When starting a business it’s incredibly important to think first about your business model. When I talk about a business model I mean a specific framework and structure you should establish in order to have long-term success.
But what does this mean in reality? How does a profitable business model look like? And what digital marketing challenges do you have to master to get your business started?
Types of Business Models For Startups
One Time Revenue Business Model
Now let’s take a closer look at a Business Model that has one simple product, that sells only once. For example. A Water Filter that helps customers to drink purified water.
Let’s assume further, you’ve been running a fantastic advertising campaign. You collected leads and you have every day new sales. The product you sell online is purchased once by one of your newly acquired customers.
But the same customer will not continue paying any more money for that product he just purchased. It’s a one time transaction and there are no more recurring payments made. The deal is done, until you are running another sales campaign and you are trying to sell another product to your existing customer.
For sure, you can constantly send new product offers to your existing customers. But no matter what. This business model is a very tough one to stay long term in business. That’s why understanding business models is a fundamental milestone in your journey of entrepreneurship.
Why Your Business Model has to consider the Cost Per Acquisition
Why is that? We need to understand that every lead you want to acquire will cost you a lot of money. And yes, you need to be able to know how much it will cost you to acquire one new customer. This is also known as the Cost Per Acquisition, in short CPA. It’s a metric you will hear more often about that topic, especially when dealing with marketing analytics.
So now we know. We need to consider the so-called CPA. How much money will it cost you to acquire 1000 leads? How many of those leads can you reach by email, SMS, or any other messaging services? And what’s your sales ratio? Once you’ve been breaking down those numbers you’ll get a pretty clear picture of how important the CPA metric is.
Types of Business Models For Entrepreneurs
To understand the CPA value, let’s consider the following example.
To acquire 1000 leads, you’ve invested into a Paid Advertising Campaign $10.0000 USD. That means, that you’ve paid for advertising $10.000 USD to get 1000 emails, phone numbers or any other contact data to start your outreach process.
Let’s assume, you decided to use an Email Marketing tool to connect with your potential new customer. When sending out emails, to your collected leads, you might reach 30% of your collected leads.
If you are over the top, you might be able to reach even 40%. Now let’s continue our little example. If you’ve been able to reach 40% of your collected leads by email, you’ve noticed that 60% of your leads don’t even respond to your email.
That shrinks your potential sales volume down to 400 people, instead of 1000. Now let’s continue this example. If 400 people are opening and reading your email, only 40% will actually click on your offer. And trust me, that 40% is a really high number. Meaning, under very good circumstances you are going to get another 40% from 400 leads more interested in buying your product.
Now we are already down to 160 leads that have made it so far into the final round to become a happy customer of your water filter. But guess what. From those 160 happy clickers only 5% will actually purchase your product.
The rest will vanish as well. That means, at the very end you generated 8 Sales. Those numbers are legitimate numbers. Of course we can argue about ups and downs. Different sales ratios for different products, services and industries. But the math will stay the same.
How to use the CPA to calculate your Sales Price?
Let’s break down the numbers:
- $10k paid for Digital Marketing Ads
- 1000 Leads generated
- 8 New Customers acquired
And now finally you have to ask yourself one question. If you paid $10k for Digital Marketing Ads, and you have been able to make 8 sales. For what price do you need to sell your water filter to one of those customers, that you can even break even with your initial costs?
And if your sales closing ratio is around 5% – your sales ratio is fantastic. The price is $1250 per water filter. And then you’ll have your invested money back. But still no profit.
A profitable business model certainly looks at that very important factor. A profitable business operation has to minimize the cost per acquisition to maximize their profits. But also to lower their sales price if needed.
We also have to keep one important factor in mind. High volume Sales and Revenue numbers alone don’t really matter. What matters is that your company generates profit.
You can have a seven-figure revenue – but if your paid advertising campaigns cost you more than your actual revenue – you are already losing money.
Recurring Revenue Business Model
As mentioned before, it makes a lot of sense to start with a business model that has recurring revenue. Depending on your product or service you’ll be able to create a business model that is built on a recurring revenue stream.
Here are a few examples of those business models:
- Email Marketing Tools
- Keyword Research Tools
- Hosting Companies
- Graphics Software Products like Adobe
As you can see. As long as you want to watch new TV-Shows or new Movies you’ll have to pay your monthly subscription plan to Netflix. That means, that you are not just a one time customer – it’s quite the opposite. You are most likely a life-long customer.
And that’s the huge benefit of running and operating a business model that’s based on a recurring revenue stream.
B2B vs. B2C
Another important factor is to decide if you are going to start a Business to Business Model (B2B) or a so-called Business to Customer (B2C) Business Model.
The difference is quite simple – but also requires totally different digital marketing solutions.