Startups Tech

Business models for tech startups in 2022

Choosing the right business model is crucial for businesses. We've identified the most powerful business models for tech startups in 2022.

In 2022, startups and established businesses should consider themselves lucky that there are so many potential business models that allow for making money flexibly. Business models for tech startups are many, but which is the right one for you and your business?

Just because there is so much to choose from does not mean that it’s an easy task to pinpoint the right one.

By taking a look at our list of top tech startups in the metaverse this year, you’ll find that the trend of the metaverse is allowing for creativity, diversity and flexibility to existing business models.

It is common for businesses to force themselves to stick to a particular business model because it’s the standard in a given market. You should never limit yourself, but always look at new ways of making money.

Establishing effective business models for tech startups is especially necessary to build a strong development strategy for the future, but also to prove to potential investors that a particular startup will provide them with a return on investment, allow for an assessment of the risks involved and proof of concept.

In this list we have pinpointed 5 business models that every tech startup and business needs to consider in this new era of rapid technological change.

  • #1: On-demand model
  • #2: Freemium model
  • #3: Smart, connected products
  • #4: Subscription model
  • #5: Crowdsourcing model

Business model #1: On-demand model

The on-demand business model involves providing your customers with specific services that they can get “on-demand” (hence the name) anytime they’d like. An example that is almost cliche at this point, is Uber, which has a 68% of the total US rideshare market and processed $26 billion worth of bookings last year, according to Backlinko.

This particular business model works with anything – for example food delivery through a mobile app – a concept that became extremely popular in 2020 and is now just in its initial stages of evolution.

Business model for tech startup #1: On-demand model
Business model #1: On-demand model. Photo credit: Tareq Ismail

Benefits of the on-demand business model for startups:

  • Simplicity: the ability to provide a variety of good and services with single app;
  • Tech savvy: Aimed at the younger generation – Gen Z, Millennials;
  • Freelancers possible to use for app development – flexibility.
  • Drawback: The on-demand business model requires heavy investments in digital product development and finding top-notch UX/UI designers with skills in Ruby / Rails. This can stack up the labor costs.

Business model #2: Freemium model

The word freemium is composed of two words: Free and Premium. Under this business model, the startup or company provides services in which the basic trial features are free, but would have to pay for the advanced Premium functionality.

This is an ideal choice for startups focused on widespread services, because it allows the combination of free and paid services in one go.

In this model, the business provides certain services to the consumer for free to set them up for future transactions. Another cliche example of this, but does the job, is streaming giant Spotify. The model is also popular with Internet companies and developers of computer and mobile programs and applications.

The goal of the freemium model relates back to its name. The “Free” charge has the goal of spreading information about a product or service. Who doesn’t like free stuff?

Once this stage is complete, you have to create the right incentive to convince the customer to continue using the service and even make them pay for it. This is the premium.

Business models for tech startups #2: freemium model.
Business model #2: Freemium. Photo credit: Mark Fletcher-Brown

Benefits of the freemium business model for startups:

  • Customer base: access to larger audiences and diverse types of customers;
  • Powerful balance: Balanced versions of free and premium plans;
  • Pull strategy: A striking list of services that grab customers’ attention which encourages them to renew their subscriptions.

Business model #3: Smart, connected products

The smart, connected products business model has seen a steady increase in popularity over the years. It has also been called the “Razor and Blades” model.

The smart, connected products business model uses an approach in which vital or “core” products are sold at a low price to make a profit by selling additional necessary products at a higher price.

This business approach is often associated with Gillette, the inventor of disposable razors and the company has been the source of inspiration for many competitors to build businesses on this concept. It’s one of the most powerful business models for tech startups.

Benefits of the “smart, connected products” model for startups:

  • Necessary products for customers, profitable for companies: a blade must be used with a razor. A coffee machine cannot be used without coffee beans;
  • Potential for high customer loyalty – Create a loyal community is ideal in this day and age, which can serve as a shield for preventing other companies from entering your marketplace;
  • Increased adaptability to the needs of the customers and market.
Business model for tech startups #3: Smart, connected products.
Business model #3: Smart, connected products. Photo credit: Brett Jordan.

Business model #4: Subscription model

The subscription model has become a powerhouse in recent years. Entire books have been written about it.

In The Forever Transaction by Robbie Baxter (Evolvera-affiliate link), it has been labelled as one that cultivates the greatest long-term customer relationship. It’s simple and effective. The user pays a fixed amount each month for the service provided by the company.

It’s no surprise, in this case, that a lot of the most successful global companies operate on this model: Netflix, YouTube and Apple. They all sell a subscription service rather than one-off purchase.

Benefits of the subscription business model for startups:

  • Cash flow: the main feature that sets this model apart from other business models for tech startups is that the business receives steady cash inflows;
  • Building customer loyalty: obtaining and retaining customers for the long term;
  • Effective targeting: targeting large pools of customers who are looking for a service for a given timeframe;
  • Know-your-customer (KYC) and data: By analyzing what your customers are viewing and browsing, you can create tailored experiences that retain them for longer.
Business models for tech startups #4:  Subscription model.
Business model #4: Subscription model. Photo credit: Marques Kaspbrack.

Business model #5: Crowdsourcing model

The crowdsourcing business model is a method of solving problems with the help of volunteers, typically online. This business model is widely used on the Internet with a prime example being Wikipedia.

People write, edit and upload themselves and they do so voluntarily. In other words, it’s all about utilizing the potential of volunteers to solve various tasks that arise in business.

YouTube is another platform where users publish videos and where most do so without monetization.

Benefits of the crowdsourcing business model for startups:

  • Scalability: since volunteers build the base of the business themselves, it makes it possible to quickly create a truly global product should it catch on.
  • Reduction of risk: the opportunity to share your business risks with the volunteers that build your platform is an inherent advantage. Should these volunteers be paid in the future, their rewards would be sourced from the profits that he or she already brought to the business.
  • Cheap: since crowdsourcing is typically derived from a global network of volunteers, this accounts for regional differences and living standards. Remote labor on a volunteer-driven basis makes it one of the most powerful business models for tech startups in 2022.
Business models for tech startups #5: Crowdsourcing.
Business model #5: Crowdsourcing. Photo credit: Cristi Tohatan.

But before you leave!

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