online only. In social networking sites they come in the form of virtual items that include gifts or cards. Users can pay for a birthday card and have it sent to a friend, colleague or relative on their email ID. This model is also prevalent in game apps where users pay for virtual items such as upgrades, points, gifts or weapons. Most of the online games use this model as well as portals such as Facebook and Plaxo.

The Reverse Auction model:
This is quite a popular model with buyers as they feel that they are getting a product or service at a bargain. It works somewhat like a marketplace where products and services are listed on the marketplace that the buyers can bid for. When a buyer makes a bid and if a seller accepts the bid, the buyer has to agree to all the terms and conditions of the seller. Several e-commerce facilities such as indiamart.com and tradeindia.com provide reverse auction services.

On-demand model:
On-demand services provide greater convenience, speed, and simplicity and the opportune introduction of smartphones at a ripe time has made this model even more popular with the users. A very good example of such a business model is the cab/taxi aggregators. The user uses the app on a smartphone and specifies the location (from and to) along with the time of requirement. Nearby cabs get to see this information and respond to the call. A message is sent to the user with details about the cab, driver, and expected time of arrival at the user’s location. In addition, the smartphone used by the cab driver shows the fare at the end of the journey. Cab aggregators like OLA and Uber are live examples of this model.

Franchise model:
Set up your own retail center and build in systems and features that are highly customer-centric and user-friendly. Document your experiences into a handbook and sell it to entrepreneurs all over the world. You may throw in a set of training sessions to start them off. You may extend this into a revenue sharing system for long-term benefits. Diverse types of businesses use this model. On the one hand, you have businesses like Delhi Public School (DPS) and on the other you have fast-food outlets such as McDonald’s, Dominos and KFC who have adopted this model and deployed it quite successfully.

These models can be used individually or in combination, all working towards the monetization of your startup. Which will fit and work will be determined by the business idea that you have. Strategyzer has designed and developed a business model canvas, a strategic management and entrepreneurial tool that allows you to play around with your business model till it is perfectly tuned (http://businessmodelgeneration.com/canvas/bmc).

Plan to disrupt the market, only then will you be noticed and business will follow. A word of caution is that you will find it extremely difficult to disrupt the market as well as make money at the same time. Chris Pentilla argues that The old business methods won’t work anymore. It’s time to evolve. He lays down seven ways that can guide you to become a game changer (The link to the article is mentioned in the references.)

The models that are used by existing startups are quite generic and can be replicated quite easily. Two things you must ensure to remain on track to success: your business model must relate to the customer pain point that you are targeting and your solution must work better than your competitors. It may be more rewarding, however, to be creative and design your own models by taking ideas from the models in existence today. Do you have it in you to come up with something spectacular?

An intriguing statement made in an interview with Indrajit Gupta by Erik Roth, Head of Global Innovation Practice at McKinsey and Co.:

But it isn’t just technology. Technologies do not disrupt, business models disrupt. It is about the commercialization and application of the technology that makes all the difference. I have seen some mind-bending technologies in the labs, which have never seen the light of day

References:

1. Peter S. Cohan. 6 Great Business Models to Consider for a Startup. 2014.
2. Nina Tomaro. 9 Proven Business Models to Consider for Your Startup. 2015.
3. Strategyzer. The Business Model Canvas.
4. Tim Berry. The Business Model for Disruption. 2012.
5. Chris Pentilla. 7 Ways to Transform Your Business Model. 2009.
6. Madanmohan Rao. Fail fast, learn fast  four lean model tips for startups. 2015.
7. Shweta Kothari & Dilip Vedula. Start-ups (and downs): A cautionary tale. 2015.
8. Indrajit Gupta. Technologies do not disrupt, business models disrupt: McKinsey’s Roth. 2015.