August 16th •
We’ve got some experiences executing marketing strategies for startups and until recently, most major startup innovations happened because some new technology had surfaced to provide a solution to a problem that simply couldn’t be solved before.
The first MP3 player was just a pipe dream until technology advanced far enough to allow for storage and computing power small enough to fit in your pocket. Technology continues to be a bottleneck for business innovation, but recently the startup scene has begun to look a little different.
Where tech used to dictate how big or small a business could dream, new business models are increasingly driving innovation.
Business model innovation comes in two forms—the creation of entirely new models that don’t resemble previous business types, or the disruption of traditional industries by radical new business models. Examples of the former include companies like PayPal and Google, while examples of the latter include Amazon and Salesforce.
This introduction to business models is meant to go through the wide variety of new strategies businesses are employing to get ahead, since some of the biggest innovations in recent years have been by companies adopting new ways of thinking rather than simply relying on new technology.
One of the most exciting things about these new business models is that the companies who pioneered them often don’t have a stranglehold or monopoly on further innovation in that field. Salesforce, for example, honed executing and marketing for the SaaS business model and made it work really, really well for CRM in particular. But the opportunities for other SaaS companies in different industries are simply astronomical—just look at Aluvii.
Not every new business model is a success, though. Understanding why businesses fail is as crucial to startups as knowing why businesses succeed.
One of the biggest reasons startups fail—by far—is that entrepreneurs are far too optimistic about customer acquisition. They believe that just having a cool site and a fun product/service, the money will just print itself.
Initially, hype for a new startup may be high among a small portion of potential customers, but over time the startup finds that the cost of acquiring new customers far exceeds the lifetime value of those customers. In short, spending a thousand dollars to find a customer who spends $500 on your service is a losing formula.
Despite how obvious that seems when spelled out, time and time again new entrepreneurs fail to factor in this cost of acquisition to their business plan.
Is there a scalable way to find more customers? Can you get those customers to spend more on your business than it cost to acquire them?
That’s the essence of a successful business model. If you can only fulfill the first point, you’ll never turn a profit. If you can only meet the second criteria, might be able to turn a profit but never be able to grow your business.
Your industry might mean additional factors come into play besides these two, but it’s helpful to think of business models in simple terms, too.
The most optimal business model is one that has astronomical monetization potential when compared to a relatively low cost to acquire customers. Conversely, spending a fortune to acquire new customers and not making back your advertising budget with new sales is an unsustainable business model.
Driving down your cost to acquire new customers depends on a variety of factors, and can be aided by strong inbound marketing and hindered by inefficient outbound marketing.
Increasing your monetization potential means focusing on recurring revenue, cross selling and upselling, and scalable pricing. Of course, you can always drive down monetization by delivering poor quality to your customers. But let’s try not to do that.
In later posts, we’ll examine five specific business models, including:
With more on the way.
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