How To Choose The Right Business Model For Your Business

Kurt GraverBusiness Development

Selecting the right business model is one of the most critical decisions when starting a company. Your model dictates how you create value for customers, deliver your products/services, generate revenue, and ultimately achieve profitability and growth.

With so many options, from advertising to subscriptions to marketplaces, how do you choose? Follow these key steps:

Understand Your Target Customers

Your business model must align with your target customers’ needs, pain points, and willingness to pay. Conduct in-depth market research through surveys, interviews, and data analysis to determine:

  • Core customer demographics, psychographics, behaviours
  • Underserved needs or problems they face
  • Benefits and outcomes they desire most
  • Preferred channels, formats and touchpoints
  • Price sensitivity and spending thresholds

This customer intelligence guides your value proposition and route-to-market—test assumptions directly with real prospective users.

Study Your Competition

Analyze competitors succeeding in your market using models like freemium, subscription, advertising etc.

  • What models are gaining the most traction? Why?
  • What challenges or shortcomings do their models have?
  • Could an innovative new model disrupt the status quo?

Derive insights about customer priorities and willingness to pay based on what models competitors have adopted. Then, explore how you may differentiate.

Model Your Cost Structure

The viability of certain models depends greatly on your expense structure. Cost factors like technology, production, inventory, support, etc., determine what pricing and revenue mix allows profitability.

Map out your projected cost components in detail under different models. Estimate impacts to your capital requirements as well. This analysis indicates what models align with your capabilities.

Analyze Required Resources

Resource requirements also dictate viable models. For example, a paid subscription model may require significant upfront investment in features and infrastructure to delight customers.

An advertising model, however, relies more on traffic volume and relationships with advertisers. Think through technology, people, facilities, partnerships and other resources needed.

Evaluate Scalability

Models like marketplaces and software have a much greater ability to scale without proportional cost increases. The model should align with your growth ambitions in terms of capital efficiency.

Analyze the profitability of customer acquisition and expansion into new segments under each model based on marginal costs. Prioritize scalable models that provide flexibility.

Model Cash Flows

Map out multi-year cash flow projections under each model you are considering. Assess upfront investment, revenue timing, burn rates, breakeven points, and profitability timeframes.

This stress testing indicates which models offer the healthiest cash flow given your cost and revenue assumptions. Flush out the Model in a spreadsheet.

Remain Adaptive

Business models evolve constantly. Do not get stuck on your initial choice. Continuously test new options and be prepared to pivot based on market feedback.

Successful companies like Slack, Dropbox, and Instagram pivoted from their early models as they refined their positioning and execution. Stay nimble.

Case Studies

Review examples of companies succeeding and struggling with various models in your industry. Learn how leaders like Amazon, Netflix, Uber, Airbnb and Salesforce leverage their particular models.

Derive lessons around customer targeting, pricing, costs, resources and the evolution of their models over time. See what may work for your context.

Carefully weighing these factors will lead you to the ideal model that aligns with your capabilities and market. And remember—adaptability is key. Continuously evaluate your model against customer needs and be ready to transform it as markets change. Choose a model positioned for long-term success.