Designing your business model in the digital age
Today more than ever, the proper design of your business model is vital. This will allow you to be an entrepreneur with a successful startup!
One of the biggest challenges that entrepreneurs face is appropriately choosing the business model of their startup from the beginning. If they catch it at an early stage, they would have found the gold mine; saving time, investment and effort. However, if it is not achieved from the beginning, they will have to pivot as many times as necessary until it adjusts to the market needs.
A clear example is Dropbox, a company founded in 2007 and dedicated to document sharing, collaboration, and storage solutions. Its business model from the beginning was very clear, providing these services to individuals and businesses globally. Today it is a successful company listed on the stock market in the United States with a market capitalization of more than USD$8bn.
A successful business model must solve a problem, create value for the user and generate profits (at some point in time). In addition, some attributes are scalability; clear communication with customers; accessible and strong focused on the user experience; a robust technological base and a professional, experienced and motivated team.
According to a CB Insights study, 42% of startups fail because the market does not need their product or service and 17% because they have a product without a business model. Thus, given that a business model is fundamental in the success of a business, after analyzing different proposals we have found that, regardless of the level of innovation, most business models comply with one of the following structures:
Business to Business (B2B)
This business model is based on providing a product or service to another company solving existing problems. Amazon Web Services is the perfect example of this category, offering its cloud service solution to other companies to process transactions and store data.
Business to Consumer (B2C)
It focuses on providing products or services directly to the consumer. An example is Uber, which has positioned itself as a logistics company at the service of the consumer, through ground transportation services, food delivery, parcels, etc.
Business to government and other institutions (B2G)
Usually governments make bidding processes in which startups participate and if they win, a contract is formalized. Startups can also access other non-profit organizations such as NGOs, Universities, Foundations, among others. A company with this business model is Irys (CityFlag), which offers a SaaS platform that connects governments and residents in the reporting and monitoring of incidents related to infrastructure and services.
Add-ons: Business, Consumer, Government
Any of the previously described business models may have derivatives extending in its value chain. For example, a startup can define its business model as B2B2C, that is, it sells a product or service to a business and this in turn provides it to a final consumer. An example is OpenTable, which provides its services to other restaurants, having the consumer as the end customer.
Consumer to Consumer (C2C)
There are also business models that start with consumers offering products or services to other consumers. An example is when a person, through her own web page, application or directly, connect with other consumers.
Consumer to Business (C2B)
In this business model, a person offers her products or services to businesses through his or her own digital platforms or directly. This model is the one that cleaning, or maintenance service providers follow directly with businesses.
Consumer to government and other institutions (C2G)
Consumers can also offer their products or services directly to non-profit organizations, such as Governments, Universities, NGOs, Foundations, among others. Let’s consider all those people who offer professional services such as consultancies to this type of institutions.
Add-ons: Business, Consumer, Government
Any of the previously described models may have derivatives extending in its value chain. For example, a person offers his or her products or services through digital platforms (C2B2C) such as Amazon, Ebay, Mercado Libre for consumption by businesses or companies, or consumers or governments.
However, faced with the challenges of developing and consolidating a business model, startups at some point in their lifecycle can pivot. The reasons are different: bad business model, changes in the market or affected by the external context. In the end, the goal of any pivot should be to maximize revenues, minimize costs and run operations efficiently to increase the business value. Here we present a diagram that exemplifies the main types of pivoting.
Pivoting by income
Some startups originally start with a business model looking for a certain type of customer and after a while they realize that they are reaching the wrong market. For example, they start as a B2C and migrate to a B2B, realizing that they can extract more value from businesses than from consumers. (ie. Cabify, Aliada, IguanaFix, etc.)
Pivoting by way of charging
Sometimes startups don’t find the best way to charge the customer. For example, at first iTunes charged per song, due to market needs and the entry of a new competitor (Spotify), it had to migrate to a subscription model.
Pivoting by costs
Usually this pivot lies in the search for financial efficiencies. Logistics companies have been important players in this category, they have modified their costs from fixed to variable through the outsourcing of fleets.
Pivoting by operational efficiency
Every company seeks to streamline its operations to have a greater financial margin. Traditional restaurants have opened dark kitchens or have hired Kitchen-as-a-Service suppliers, seeking efficiencies. Other companies leverage the use of the gig economy with the same objective.
Pivoting by suppliers
Generally, over time, companies realize which activities are primary and which are secondary. Thus, they make use of outsourced providers (outsourcing), or they generate internal capacities to develop the main activity (insourcing).
Pivoting by distribution channel
One of the key elements for any company is its distribution channel. Companies recognize the relevance of the physical world (offline) versus digital (online) and adapt their business model. For example, Crocs migrated most of its stores to the online world, closing stores and saving rental costs. Different banking groups are following the same trend.
Pivoting by context
Externalities such as Covid-19 have an impact on business models. The current pandemic has forced companies to migrate from the physical world (offline) to the online world, to seek new clients (B2B to B2C) or distribution channels (ie. UberEats, Doordash, etc).
Pivoting by industry
Startups sometimes have a good technological base; however, they start in the wrong industry. After a while they reflect and make the decision to change it to reach the right customers. An example is TikTok, who initially created its algorithm to focus on the information and news sector. Having validated the potential of the technology, it migrated to the entertainment sector where it can extract much greater value.
In summary, if you are building a startup, plan your business model very carefully. If you are operating a startup without the expected success, consider pivoting while keeping revenue, costs and operational efficiency in mind. As Vince Lombardi said, “winners never quit and losers never win”.
Hector Shibata. Director of Investments & Portfolio at ACV a global Corporate Venture Capital (CVC) fund and Adjunct Professor for Entrepreneurial Finance.
Ana Maury Aguilar. Investment analyst at ACV.
ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.
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