How to Choose the Right Business Model | Entrepreneur

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Embarking on the entrepreneurial journey is an exhilarating step toward creating a legacy. However, the stakes are high — it’s almost common knowledge that 90% of startups fail. A recent survey by Failory looked into the why behind this number in 2024. Over half of the failed businesses cited marketing failures. Specifically, 34% cited poor market fit as a critical factor.

This makes selecting the right business model in 2024 more crucial than ever to ensure you’re positioned correctly in the market. Aligning your business model with market demands and personal values is key to avoiding these statistics.

By exploring the advantages and challenges of various models, from the structured support of franchising to the flexible adaptability of lean startups, it’s important to assess how each aligns with your long-term goals and immediate needs.

1. The structured approach of franchising

Franchising offers a structured pathway to business ownership that combines the security of a proven system with the excitement of entrepreneurship. One of the primary benefits of franchising is its turnkey operation. Franchisees are provided with a ready-made business blueprint, significantly lowering the startup failure rate compared to independent ventures. This model comes with established brand recognition and customer loyalty, which can be invaluable assets from day one.

Take McDonald’s, for example. With over 38,000 locations worldwide, McDonald’s franchisees benefit from the power of a globally recognized brand and a loyal customer base, reducing much of the risk that comes with starting a new business. McDonald’s offers its franchisees extensive training and support, covering everything from store operations to financial management and marketing campaigns. This ensures that franchisees can focus on growing their individual outlets without the burden of building these systems from scratch.

McDonald’s has perfected this model by streamlining processes and leveraging its vast supply chain. Franchisees get the advantage of bulk purchasing, established suppliers and powerful advertising campaigns. This support structure helps new owners avoid many pitfalls that independent businesses face, such as inconsistent quality or costly marketing efforts.

However, franchising comes with challenges. In the case of McDonald’s, the initial investment is significant, often ranging between $1.3 million and $2.3 million. Franchisees must also pay ongoing royalties, typically 4-5% of gross sales, which can impact long-term profitability. Additionally, while franchisees benefit from McDonald’s global reputation, they must adhere to strict operational guidelines, leaving little room for creativity or local adaptation. McDonald’s maintains tight control over everything from the menu to store layout, which limits entrepreneurial freedom.

For entrepreneurs drawn to the structure and support of a well-established brand, franchising can be a less risky pathway to success. However, it’s important to weigh the financial commitments and lack of operational flexibility when considering this model.

2. The subscription-based model

Subscription-based models offer several compelling advantages for businesses looking to establish a steady and predictable revenue stream. This model significantly reduces the unpredictability associated with one-time sales by ensuring that revenue is generated on a regular basis through monthly or annual subscriptions. For example, Dollar Shave Club revolutionized the razor industry by offering affordable razors and grooming products directly to consumers via subscription. This not only created a consistent revenue stream but also built strong customer loyalty by delivering products on a recurring basis.

One of the key benefits of this model is its scalability. Dollar Shave Club demonstrated this by expanding its offerings based on customer feedback, moving from simple razors to a broader range of grooming products. The subscription model allowed the company to scale quickly and efficiently, as it could adjust its services without substantial incremental costs. This adaptability helps businesses respond to market demands and maintain operational efficiency as they grow.

However, while subscription models like Dollar Shave Club have thrived, maintaining customer retention is an ongoing challenge. To prevent churn, companies must constantly innovate and deliver exceptional customer service. In Dollar Shave Club’s case, they continuously updated their product line and used clever, engaging marketing to keep customers interested and subscribed. This approach helped them avoid high churn rates, but it also required significant investment in product development and customer engagement strategies.

While the subscription model provides businesses with stable revenue and growth opportunities, it also demands consistent attention to customer satisfaction. Companies need to focus on innovation and customer service to retain subscribers, making the model both lucrative and resource-intensive.

3. The lean startup model

The lean startup model is highly regarded for its flexibility and cost-effectiveness, making it an attractive option for entrepreneurs aiming to minimize risk while maximizing adaptability. A prime example of this is Dropbox, which used the lean startup approach to become a multi-billion-dollar company. Rather than building a full product from the start, Dropbox launched a Minimum Viable Product (MVP) — a simple video demonstration of its concept. This allowed the founders to gather feedback and gauge interest before committing to full-scale development. The overwhelming response validated the demand for a simple file-sharing solution, and Dropbox quickly grew from a startup into an industry leader.

By following this lean methodology, Dropbox was able to iterate rapidly, continuously improving its service based on real-time user feedback. This approach minimized upfront investment while ensuring that their product met the needs of the market. As of its 2023 revenue report, Dropbox has reached over 700 million registered users, and its annual revenue was $2.5 billion, demonstrating the power of scaling efficiently using lean principles.

However, the lean startup model isn’t without challenges. Its iterative nature requires constant adjustments, which can lead to uncertainty and the risk of over-pivoting. While Dropbox managed to scale effectively, frequent product changes can confuse stakeholders or destabilize the business strategy if not carefully managed. Despite these risks, for entrepreneurs who prioritize flexibility and responsiveness, the lean startup model offers a pathway to success with minimal initial investment.

4. The cooperative business model

The cooperative business model emphasizes shared ownership and decision-making, fostering a democratic approach to running a business. Each member has a voice in key decisions, promoting transparency and engagement. This model often leads to a strong sense of community and prioritizes long-term value over short-term profits. A prime example is REI (Recreational Equipment, Inc.), a consumer cooperative that has successfully operated under this model for over 80 years. REI’s profits are either reinvested in the business or returned to its members through annual dividends. In 2022 alone, REI returned $234 million to its 23 million co-op members in the form of dividends and member-exclusive discounts.

One of the major advantages of the cooperative model is the alignment between the business and the community it serves. REI, for instance, focuses on environmental sustainability and local development, ensuring its values match those of its members. This not only creates brand loyalty but also strengthens the cooperative’s long-term sustainability.

However, there are challenges inherent in the cooperative model. Since profits are distributed among all members, individual financial returns may be lower compared to other business structures. Additionally, decision-making can be slower due to the need for consensus among many members. For REI, balancing its cooperative ideals with financial growth has been crucial to maintaining its success while supporting both the environment and its community.

Choosing the right business model is a cornerstone decision for every aspiring entrepreneur. By considering both the advantages and limitations of each model, entrepreneurs can align their business strategies with their personal values, market conditions and long-term goals, forging a path to success that is both fulfilling and sustainable.

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