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Embarking on an entrepreneurial journey is an exciting step towards creating a legacy. However, the stakes are high – it is almost universally known that 90% of startups fail. A recent survey by Failory explored the reasons for this number in 2024. The End half of bankrupt enterprises cited marketing failures. In particular, 34% cited poor market fit as a critical factor.
This makes selecting the right business model in 2024 more vital than ever before to ensure the right positioning in the market. Adapting your business model to market demands and personal values is the key to avoiding such statistics.
As you explore the advantages and challenges of various models, from the structured support of franchising to the flexible adaptability of lean startups, it is important to evaluate how each one aligns with your long-term goals and immediate needs.
1. A structured approach to franchising
Franchising offers a structured path to business ownership that mixes the security of a proven system with the excitement of entrepreneurship. One of the most important benefits of franchising is its turnkey operation. Franchisees receive a ready-made business plan, which significantly reduces the failure rate of start-ups compared to independent ventures. This model is associated with established brand recognition and customer loyalty, which could be an invaluable asset from day one.
Take McDonald’s for example. With greater than 38,000 locations worldwide, McDonald’s franchisees profit from the strength of a globally recognized brand and loyal customer base, reducing much of the risk associated with starting a recent business. McDonald’s offers its franchisees comprehensive training and support, covering every little thing from store operations to financial management and marketing campaigns. This allows franchisees to focus on the development of their individual outlets without having to build these systems from scratch.
McDonald’s has refined this model by streamlining processes and leveraging its extensive supply chain. Franchisees profit from wholesale purchases, recognized suppliers and effective promoting campaigns. This support structure helps recent owners avoid many of the pitfalls that independent businesses encounter, similar to uneven quality or costly marketing efforts.
However, franchising comes with its challenges. In the case of McDonald’s, the so-called initial investment is significant and often ranges from $1.3 million to $2.3 million. Franchisees must also pay ongoing royalties, typically 4-5% of gross sales, which may impact long-term profitability. Additionally, while franchisees profit from McDonald’s global popularity, they have to adhere to strict operating guidelines, leaving little room for creativity and local adaptation. McDonald’s maintains tight control over every little thing from its menu to its store layout, which limits its freedom of enterprise.
For entrepreneurs attracted to the structure and support of an established brand, franchising could also be a less dangerous path to success. However, financial liabilities and lack of operational flexibility should be considered when considering this model.
2. Subscription model
Subscription-based models offer several significant advantages for firms that want to ensure a regular and predictable revenue stream. This model significantly reduces the unpredictability associated with one-time sales by ensuring regular revenue generation through monthly or annual subscriptions. For example, Dollar Shave Club revolutionized the razor industry by offering inexpensive razors and grooming products directly to consumers via subscription. This not only created a regular revenue stream, but also built strong customer loyalty through regular product delivery.
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 easy razors to a wider range of grooming products. The subscription model allowed the company to scale quickly and efficiently because it could customize its services without significant incremental costs. This adaptability helps firms respond to market needs and maintain operational efficiency as they grow.
However, while subscription models like Dollar Shave Club are thriving, maintaining customer retention is an ongoing challenge. To prevent worker departures, firms must continually innovate and provide exceptional customer support. In the case of Dollar Shave Club, the company continually updated its product line and used smart, 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 firms with stable revenues and growth opportunities, it also requires constant attention to customer satisfaction. To retain subscribers, firms must focus on innovation and customer support, making this model each lucrative and resource-intensive.
3. Lean startup model
The lean startup model is highly valued for its flexibility and profitability, making it an attractive option for entrepreneurs looking to minimize risk while maximizing adaptability. An ideal example of this is Dropbox, which used a Lean Startup approach to develop into a multi-billion dollar company. Instead of building a full product from scratch, Dropbox launched a Minimum Viable Product (MVP) – a easy video demonstration of its concept. This allowed the founders to gather feedback and gauge interest before committing to full-scale development. The overwhelming response confirmed the need for a easy file sharing solution, and Dropbox quickly grew from a startup to an industry leader.
By using this lean methodology, Dropbox was able to make changes quickly, continually improving its services based on real-time user feedback. This approach minimized initial investment while ensuring that the product met market needs. From 2023 revenue reportDropbox has reached over 700 million registered users and generated annual revenue of $2.5 billion, demonstrating the power of scaling efficiently using Lean principles.
However, the lean startup model is not without its challenges. Its iterative nature requires constant adjustments, which may lead to uncertainty and the risk of over-trading. While Dropbox has successfully scaled, frequent product changes can confuse stakeholders or destabilize business strategy if not managed properly. Despite these risks, for entrepreneurs who prioritize flexibility and responsiveness, the lean startup model offers a path to success with minimal upfront investment.
4. Cooperative business model
The cooperative business model emphasizes shared ownership and decision-making, promoting a democratic approach to doing business. Every member has a voice in key decisions, promoting transparency and engagement. This model often leads to a strong sense of community and emphasizes long-term value over short-term profits. An ideal example is REI (Recreational Equipment, Inc.), a consumer cooperative that has been successfully operating this model for over 80 years. REI profits are either reinvested in the company or returned to members in the type of annual dividends. Only in 2022 REI returned $234 million to its 23 million cooperative members in the type of dividends and member-only rebates.
One of the most important benefits of the cooperative model is the alignment of the business with the community it serves. For example, REI focuses on environmental sustainability and local development, ensuring that its values match those of its members. This not only builds brand loyalty, but also strengthens the long-term stability of the cooperative.
However, there are challenges inherent to the cooperative model. Because profits are distributed among all members, individual financial returns could also be lower compared to other business structures. Additionally, decision-making could also be slower due to the need for consensus among many members. For REI, balancing cooperative ideals with financial growth has been critical to maintaining success while supporting each the environment and community.
Choosing the right business model is a key decision for every starting entrepreneur. By considering each the benefits and limitations of each model, entrepreneurs can tailor their business strategies to their personal values, market conditions, and long-term goals, charting a path to success that is each rewarding and sustainable.