Suraj Kripalani, Co-Founder at BonBillo, discusses the following business model choices and the pros and cons associated with each.
• One time charge plus (potentially) ongoing maintenance agreement. Eg. Manufacturing equipment
• Subscription or leasing model: Now very popular, especially in the software area with SaaS – Annual or MTM commitment.
• Consumables: The classic razor/razor blade model, where the initial product purchase is inexpensive (the razor), but the consumables needed to continue using the initial product (disposable razor blades) have a high profit margin. Eg. Printers
• Advertising: Selling access to your user. Eg. Google, Facebook, LinkedIn
• Upsell High-Margin Products: Money is made when the customer buys optional high-margin add-on products. Eg. Consumer Electronics
• Cost Plus: Customer pays what it costs to make the product plus some percentage of markup. Common with government contracts and not a good idea in the long term. Focus is on costs, not value creation.
• Hourly Rates: A consultant or service provider model not based on costs but based on human utilization (variant of usage model). Unattractive because it rewards activity and not results.
• Shared Savings: Customer pays only after getting benefit from the product, and pays some fraction of the benefit they receive. Conceptually a good model to align customer and vendor interests, but challenging to implement, especially over the long term.
Credit to ‘Disciplined Entrepreneurship’ by Bill Aulet and MIT’s Entrepreneurship Development Program.
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