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12 startup business models (and how to choose the right one)

Your startup business model determines how your business makes money. For starters, will you sell products or services? Will these services be available one-off, or will customers need to sign up for a monthly (or annual) subscription?

These are the choices you’ll need to make as you build out your solutions and find a business model that works for your startup.

There’s a lot you need to consider when deciding on your startup business model:

  • Potential revenue
  • Costs
  • Target market
  • Customer budgets
  • Sustainability
  • Scalability
  • Competitors
  • Alternatives
  • Technology

Don’t worry—you don’t need to have everything figured out already. Determining your business model is a process, and we’re here to get you started in the right direction. We’ll walk you through the most common types of startup business models and how to choose the right one for your venture.

What is a startup business model?

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Your startup business model essentially explains how your business will operate and make money—and it also takes into account the cost structure.

  • Will you sell products online?
  • What will your revenue streams be?
  • Will you have a single source of income or multiple revenue streams?
  • Do customers need to pay a monthly subscription for your services?
  • Is there going to be a free and premium version of your app?
  • Will you make money off of advertisements?
  • Do you want to sell through a third party or opt for direct-to-consumer?

Answers to these questions will dictate which business model is right for your startup.

Avoid choosing a business model until you know more about your target market and your unique solution. If you dive in determined to follow an exact business model, you might miss clues and insights that could lead you in a different (more appropriate) direction.

Remember, your business model is not the end-all-be-all strategy to success—it’s more of just a template for doing business.

For example, you might decide to operate on a subscription-based business model like Netflix or Shopify. That’s the model, but you’ll still need to figure out your product-market fit, unique value proposition, and competitive advantage.

12 typical startup business models

We’ve compiled a collection of the most popular business model types we see in the current marketplace. This is by no means a comprehensive list—there are outliers and unique models that diverge from most traditional definitions.

Use these business models as a template for operating your startup, but don’t feel like you have to commit to every aspect. Take the parts you like and ditch the ones you don’t. You might adopt a business model’s revenue-making strategy but opt for a new cost structure. Or you may want to take one business model and apply it to a different industry.

1. Freemium business model

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The freemium model lets users access the base application or service for “free” before enticing them to upgrade to a “premium” license to unlock advanced (often necessary) features. You likely recognize this model through your company’s use of startup marketing tools and software. The basic features work as a standalone product, but the user interface (UI) constantly reminds users what they could utilize if they upgraded.

Upgrades could require a monthly subscription or a one-time payment. For example, Ubersuggest lets users upgrade to a $29/month plan or a lifetime business plan for $290.

Examples of the freemium business model:

  • Asana
  • Google Drive
  • Slack
  • Zoom
  • Canva
  • Mailchimp

2. Subscription business model

The subscription model requires users to pay a monthly (or annual) subscription to access your products and services. Some businesses use a combination of freemium and subscription models to bait and hook customers, while others make themselves more premium by offering no free alternatives.

The trick with a subscription-based business model is to provide continual value. You can’t just earn a customer one month and lose them the next—you need to keep them satisfied and paying for your service.

Examples of the subscription business model:

  • Netflix
  • HelloFresh
  • Stitch Fix
  • Strava
  • Amazon Prime

3. Pay-as-you-go business model

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The pay-as-you-go business model has users pay based on their consumption. You could consider your electricity and water bills as pay-as-you-go models—the more you use, the more you pay.

With pay-as-you-go pricing, consumers pay for what they get. There’s no _wasted _subscription they might forget about—they trade value for value. That’s why we use subscriptions and pay-as-you-go for DigitalOcean’s mix of cloud solutions.

Examples of the pay-as-you-go business model:

  • DigitalOcean
  • Twilio
  • Amazon Web Service (AWS)
  • Audible
  • Stripe

4. Ad-based business model

Advertising business models offer free services in exchange for ad views. Consumers get to use the product for free as much as they want, but the more they use it, the more ads they’ll see (which is a win-win for businesses).

This business model works perfectly for services that customers might not be willing to pay to use, but they’d be happy to consume ads. Businesses collect behavioral data about customers and offer it to advertisers to better reach their target audience.

The better the advertisers do, the more money you make—and the cycle continues.

Examples of the ad-based business model:

  • Hulu
  • Instagram
  • TikTok
  • Google Search
  • YouTube

5. Transactional business model

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Transactional business models typically look like eCommerce websites and brick-and-mortar stores. Customers buy specific items or services for a one-time cost, whether that’s an ebook or an electric drill.

The transactional business model is probably one of the most common (and easy to adopt) revenue-making models. Your business buys (or produces) goods at a discount or wholesale cost and marks up those prices to buyers.

Examples of the transactional business model:

  • Apple
  • Nike
  • Wendy’s
  • Walmart
  • Ford

6. Direct-to-consumer business model

Direct-to-consumer (D2C or DTC) business models eliminate the middleman and sell directly to the customer. This eliminates the cost and profit sharing of being on marketplaces like Amazon, eBay, or physical stores like Walmart and Target.

The D2C business model works great when you already have an audience, but it can be hard to start from scratch. Building brand awareness and an initial customer base can be difficult, especially when would-be buyers struggle to find your products.

