Is Your Good Idea a Good Business? (Part 3 of 3)
Author: Jeff Maglin
This is the last in a series of three on how to build and use economic models to determine the viability of your business idea. In the previous two entries, I discussed how market sizing and segmentation and competitive market research can help you, the entrepreneur, validate initial revenue and cost assumptions and build a more robust model that can be used to feed into the financial projections of your business plan. In this post we’ll explore how “reference businesses” can contribute to the economic modeling process.
A reference business is any business that in part or as a whole represents the operation and/or economics of the business in which you intend to start. The reference business can be in the same industry but often is not. Successful business models in one industry often are copied and implemented by others. Traditional brick and mortar businesses are responsible for many of the existing successful business models.
- Advertising – provide content for free mixed with advertising paid by vendors interested in reaching the content provider’s audience (i.e. broadcast television and radio, etc.).
- Brokerage – create a market that connects buyers and sellers, receiving a percentage of every transaction (i.e. equity and debt transactions, real estate purchase and rental, etc.).
- Franchising – charge fee or royalty for using an established brand, process and procedures for delivering a specific business product and/or services (i.e. restaurants, convenience stores, cleaning services, etc.)
- Membership/subscription – charge user periodic fee to gain access to product and/or services (i.e. clubs, associations, cable television, etc.)
- Licensing – charge user fee or royalty for permission to use intellectual property (i.e. patent, trademark, copyright) for product or service use or sale (i.e. product merchandising, invention, etc.).
- Multi-level marketing – receive commission for product and/or service individual sells as well as for product and/or service other sell under the individual in the organization’s hierarchy (i.e. cosmetics, vitamins etc.).
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Utility – charge user fee for amount of use of a specific product and/or service (i.e. electricity, gas, water)
The Internet provides another medium to employ and/or enhance the above mentioned business models. It also has created some of its own, two of which follow:
- Freemium – offers basic Web services or a basic downloadable digital product, for free, while charging a premium for advanced or special features. (Source: Wikipedia) Many well known online services use the freemium model; LinkedIn (Business networking), Skype (Real time communication), Pandora (Music), Flickr (Photo sharing), Wall Street Journal Online (News), etc.
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Crowdsourcing – takes a job traditionally performed by a designated agent (usually an employee) and outsources it to an undefined, generally large group of people in the form of an open call. (Source: Jeff Howe Blog) Crowdsourcing sites make money in various ways, from direct sales to taking percentage of every transaction to advertising. Some crowdsourcing examples are Threadless (Apparel), Crowdspring (Design), Kickstarter (Funding), IMDB (Media), istockphoto (Media).
If the business model you intend to use is new to your industry, look to other business/es outside your industry that most resembles yours. Then follow the same recommendations that I outlined in my previous blog on competition to help build and validate your economic model.
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