Strategyzer has a great blog post titled Why Some Business Models Are Better Than Others. 10 years ago I had a coffee meeting with one of the most successful tech entrepreneurs in town. At that meeting, he emphasized the importance of recurring revenue and suggested that I figure out how to build a business with a subscription element. I took it to heart and have been working on Software-as-a-Service companies ever since. Recurring revenue is one of the seven ideas for better business models.
Here are the seven ideas for better business models from the article:
- Switching Costs – Higher switching costs decrease the chances of a customer leaving to go to a competitor
- Recurring Revenues – More predictable cash flow and easier to grow the business (assuming good renewal rates)
- Earning vs Spending – Models that collect payment before having to spend money to produce the goods or services are more desirable and valuable
- Game-Changing Cost Structure – Something priced 5% less than established incumbents isn’t that compelling. Something that’s priced 95% less than the established incumbents, and also sustainable, is incredibly compelling.
- Get Others to Do the Work – Think about the rise of the on-demand marketplaces and the ability to tap into under-utilized labor
- Scalability – Global reach and distribution provide for greater opportunities
- Protection from Competitors – Network effects, moats, and other strategies that make it difficult to enter the market
The next time you hear an entrepreneur’s pitch, run through these seven ideas and see how well it stacks up in each area.
What else? What are some other ideas for better business models?