Now that you’ve figured out your million-dollar startup idea, it’s time to dive deep into the

concept a little more.

Before you actually get your startup going, it's crucial that you get as much clarity as possible
about the business and the market you’ll be operating in.

Having the ​right​ kind of business operating in the ​right​ market is crucial to increasing your
chances of being successful in your venture.

Let’s try to understand all the different aspects of a business and its market.

What kind of business will it be?

Product or Service?

The classic dilemma for any entrepreneur is whether to create a service or a product. You may
have got some clarity in terms of the type of business you want to build during the ideation
phase. But there might be instances where you are caught in the middle, not sure which way to
go.

With a service-based business, you trade your skills and most importantly your time in exchange
for money. With a product-based business, you sell products for people to consume.

Both types of businesses can lead you to success. There are thousands of hugely successful
startups, both service-based and product-based. However, you need to know one crucial
difference between service-based startups and product-based startups - ​Scaling.

It’s much harder to scale a services-based business because the amount of money you can
make is proportionate to the number of hours you – or your staff - can work, and there are only
24 hours in a day. As the number of staff increases, so will your expenses, leaving very little for
you to reinvest in growing your business.

It’s far easier to scale a product-based startup. In fact, for a product-based startup, the more you
scale, the unit economics only become better. What I want to emphasize here is that
product-based operations can be easily scaled to a certain extent ​without ​the need for
additional investment…until of course you’re looking at achieving massive scale. And for a
startup, scaling up is everything.

Another important thing you need to understand about a services-based startup is the low
set-up costs and low barriers to enter the market. This makes it less risky in that you’re investing
less in terms of money. This is ​precisely​ why a lot of first-time entrepreneurs are drawn towards
setting up a services-based business rather than a product-based one.

On the other hand, a product-based startup requires a significant upfront investment, and it may
be some time before you see ​any​ return on the investment at all, especially if you have jumped
in blindly with no clear idea of the demand for the product.
So how do we solve this problem? A simple way to fix this is to stop looking at them as two
independent options. Instead, you can start with one and then transition to the other.

That’s right. You can start off as a services-based startup with a low investment, ​validate​ the
market with little risk and slowly transition into a product-based startup with a good
product-market fit. Predictable revenues will actually allow you to scale much more rapidly.
Basically, what you’re doing is ​productizing​ your services.

The best example of this is Ola. When they started out, you could book your cab only through
their call center. This was much easier for Ola than having to invest millions of dollars into
developing the product that they have today. But eventually, after understanding the market’s
needs and pain points, they smoothly transitioned into a product company, which allowed them
to scale rapidly and capture significant market share.

You could do the same. Again, this is not the ​only​ way to go about it, but it’s a lot less risky than
jumping in product-first.

Once you have ​that​ figured out, you can move on to the next question of whether to sell to a ​lot
of people at a low cost or to fewer people at a high cost; in other words: B2C versus B2B.

So, do you sell to a consumer or to a business?

Imagine you want to buy a mobile phone for your personal use. How would you decide which
one to go with? Who would you consult about these decisions? How will you evaluate whether
your purchase is good or bad? How long will you take to make a decision?

Now, put yourself in the shoes of a high-level executive in a multinational company who is
authorized to purchase 2 million dollars’ worth of software. Again, ask yourself the same
questions. Despite the questions being the same, your answers will vary considerably. That is
probably the most significant difference between opting for B2C or B2B.

Put yourself in the shoes of your prospects and think ​how​ you would sell to them. I’m sure your
approach will be very different for each option. These differences stem from the change in
customer behaviour.

B2C or B2B, at the end of the day, all businesses are about human interactions and
relationships, but there are ​three​ critical differences between a startup that caters to consumers
and a startup that caters to businesses.

1. Return on Investment (ROI),

First: let’s look at return on investment

Consumers and businesses look at the return on investment very differently. The return on
investment for most consumer goods is intangible and quite hard to quantify. Imagine you
bought a car: how would you go about figuring out the return on investment for that? But that is
exactly​ the question that will help you understand consumer behavior and which way to go with
your business.

