Make That Money!

While you've been spending most of your time working on the product, it's also essential to have a plan for how you're going to make money as a business. The structure of the product will have a significant influence over what type of business model you can use. The opposite is true as well; if a particular kind of business model appeals to you, you could consider changing your product to better align with your business model. Identifying a sound, profitable business model is necessary for turning your startup into an actual company.

Real-World Business Model Examples

Failures

Unfortunately, the startup world is filled with ample examples of unsuccessful companies who have discovered customer needs or interests but haven't been able to figure out the right business model. Here are some cases:

• Startups that want to build a free social networking or photo-sharing app, hoping to be the next Instagram/Snapchat, will need to have user numbers in the millions to have a chance of making advertising work as a business model.
• Movie theater subscription company MoviePass, which did not get the buy-in of critical partners (movie theaters like AMC and Cinemark) that they needed to make their business model sustainable. Moviepass only charged a flat fee of $10 per month for their users to watch a movie a day at any theater, but the company had to pay AMC or Cinemark for the full price of a movie ticket. They hoped to have revenue share on concessions or monetize their consumer viewer data, but the movie theaters refused or were uninterested. They did, however, illuminate the appeal of a subscription model to incentivize customers to leave the comforts of their couches for an expensive movie and overpriced concessions because both AMC and Cinemark ended up updating their subscriptions to be more like Moviepass.
• Homejoy was another hot startup that leveraged the nexus of a couple of trends to build an on-demand gig marketplace for home cleaning services. When Homejoy launched, there were a few other startups eager to compete, so a battle ensued to win over customers. Companies offered generous discounts for first-time users to try out their services. That was fine with the Homejoy team because they were betting on returning customers - your home has to be cleaned regularly after all. However, their bet on users coming back to the service did not come to fruition because, as it turned out, people care a lot about the quality of their cleaning service and who comes into their homes. A gig marketplace with relatively unskilled gig economy workers was not going to be the right solution for a home cleaning market. The competing startups also soon folded.

Successes

On the other side of the failure and success spectrum, the opposite is also true. Long-lasting companies worth trillions of dollars have been able to succeed because they've figured out how to remain profitable and ward off competition for decades through their business models.

• Microsoft has focused on its core suite of software products - the Windows operating system and Office productivity apps - for decades until its relatively recent and successful expansions into the cloud. Microsoft's business model was simple: build a product people find useful, license it to large companies, and then periodically update it so they'll have to pay for it again. Companies will have to pay for each person who uses their software, and every few years, when there's a new version of Office or Windows, they'll pay for the upgrade. No company has been able to unseat Microsoft from its position of dominance as most Fortune 1000 companies continue to use Windows and Office.
• Google is known as an innovative company with a diverse suite of products. However, upon closer inspection, it's evident that the core of their business continues to be their search engine and revenue from their advertising platform. Whether it's the Chrome browser, the Android mobile operating system, Google Maps, or productivity tools, it's all about funneling searches through Google. The traffic supplies its ad platform with data from not only your search history but also your browsing and other user data. Stand-alone these products would be expensive and would not generate enough revenue to sustain the company, but when paired with Google's advertising platform, it makes Google unstoppable.
• Evernote - a web service and mobile app to help with organizing lists and notes - is another example of a business built on a successful business model - now servicing more than 200 million users around the world. Evernote is built on a freemium business model - on the idea that you provide your offering for free to customers on the premise that you can attract more attention and eventually convert some free users to a premium version of your offering. Evernote was able to succeed because it was able to keep its costs very low, so its model had a one-percent conversion rate (it expected 99 percent of its users never to pay for its offering).

Business Model Drivers

The business model you choose dictates how you intend to monetize your company. To create a profitable business model, we need to consider all of the factors that go into a business's profits, including revenues and costs.