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December 1, 2020 @ 9:40 AM By Pavel Demeshchik
This short post is a quick note which helps to define a startup’s business model and the general stages of its growth.
Initially, we decided to give this basic information in addition to our guide about startup metrics that should help business owners analyze the current state of their project and make data-driven decisions.
So, here we will describe 2 main factors which will help you to define what metrics are more important for your business:
Business Model
Stages
We have broken down the most common business models into the following types:
This type of business model generates profits from selling products (usually, physical goods) to customers and getting a margin for it. Those goods can be produced either by the business or supplied by 3rd-parties. Such types of businesses usually face tough competition (unless they offer unique products) and need to grow really fast to survive.
Such businesses generate revenue from the use of their products. Their customers can pay them in cash or generate some kind of data for such businesses that can be sold or used in any other way that drives their revenue. However, there are several drawbacks, which are security (as the systems connected over the network), privacy (as they deal with sensitive data), and complexity (designing, developing, maintaining a large technology system).
Product owners get recurring revenue by charging customers typically on a monthly/yearly basis in exchange for access to their software or content. Subscription-based services are easily scalable as the cost of production of another copy of software/content is literally zero.
However, subscription-based businesses need to invest much effort in customer retention as their revenue depends on the repetitive use of their product.
Usually, such businesses generate and provide some content for free, which may be attractive for many users. Instead of charging users for access to their content, they find advertisers who are willing to pay in order to get in touch with their target audience. The main drawback of this business model is getting enough audience to interest potential advertisers. Also, it’s crucial to produce content that will be interesting for your target audience. However, social networks deal with it in a tricky way: their users produce the content they are interested in on their own.
Such businesses power gig economies that are growing crazy popular these days. Usually, this kind of product connects customers directly with service providers, which eliminates 3rd parties (people, companies) and results in cost reductions. In the same way as marketplaces, such businesses should grow fast and keep the balance between services demand and supply. As they replace old institutions and create entirely new ways to generate cash, they face legal problems, here is an example of the latest regulations Uber/Lyft faced in California.
Here, we decided not to cover business models that assume uneven revenue distribution across customers. If your business provides a service to one or two big clients that generate 80% of your revenue, data analysis won’t be as helpful as for the business models above.
We define 4 main stages in the startup lifecycle in terms of developing a product:
The goal of this stage is to validate if there is any interest in your business idea. During this phase, you need to do a lot of research, communication, and hypothesis construction.
The MVP stage officially starts after your prototype passed initial business idea validation, and ends when you achieve the product-market fit. This is the phase of experiments and thorough business analysis.
Read about the lean startup way of developing MVPs.
The growing phase of every product that shows how your business model behaves when more people start using your product. For some products, this phase never ends.
Stabilization and optimization phase of your product. You pay more attention to your current/past customers and focus on user retention, trying to grow your product at the same time if possible.
Knowing your business model and its features, you will be able to build a project strategy, define what value you plan to give your customers and your profit streams.
As a next step, to measure the result of your actions and make data-driven decisions you need to figure out what metrics you should track.
About the author:
I have passed a long way from Software Engineer to CEO of own software development company. During the last 6 years, I’ve participated in 20+ IT projects and gained experience in a variety of business domains such as entertainment, social media, ridesharing, advertising, banking, real estate, and many more. I know how to build successful IT products & companies and share my knowledge with our clients at datarockets.