Consumers ​love​ novelty. They often buy things based on emotion and then rationalize the
purchase with logic. Human beings are social animals and we do everything we can to fit into
the tribe. The easiest way to do this is to conform to what others around us are doing. The fear
of missing out is powerful, especially when it comes to entertainment, fashion trends, and new
technology.

We do this because change involves a cost. Whenever you challenge the status quo, you incur
a cost in the form of time, effort, or money, and that's what it is - a ​cost​ and not an investment.
And subconsciously, we go to any length to avoid it.

On the other hand, a ​B2B​ transaction is inherently an investment. An investment with the
expectation that it will increase profitability, reduce costs, improve productivity and efficiency,
and most importantly, sales.

Unlike individual consumers, B2B customers never buy things to look good, for fun, or for the
user experience. The expectation of a return on investment from the purchase is inherent. There
has​ to be one.

A new software ​has​ to be faster and more reliable; the marketing automation solution ​has​ to get
them more business, and a new HR tool ​must​ help make employees happier and more
productive.

What consumers call novelty, businesses call risk.

What ​companies​ are looking for is a way to differentiate and stand out from the crowd.
Organizations want to gain an edge over their competitors by doing something better than them.
For this, they actively look out for products or services that will make them faster, more efficient
and most importantly, better than the competition.

You first have to understand and decide ​where​ your product or your offering falls in this
spectrum.

Next, look at consumer relationship

B2C markets are usually big. Customers keep changing over a period of time. Customer
retention and loyalty is a ​big​ issue for B2C startups. Although instinctively, most
consumer-focused startups try to limit the churn, they ​know​ that they can never fix it completely,
and they’re are with it.

On the other hand, B2B markets tend to be smaller and more focused. For you to thrive as a
B2B startup, you need to invest in building deep relationships with a small number of
companies. These relationships are ​crucial​ for you to score long-term agreements or even
keep​ existing agreements. This is also one of the reasons why B2B companies tend to lean
towards the ​customized service​ side of the business.

Three: What’s your decision-making process?

The decision-making process for consumer products varies quite a bit. For a low-priced item,
the decision-making process is rather intuitive and instantaneous. For a high-priced item, B2C
customers might consult family, friends and their social network, but it rarely gets more
complicated than that.

For a B2C startup, the customer and the consumer are the same people. This makes it easier
for these startups to target these customers effectively and for that, they have consistent
marketing communication.

On the other hand, for a B2B purchase, the approval or pre-authorization of multiple
stakeholders is the norm. In fact, the end user may or may not even ​participate​ in the decision.
This is why the sales cycle can be dramatically longer in a B2B business. This lengthy sales
cycle can also disrupt your daily operations to a large extent. So it becomes important to create
communication that connects and engages all these stakeholders.

These are all the things you have to consider before deciding whether to go B2C or B2B.

Would you go after a market which is very big but won’t pay much, is emotionally driven, difficult
to penetrate but easier to convince?

Or would you go after a very narrow market, which wouldn’t mind paying a lot, but with an
extremely long sales cycle.

That’s what you need to think about.

Business Model or Revenue Model

Once you’ve decided on the nature of your business and who your typical audience is, it is time
to figure out what is the best way to monetize your audience.

You have to get them to pay for your offering for you to continue servicing them ​and​ the rest of
the market. This is your business or revenue model. You’d build your business depending on
how you want to monetize your audience.

Here are a few ways you can monetize your audience:

One is the ​Transactional Model - Physical Products, digital Products, or the service Model

When I hear aspiring entrepreneurs say they want to start their own business, they are usually
talking about creating and selling their own products or services. It doesn’t surprise me that
most entrepreneurs lean towards this business model. Although it's a great model, it's not the
only​ model out there.
This model is a broad representation of business models and can have multiple business
models within it. Its biggest advantage is probably the flexibility it offers. Let me elaborate: You
can choose whether to make a physical product or a digital product or even a ​service​ for that
matter. Then you can promote it through the marketing channels of your choice and distribute it
the way you see fit. Your customers are directly transacting with you for your offering.

Two: a s​ubscription-Based Model

A spin-off of the transactional model is the subscription-based model. This is where your
audience is again transacting with you directly but also ​frequently​ over a particular period.

