Sep 6, 20229 min read

Business Model Architecture To Consider When Starting a New Business

Updated: Sep 7, 2022

In addition to the problem you seek to solve or the opportunity you choose to pursue and the product or service you offer, one of your key decisions as a founder is what business model to employ. This week, we’re sharing a high-level overview of business model architecture to consider when starting a new business so you can make the best decisions from the start. We will get more granular over time.

Your business model is essentially your blueprint that outlines how the product or service you intend to offer reaches customers, and how value is created and monetized. More specifically, your business model provides the framework for how your company:

selects its ideal customers following thorough customer discovery
defines and differentiates its offerings within the market it operates
establishes its scope, and tasks it will do
configures and optimizes its resources
goes to market
creates utility and value for customers and
ultimately generates reoccurring revenue and profits.

Here’s a handy business model framework from Stanford’s Idea to Market Program that provides a clear visual representation that you can adapt for your pitch deck or use to frame key areas of focus in team meetings:

Product/Offering - Type of Business (blue)

What do you offer or sell?

This is a combination of the company structure and output that defines the core value creation mechanism for the business. It establishes the conditions around which all other interactions and decisions will be based.

Customers/End Users (red)

To whom do you sell?

These are the end users of your product or service that realize the value created and make the utilization, consumption, or purchase decision. These are stakeholders that determine product-market-fit which we will focus on next month.

Access/Customer Acquisition (orange)

How does the product reach the customer?

These are the methods used to reach, acquire, and maintain customers that define the objectives for marketing, and market positioning. Customer acquisition establishes the basic mechanisms for the customer touchpoints around how customers learn about the product, access or acquire it, and experience the value you've created.

Partners/All stakeholders that impact the business (gray)

Who else is involved in the process?

These are all entities that are directly involved with the value creation mechanism and customer touchpoints. These include channels, manufacturers, regulators, market influencers, system integrators, resellers, etc. that can help scale customer acquisition. Efficient customer acquisition is key to building your business.

Transaction/Revenue model (green)

What is a typical transaction and what are the unit economics?

This is the clear plan that defines how to sell the product or service in order to generate revenue. It establishes the overarching framework for business cash flow, the sources of cash generation, and the margin structure for each individual transaction. Unit economics become increasingly important over time to reach profitability.

And when you put it all together, this is how a functioning, profitable business should flow:

Partners and stakeholders develop and create the offering, then, via access initiatives like marketing and sales, get the offering in front of potential customers who then purchase the offer so money can flow back to additional product development and ultimately through to the partners and stakeholders of the business.

Simple enough, right?

Put simply; most business models will fall into one of four general categories that I outline below. Within each are a myriad of business models and types across industry sectors:

Four Primary Business Models

1. Business-to-Consumer (B2C) aka Direct-to-Consumer (DTC)

The B2C or DTC business model refers to commerce between a company and an individual consumer, i.e. when you buy a book from Amazon, buy Impossible burgers from Whole Foods, or subscribe to Netflix, Bark Box or ro. These are all vastly different businesses with different business models but all are BTC.

2. Business-to-Business (B2B) or Enterprise

B2B or Enterprise refers to any commerce between two businesses. When Deloitte or Salesforce sells to another large corporation, a SaaS (software as a service) sells to another SMB (small- to medium-size business), when Apple sells MacBooks to Ford, or a wholesale textile company sells to a fashion label, these business models are B2B.

Some brands operate as both B2B and B2C. For example, Apple sells its products directly to you and me as well as to other businesses as mentioned in the example above.

3. Consumer-to-Consumer (C2C)

The consumer-to-consumer business model is when a consumer sells a product or service to another consumer. For example, when someone sells used furniture on letgo, or sells crafts and jewelry on platforms like Etsy and Shopify. Individuals often begin selling on existing online marketplaces and then start their own online stores when they've built up enough brand awareness. Sometimes, they sell via both channels.

4. Consumer-to-Business (C2B)

Any individual who sells their products or services to a company can be included within this category. When a consumer sells their own products or services to a company, they are often called a “creator” which is usually different than a more traditional freelancer who often does the same work as an employee on a part-time or fixed-term basis through a service agreement without becoming a full-time employee. Influencers are an example of creators who are personal brand builders with large audiences who create content and community that corporate brands want to reach and will pay to get their products in front of targeted consumers. Photographers who sell their photos online as stock images for corporate presentations are another good example of the growth of the creator economy and business model.

Within each of these primary business models are more specific models for early-stage tech companies, which I outline below. It's important to think about what market you're participating in from a business model perspective so that you understand what metrics to track and what investors expect to see. Here’s a rundown:

Enterprise

When you work with enterprises (as a B2B business as described above), you work in terms of contracts. This means it's your predominant focus from which you can frame your metrics.

What are key metrics to track?

Number of bookings or customer agreements - the total number of contracts/commitments your company has
Total customers - the total number of unique customers that you get
Revenue - the money received for providing your services

Enterprise model common mistakes: Confusing “bookings” or customer agreements with “revenue” and implementing contracts when working with the enterprises. A startup hasn’t delivered any services or value unless the contract is fulfilled. Therefore, you cannot report revenue when you haven’t yet delivered any service unless there are aspects to that agreement that involve some kind of work that you get paid for which is not part of the larger core services agreement. Just because you have a LOI or even a signed agreement, unless there is work getting underway or completed and a commitment to pay for that work and the terms of that payment are agreed then don't report it as revenue.