Want to Make Money? Pick One of These Profitable Business Models

On November 21, 2017, the Berlin Bootstrappers held its second event at 800A in Berlin. I presented at the event along with my good friend Louigi Verona. My presentation, called “So, what kind of business do you want to build? An overview of bootstrapped business models,” was a culmination of the different business models that I have studied and evaluated over the past few months as I work toward building a product of my own. The business models that I cover in this presentation are one-time purchase, recurring purchase, productized service, software-as-a-service (SaaS) and advertising.

Though I will not say that this is a comprehensive list of the business models that can work for bootstrapped entrepreneurs, I think that it covers some of the most common ones fairly well. Let’s take a look at how each business model works, some representative bootstrapped companies using those business models, and the pros and cons associated with using each of them!

One-Time Purchase Business Model

Anything that you sell only once to a customer is in this category. This can include software licenses, eCommerce-based products, eBooks, online courses, WordPress plugins and much more. There are quite a few successful bootstrapped businesses using the one-time purchase model such as AppSumo, Nasty Gal, GoPro, and Tuft & Needle.

Pros of One-Time Purchase Business Model

• Easiest of the business models to build without code — you can use Shopify for eCommerce products, for example
• Receive all of the revenue of the purchase upfront — customer retention is not very important for one-time purchase products
• There are many opportunities to cross-sell and up-sell — you may be able to get customers to purchase access to increased levels of functionality in the product or buy additional similar one-time purchase products from you

Cons of One-Time Purchase Business Model

• No built in recurring revenue — once the purchase is done, you have to either cross-sell or up-sell the customer or get more customers through the door
• Needs lots of customers to profit — this is true for most businesses, but particularly true for one-time purchase business models as most sales are just made once
• No payments received for support made to the product over time — If you are selling something that will require continual updates and support over the life of the product, then you will probably need to provide this service free of charge. As such support costs can become quite expensive over time, software companies have moved more toward the Software-as-a-Service business model (discussed below) that enables them to continue to charge customers as they improve the performance, stability and functionality of the product over time.

Recurring Purchase Business Model

Recurring purchase products are physical or digital products that are more geared toward motivating customers to purchase them on a consistent basis over time. Some examples of bootstrapped companies utilizing this business model include Dollar Shave Club’s shaving razors and Dynamite Circle’s online community memberships.

Pros of Recurring Purchase Business Model

• Consistent, recurring need for the product over time — this should significantly increase the customer lifetime value compared to one-time purchase products.

Cons of Recurring Purchase Business Model

• Difficult to scale — These products, specifically online memberships, may not have a large market and may be difficult to scale. Bootstrapped businesses tend to target a niche, and as such it can be challenging to identify this market, make them aware of the product, and convince them to buy.

Productized Service Business Model

Productized service companies provide a very specific service in a way that can be automated through scalable, repeatable processes. In many ways, a productized service company looks like a consulting or agency business, but the difference lies in the way that the service is being delivered and charged. Consulting companies tend to charge by the hour (ie. $100 per hour) whereas productized service companies charge by the package (ie. $49 for one specific service). This allows productized service companies to provide demonstrable value in a way that decouples them from the “$ per time” formula to be able to scale much more quickly and effectively. Some successful bootstrapped productized service businesses are WPCurve, Restaurant Engine, 3 Wise Bears and CopyHackers.

Six Steps to Building a Productized Service

Let’s take a look at the steps required to build a productized service company:

1. Focus on a service that you already know well — let’s assume in this example that you know how to do web and marketing copywriting really well!
2. Simplify offerings to a single service package deal — take your copywriting skills and figure out a service package that you could do quickly and reliably thousands of times. Maybe $49 for creating the copy for a web landing page that you should convert well based on what you have seen work in the market so far? Use your knowledge of the space to determine the appropriate contents and cost of the service package.
3. Find clients for the packaged service — go out there and market your services to companies interested in what you are selling. This takes knowing your target market and ideal customer quite well so that you can be laser-focused in your search.
4. Hire people to implement the service package — once the ball gets rolling and customers are coming through the door faster than you can handle on your own, hire freelancers, part-timers or full-timers and train them to perform this service package up to the high level of quality that you have set for yourself.
5. Automate the work through building processes — as the ultimate goal of this business is to get it running without much of your day-to-day involvement, you need to set up the processes and guidelines to make sure that the business can keep itself going without you being present everyday. Write down the steps to every single business process in a guide that current and future employees can rely on to make sure that everything runs smoothly.
6. Remove yourself from the business over time — by getting managers and employees under you to do the work of finding new customers and efficiently completing the service package deals that you have laid out guidelines for, you will be able to step away from the business as it grows to a reasonable scale.

Pros of Productized Service Business Model

• Business is built around the area of your expertise — though it is advisable to go with what you know in most bootstrapped businesses, utilizing your unique knowledge and skills is required in productized service businesses.
• Running the business without you — Ideally you will be able to scale the business to the point that you do not need to be involved in it day-to-day.

