Choosing our business model
Software is eating the world
In 2011, the prolific Silicon Valley technologist and investor, Marc Andreessen said, software is eating the world. It’s hard to ignore the fact that software, in its many guises, has an enormous impact on our lives and the world economy. Just this week, a powerful AI model called GPT-4 was released which can answer complex questions, interpret images and write software applications. Many of the world’s most valuable companies are based on software, e.g. Amazon and Airbnb. Such organisations make money by employing a few business models which we can use ourselves.
Founders should understand the main business model options available. While established companies can combine business models together, startups should focus on one.
Top 3 business models
Startups don’t fail because they lack a product; they fail because they lack customers and a profitable business model. - Steve Blank
The top 3 business models founders should familiarise themselves with are: SaaS, Marketplace and Transactional.
SaaS
SaaS (Software as a Service) provides users with access to cloud based services, e.g. Zoom and Slack. Users subscribe on a monthly or annual basis. Growth can be driven by self service channels (product led) and/or direct sales (sales led). Our Product Led Growth explores this further. Key metrics include: MRR (Monthly Recurring Revenue), Monthly growth rate, Net Revenue Retention (% of recurring revenue retained from a prior period) and CAC ( Customer acquisition costs).
Marketplace
Marketplace apps enable transactions between sellers (providing items or services of value) and buyers (purchasing those things) e.g. Airbnb and eBay. As I explain in Network effects - Growing Pains, there a cold start problem to overcome plus various techniques to grow and protect your position. For a given market, often there is a single winner. Key metrics include: Merchandised value, charges per transaction, acquisition and churn rates.
Transactional
Transactional apps enable transactions and take a cut of them, often fintech and payment businesses, e.g. Stripe and Coinbase. Often the fee per transaction is relatively low, 1% - 3% typically, but the transaction volume for established apps are high. Hence, the most successful businesses have consistent revenues. Key metrics include: Transaction value, net revenue (from fees), retention and acquisition costs.
Other business models
The smallest company in the world can look as large as the largest company on the web. - Steve Jobs
Other business models include:
Subscription: Product or service sold on a recurring basis, often to consumers paying small monthly fees, e.g. Netflix. Growth is via customer self-service.
Usage based: User pay-as-you-go consumption in a given period, e.g. AWS. Grow with customers by scaling product and pricing.
E-commerce: Sell products online, e.g. Amazon. Low unit costs are required.
Enterprise: Sell large contracts to large companies, e.g. Salesforce. Growth is driven by direct sales with long lead times. Low churn rates are key.
Advertising: Monetise free users by sell ads, e.g. Facebook and Twitter. Our customer is the advertiser, not the end user. Many active users are required and few dominant players prevail.
Other resources
Business Model Canvas talk by Steve Blank
Crafting Our Business Plan post by Phil Martin
5 Features of Our Fantastic Business post by Phil Martin
As Steve Jobs said, The ones who are crazy enough to think that they can change the world, are the ones who do. I’m off to have a chat with GPT-4.
Have fun.
Phil…