Fortunately, pivoting is not too difficult if things don’t go in the right direction. You’ll lose some of your profits and the exclusivity of your business, but you’ll gain access to a larger pool of buyers through a global marketplace.

Many businesses use a combination of marketplaces and D2C to market their goods and services. Take Nike, for example. You can buy Nike products at practically any retailer, but you can also purchase their entire collection from the Nike website.

Examples of the direct-to-consumer business model:

  • Casper
  • Warby Parker
  • Teva
  • Everlane
  • The Honest Company

7. Marketplace business model

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The marketplace business model operates as a platform to connect sellers and buyers. Typically, startups operating under this business model don’t sell their own goods—however, Amazon is an example of a marketplace that also produces and sells its own products (or does white labeling).

Marketplace platforms make money from transactions on their platform. They expose sellers to a broader audience but take a small portion of their sales in exchange for the exposure.

Examples of the marketplace business model:

  • Amazon
  • Upwork
  • Fiverr
  • eBay
  • Etsy

8. Razor and blade business model

Razor and blade business models sell an entry-level item at a low price (or loss) but profit from add-ons and refills. It was made popular by men’s razor companies selling cheap razors but requiring you to purchase expensive replacement blades. Another example is some console companies. Sony sells their Playstation consoles at a loss, but they profit from online services, in-game purchases, and their online marketplace.

This business model is great for budget-minded customers that don’t want to invest in a product they’re not sure they’ll love. It’s an inexpensive way for them to experiment with new items—and if they like it, they often become long-time buyers.

Examples of the razor and blade business model:

  • Harry’s
  • Keurig K-cup pods
  • Nintendo
  • Amazon Kindle

9. Private label business model

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Private-label (or white-label) business models create products or services through a third-party provider but sell them under the brand’s name. You’ll see this commonly with educational content created using a third-party platform but branded entirely with the startup or creator.

This is also very common for products sold on Amazon. Most of the products look exactly the same—they just have subtle differences and branding. For many products, they likely just used a very similar manufacturer.

Private labeling is a typical way for brands to sell their own supplements. Most of the ingredients might be the same, but their brand design differs. It’s hard to find real-life examples of private labeling since the whole point of doing it (effectively) is to look like it’s your brand’s own manufactured product.

Examples of the private label business model:

  • Cosmetics
  • Paper products
  • Supplements
  • Cleaning products
  • Frozen foods
  • Snacks

10. Franchise business model

Franchise business models are businesses that operate using the trademarked branding and products of the parent franchising company. They’re simple to startup and operate because most of the marketing material and products have been created—and you likely already have loyal customers to the brand.

You’ll likely have to pay a franchise fee to operate under this model, which can eat into your profits. However, if there’s a market need and a franchise solution to solve it, it’s often easier to open a franchise than to try and introduce the same solution (under a brand-new brand) to the market.

Examples of the franchise business model:

  • Subway
  • 7-Eleven
  • Great Clips
  • Ace Hardware
  • The UPS Store
  • Anytime Fitness
  • Nothing Bundt Cakes

11. Dropshipping business model

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The dropshipping business model is when your startup sells products online but doesn’t keep any physical inventory. This means you don’t have to worry about storing your goods in a store or warehouse—and you don’t worry about storage fees or expiring products.

Instead, you just sell and market the product, while your third-party dropshipping supplier takes care of all the inventory, shipping, returns, and customer service. It’s a low-investment way to do business, especially if you have a small team but want to scale your customer base.

Examples of dropshipping suppliers:

  • AliExpress
  • Wholesale Central
  • Sunrise Wholesale
  • Spocket
  • Printful

12. Affiliate business model

With the affiliate business model, you don’t sell or manufacture your own products or services. Instead, you get paid for recommending other businesses’ goods. When a customer uses your link (or coupon code) to make a purchase, you get paid a percentage (or commission) of the sale.

Affiliate business models are popular with influencers, bloggers, teachers, and coaches. These individuals usually don’t have their own businesses, but they make money by recommending trusted products and services.

Examples of the affiliate business model:

  • Smart Passive Income Blog
  • Nerdwallet
  • The Wirecutter
  • Finder
  • The Points Guy
  • Skyscanner

How to choose the right startup business model

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No business model is necessarily better than another. Each has a place in certain industries and target markets. Different business models performed better a decade ago, while others seem to be trending now.

Don’t focus on the business model first. Instead, look at your customer’s pain points and the solutions you can provide. Once you’ve identified your solution, you can start thinking about the business model to make your startup scalable and profitable.

Look at your competitors and their business models.

Would you be better off replicating their success, or can you find a niche answer with another business model that your customers will prefer?

Do your market research to learn more about your market. You might find a business idea that better solves their needs.

Build your startup on DigitalOcean

Whether you’re building an eCommerce platform or a freemium application, trust DigitalOcean to provide the scale and affordability you need. We provide the building blocks you need to build your solution from scratch and scale it from startup to enterprise.

Check out our subscriptions and pay-as-you-go pricing to find the perfect plan for your startup.

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