Cons of Productized Service Business Model

• Agency service model — You will need to run the business in an agency-style model where you and your employees are doing work directly for the benefit of the client. This is not necessarily a bad thing, but some people may not be interested in a business model where they are not producing an actual physical or digital product of their own.
• Capacity limitations — Though productized service companies are generally more scalable than consulting businesses due to narrow product focus and process automation, it still has the same personnel capacity limitations that any other client-centered business has to deal with.

Software-as-a-Service (SaaS) Business Model

Software-as-a-Service (SaaS) business models enable businesses around the world to utilize your web-delivered software product to meet their business needs. Many SaaS companies provide new customers with a free version of the product so that they can try it out to see if it meets their requirements. Once the users begin to feel the pain of the limits set on the free version in terms of usage or functionality of the product, they may choose to upgrade to premium product plans. The premium plans tend to be charged on a monthly or annual basis, providing customer lock-in, recurring revenue, and higher customer lifetime value. There are many bootstrapped companies that use this business model including MailChimp, Drip (sold to LeadPages), SurveyMonkey, GitHub, Trello (sold to Atlassian) and Basecamp.

Pros of SaaS Business Model

• Value-added products promote customer lock-in — once a company starts managing a key business process through a product, trains its employees on the software’s interface and allows the product to control and manage its data, it is much harder for the firm to move away from that product to a competitor. This customer lock-in can create higher customer lifetime value for your business at the end of the day.
• Target market tends to be businesses — businesses have higher budgets than consumers, which means that you can likely charge more for the product if you can manage to convince the company to go with your solution.

Cons of SaaS Business Model

• Time and money-intensive — building this product will take a lot of time and money, it’s that simple.
• Challenging to acquire initial customers — getting a company to rely on a brand new product for a key business process will likely take some convincing.
• Requires long-term commitment to support the product — it is extremely important for SaaS businesses to continue to update and improve their products over time as users pay for the product on a regular, ongoing basis.

Advertising Business Model

Advertising-driven businesses, as the name implies, display ads for other goods and services in their product. This is one of the web’s first business models and still one of its strongest. Ads are intended to drive product awareness and adoption, and they can come in many forms including posts, images, banners, videos and audio. Some examples of bootstrapped businesses that have used an advertising-based business model include Plenty of Fish (acquired by Match.com for $575 million), TechCrunch, Indeed (acquired by Recruit Ltd. for $1 billion) and Indie Hackers (acquired by Stripe).

Pros of Recurring Purchase Business Model

• Does not require customer to pay for the product directly — the user’s attention is what is for sale in ad-based business models, so you do not actually need to convince users to open their wallets for your product in order to make money.
• Can monetize user-generated content — these sites have their own original content as well as comments, forum posts, guest blog posts, and more from the broader community. As a place to post this content, the platform benefits from the traffic and ad revenue that comes from these user-generated comments as well.

Cons of Recurring Purchase Business Model

• Requires a LOT of content to be able to monetize effectively — if your content does not get a ton of views and a huge audience, then it can be a tough road to make this business model work.
• High monetization may require custom ad deals — using an all-in-one solution to set up your advertising deals may not get you an optimal rate, so it may be more difficult and time-intensive to find the right advertisers and set up a deal with them.
• Ad blockers have been on the rise — Ad blockers have become pretty commonplace in the last few years, making it more difficult to succeed with a banner ad-based business. However, native ads, audio ads, video ads and other formats can still be profitable. Additionally, some publishing businesses like The Guardian have been able to successfully request users for donations in lieu of traditional ads, proving that there are other ways that organizations or individuals with large followings can make money in 2017.

Mixing and Matching

As you build your businesses, you can also mix and match business models so that you can get the best aspects of each of them. Here are two examples of how you can build companies that mix and match business models in optimal ways:

Mixing and Matching: Example 1

1. Start a consulting business (one-time purchase)
2. Develop a packaged service in the same niche (productized service)
3. Create a monthly package of services as a productized service (subscription)
4. Build a self-service tool for clients (subscription)

Mixing and Matching: Example 2

1. Write a lot of content that gets many views (ads)
2. Consult others in how to do the same (one-time)
3. Create an exclusive online community where users can discuss their strategies and network (recurring)

Summary

One-time purchase, recurring purchase, productized service, software-as-a-service and advertising are the five most common business models for bootstrapped entrepreneurs. Each of these business models comes with a certain risk-reward profile and a unique set of benefits and challenges. It may make sense to focus on a particular business model and build a product around it, but I think in most cases it is best to listen to your target customers, solve their problems, and then determine your business model based on the way that best scales along with your customers.

Presentation Slides

Presentation Audio

Feedback

Disagree with what I presented? Have any other thoughts on the topic? I would love to hear your feedback, so please leave your comments below!

Originally published at www.davidemcneill.com on December 14, 2017.