5 business models to consider when starting a technology company

What separates successful from unsuccessful startups? Is it their innovative ideas, the way their products meet a market need, or how they distribute their offerings and make money? Is it their founders and teams or the investors and partners who back them?

According to the Launching Tech Ventures online course, it is all of the above that also includes a startup business model.

As an entrepreneur, it’s up to you to build every element of your startup business model through a process of search and discovery, says Harvard Business School Senior Lecturer Jeffrey Bussgang, who teaches Launching Tech Ventures. At the same time, you need to evaluate those elements to ensure you’re building a sustainable, valuable business. To do this, every part of the business model must be aligned.

To help you launch your venture on the right track, here’s a breakdown of a business model, eight components, and five examples to consider.

The 8 Components of a Startup Business Model

a business model
is a plan for how your business will succeed. You can define success in terms of finances, product-market fit, sustainable production and distribution, or reaching and converting customers.

In Launching Tech Ventures, Bussgang presents the eight components of a business model using the Diamond-Square framework devised by HBS professor Thomas Eisenmann.

The first four facets are internal and operational in nature, and the remaining four include the stakeholders involved:

1. Customer Value Proposition (CVP): How does your business deliver value?
2. Go to market (GTM) strategy: How does your company reach customers?
3. Profit Formula (PF): How are you going to make money?
4. Technology and Operations Management (T&O): How will you make and maintain your product?
5. founders: Are they a good fit for the opportunity and business model?
6. Team: Do they complement each other? Can you fill in any gaps?
7. Investors: Who did you put together to fund your business? Are you completely aligned?
8. Partners: Who did you choose to assist in your execution? How will they help?

Defining your business model is critical to charting your direction and goals before launch. All eight components work together to form yours, so it’s crucial to craft each one carefully.

Not all business models are created equal, says Bussgang in Launching Tech Ventures. Some business models produce companies that are valued dramatically differently than others.

The term business model often refers to how you deliver your product and generate revenue, or your GTM strategy and PF from the Diamond-Square framework. To decide how to make money and reach end users, here are five business models to consider.

Related:

5 skills needed to start a successful tech company

5 examples of tech startup business models

1. Freemium model

The freemium model, a portmanteau of the words free and premium, is popular for direct distribution to your target audience. This model offers one tier of your product for free and charges users for the full or upgraded version.

One tech startup using a freemium model is Screen Time Regulation App One second. It links with other apps so that when you open a particular app you’re prompted to take a deep breath and receive stats on how many times you’ve tried to open it that day, followed by the choice to continue or exit.

One Sec offers one free app link. If you want to use it for multiple apps, unlock more breathing exercises, and access additional features, you’ll need to pay for the premium version.

A freemium model can be effective because it gives users a preview of the product experience before purchase. If they love the free version, they might be tempted to upgrade to the premium version.

The downside is that users are sometimes satisfied with the free version and never convert to paying customers. Make sure your premium version offers features your target audience is willing to pay for before committing to a freemium model.

2. Advertising-based model

If you prefer to offer your product for free, an ad-based model could be the way to go. Like the freemium model, it delivers your product directly to your end user, but the profit formula differs. With an ad-based model, you sell advertising space within your product to other companies to generate revenue.

This model is effective when your product creates enough value for users to engage with it despite the presence of ads. Social media apps, such as Facebook And Instagram, are common examples. You can sign up and access all their features, knowing that you will receive advertisements.

Another option is to combine the freemium and ad-based models, like some streaming platforms, by offering your products a free version with ads and the premium version without ads.

3. Employee Benefit Model

If your tech startup offers products focused on wellness, the most effective way to reach your end users is through their employers or insurance companies. In the employee benefit model, your product is free to your end user and is paid by a company to offer it as a benefit.

For example, the app for informal care support ianacare partners with employee and workforce team tools. Together, they bundle end user resources, including their employee benefits, into the ianacare app so they feel personally and professionally supported.

To sell to employers quotes ianacare multiple stats on its website about working caregivers, including the 80 percent who report loss of productivity at work and the 32 percent who voluntarily left a job to care for a loved one. If an employee benefit model is right for your startup, be sure to communicate why your product will help increase company productivity, retention rate, or satisfaction.

In addition to the employee benefit model, ianacare uses a direct distribution method by allowing individuals to download and sign up for the app. Certain features are locked and can only be accessed through a partnership with the user’s employer.

In Launching Tech Ventures, Bussgang recommends using a mix of direct and indirect methods to reach your target audience.

Do you have the right mix of direct and indirect channels to educate, support and distribute the product to customers in a repeatable and scalable way? asks Bussgang.

Ask yourself this question when building your business model.

4. Mediation Model

Another business model to consider is brokerage, where your company is the bridge between your product and the end user.

For example travel sites like Booking. com And Expedia.nl act as an intermediary between you and airlines, hotels and car rental companies. You have the option to buy tickets and book accommodations directly from each provider, but doing this through a site means you can do everything in one place. It also gives access to potentially bigger deals and the convenience of comparing options.

If you can think of a way your company would add value to the customer experience as an intermediary, consider using this model.

5. Disintermediation model

The opposite can also make for a strong business model. Disintermediation removes a step in the supply chain process to streamline product delivery.

A well-known example of disintermediation is the e-commerce giant Amazonremoving transaction and delivery processes from retailers, simplifying the experience for the merchant and end user.

A disintermediation model is suitable for scenarios that seem cumbersome or complex. Can your product use innovative technology to remove one or more steps in a process? Doing so can create value for you and your end user while generating profit.

Selecting the right business model for your technology company

The business model of your tech startups is a critical decision that can affect their success or failure. As you think through it, consider how the eight elements influence each other.

You can’t focus on individual parts of the model, says Bussgang in Launching Tech Ventures. You need to think holistically about each element of your value proposition, go-to-market strategy, profit formula, and technical and operational management so that you can clearly align them.

One way to gain the perspective needed to evolve your business model is to learn from tech entrepreneurs who came before you.

Launching Tech Ventures features several founders, team members, and investors who provide first-hand insight into the challenges and processes of launching a technology company, from ideation to growth stage.

Are you interested in developing the skills to launch a viable, high-value tech startup? Discover Launching Tech Ventures in one of our online entrepreneurship and innovation courses and download our free guide on how to start your entrepreneurial journey.