How to Choose the Right Business Model

Embarking on an entrepreneurial journey is an exciting step towards creating a legacy. However, the stakes are high – it’s almost common knowledge that 90% of startups fail. A recent survey by Failory looked at why this number was in 2024. More than half of failed businesses attribute it to marketing failure. Specifically, 34% cited negative market equity as an important factor.

This makes choosing the right business model in 2024 more important than ever to ensure you are positioned correctly in the market. Aligning your business model with market demands and personal values ​​is critical to avoiding these statistics.

By evaluating the benefits and challenges of various models, from the structured support of exchanges to the flexibility of the changing conditions of soft startups, it is important to evaluate how each fits your long-term goals and immediate needs.

Related: 7 Elements of a Strong Business Model

1. Systematic approach to franchising

Franchising offers a structured way of business ownership that combines the security of a proven system with the excitement of entrepreneurship. One of the main advantages of franchising is its turnkey operation. Sellers are provided with a ready-made business plan, which greatly reduces the initial failure rate compared to a private business. This model comes with established brand recognition and customer loyalty, which can be valuable assets from day one.

Take McDonald’s, for example. With more than 38,000 locations worldwide, McDonald’s franchisees benefit from the strength of a globally recognized brand and a loyal customer base, which mitigates many of the risks that come with starting a new business. McDonald’s offers its owners 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 stores without the burden of building these systems from scratch.

McDonald’s developed this model by simplifying processes and leveraging its large supply chain. Franchisees benefit from bulk purchasing, established suppliers and powerful advertising campaigns. This support structure helps new owners avoid many of the pitfalls that private businesses face, such as inconsistent quality or expensive marketing efforts.

However, franchising comes with challenges. In the case of McDonald’s, the initial investment is significant, usually 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 operating guidelines, leaving little room for innovation or local adaptation. McDonald’s maintains tight control over everything from the menu to the store layout, which limits entrepreneurial freedom.

For entrepreneurs who are attracted to the structure and support of a well-established brand, making money through franchising can be a risk-free path to success. However, it is important to weigh the financial obligations and lack of operational flexibility when considering this model.

2. Subscription-based model

Subscription-based models offer several compelling advantages for businesses looking to establish a stable and predictable revenue stream. This model greatly reduces the uncertainty associated with one-time sales by ensuring that income is generated regularly through monthly or annual subscriptions. For example, Dollar Shave Club revolutionized the razor industry by providing affordable razors and grooming products directly to consumers through subscription. This not only created a steady stream of income but also built strong customer loyalty by delivering products over and over again.

One of the main advantages of this model is its durability. Dollar Shave Club has demonstrated this by expanding its offering based on customer feedback, from simple razors to a wide range of grooming products. The subscription model has allowed the company to grow quickly and efficiently, as it can adjust its services without increasing costs. This adaptability helps businesses to respond to market needs and maintain efficiency as they grow.

However, while subscription models like Dollar Shave Club have been successful, maintaining customer retention is an ongoing challenge. To prevent churn, companies must constantly innovate and deliver exceptional customer service. In the case of Dollar Shave Club, they continually update their product line and use smart, engaging marketing to keep customers interested and subscribed. This approach helped them avoid high prices, 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 requires consistent attention to customer satisfaction. Companies need to focus on innovation and customer service to retain subscribers, making the model more profitable and resource efficient.

Related: 4 Successful Business Models That Built Billion Dollar Companies

3. The first soft model

The lean start-up model is highly regarded for its flexibility and cost-effectiveness, making it an attractive option for entrepreneurs looking to reduce risk while maximizing flexibility. A good example of this is Dropbox, which used a no-nonsense start-up approach to become a multi-billion dollar company. Rather than building a full product from scratch, Dropbox launched a Low-Level Viable Product (MVP) – a simple video demonstration of its concept. This allows developers to gather feedback and gauge interest before committing to full development. The overwhelming response confirmed the need for a simple file sharing solution, and Dropbox quickly grew from startup to industry leader.

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

However, the first soft model is not without its challenges. Its iterative nature requires constant adjustment, which can lead to uncertainty and the risk of over-circulation. Although Dropbox has been able to scale successfully, frequent product changes can confuse stakeholders or disrupt business strategy if not managed carefully. Despite these risks, for entrepreneurs who prioritize flexibility and responsiveness, the lean startup model offers a path to success with minimal initial investment.

4. Cooperative business model

The cooperative business model emphasizes shared ownership and decision-making, encouraging a democratic approach to business management. Each member has a voice in key decisions, which encourages transparency and involvement. This model often leads to a strong sense of community and prioritizes long-term value over short-term profit. A prime example is REI (Recreational Equipment, Inc.), a consumer cooperative that has operated successfully under this model for over 80 years. REI’s profits are 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 discounts alone.

One of the biggest advantages of the partnership model is the compatibility between the business and the community it serves. REI, for example, focuses on environmental sustainability and local development, ensuring that its values ​​are aligned with those of its members. This not only creates brand loyalty but also strengthens the long-term sustainability of the partnership.

However, there are challenges to the partnership model. Since profits are distributed among all members, individual financial returns may be lower compared to other business structures. Additionally, decision-making can be slow due to the need for consensus among many members. For REI, balancing its corporate goals with financial growth was critical to maintaining its success while supporting both the environment and its community.

Related: How to Navigate Today’s Complex Business Environment — 4 Strategies for Success

Choosing the right business model is a fundamental decision for every budding 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, creating a path to fulfilling and sustainable success.