Instead of offering your product as a ​one-time​ purchase, startups using this model can enjoy
recurring revenue in the form of monthly or even weekly payments. Thanks to this, compared to
other business models, customer acquisition and retention becomes easier and cheaper.

Instead of asking for a significant one-time payment, this model allows you to ask your
customers to make a purchase decision at a low upfront cost. As you can imagine, most people
might be comfortable with investing 500 rupees a month than shelling out 5,000 rupees at one
shot.

This model is quite popular in industries like fashion, media, and daily consumables.

Three: The Advertising Model

This model can be extremely effective, especially considering the advent of ad networks. At the
heart of this model is the idea of providing a free product or service and relying on ad revenue
paid by companies trying to reach your audience through your asset.

But to be successful and profitable with this business model, you need to be operating at a large
scale

The bottom line here is the more people you can reach, the higher your profits will be. A prime
example of this model is YourStory itself. The platform is entirely free to use, and we monetize
our audience reach with ads.

Four: The Marketplace Model

This model revolves around providing a platform where buyers and sellers can meet and carry
out transactions. On one hand, you provide sellers with what they need: an audience, logistics
and a whole lot more. On the other hand, you give buyers a secure and convenient way of
transacting with these sellers.

This model would work brilliantly in disorganized industries waiting to be organized by a safe
and convenient platform. Revenue is usually generated by applying a small fee on the
transaction and other premium services. Like the ad-based model, you should be operating at a
certain scale for this to be profitable.
Five: The Rental Model

This is a rather new model where you ​own​ assets that you allow access to at a fraction of what
it would otherwise cost your consumers. With consumers increasingly preferring access over
ownership, this model seems to solve that problem effectively.

The biggest drawback with this model is the huge upfront costs needed to buy the assets. You
also need to consider assets that are not very difficult to maintain, or maintenance will become
an added burden.

All these business models are very broad and don’t necessarily cover ​all​ the business models
out there. In fact, new business models crop up all the time, very often based on the need of the
customer. You can also mix different business models to create your own model. So go ahead
and experiment and figure out the best way to monetize ​your​ audience.

Now while you’re doing that, you should also understand how big your market is and how fast
it’s growing.

Size & growth of the market​

It’s very important that you determine the market size of the industry you’re trying to get into.
This will tell you whether this industry is big enough to enter, and whether you can extract
enough profits if you can capture a large share of that market.

If the market is not big enough, then it doesn’t make sense for you to enter it at all. You wouldn’t
want to invest in an industry that will give you only an incremental return after years of hard
work. Instead, you should aim for an industry that is big enough for your investment to grow
exponentially. For this, you can follow these 4 simple steps.

One: ​Understand the ​size​ of the market

To understand the size of the market, you need to zero in on your exact customer segment and
understand it in-and-out. Most probably, you already figured out some part of this at the idea
generation stage. Now you need to determine the exact size of the market.

This can be tricky and the only way to do this is with research. With simple products, this
assessment becomes much easier than with complicated products. For example, if your product
is targeted at working women, you will need to figure out how many working women are there in
the location you are targeting.

Two: ​Understand the value of the market

The next step is to understand how much each customer in your audience is willing to pay for
your offering. If you already have competitors, this should be easy to find out. But if you don’t
have competitors, then you need to either look for similar products or understand the value of
your offering.
The number of people (that is, the size of the market) and the amount they are willing to pay will
give you the value of the market. Going back to the example of working women, let’s assume
that there are about 1 crore working women and each one of them can afford about 100 rupees
then the value of your market is 1 crore multiplied by 100 rupees which is 100 crores. This 100
crores denotes your total addressable market.

Three: ​Understand the serviceable market

Now, when you’re starting off, there is almost always some competition. And you can expect the
entire market to be yours if no competitor already dominates the market.

But aiming for 1-5% of the total addressable market, which is your serviceable market, is
considered a reasonable target.

Now, the serviceable market shows how big the market for your business is. Going by our
previous example of the 100 crore working women market, 5% of it which is 5 crores would be
your serviceable market. It also signifies how valuable your startup can be. How big your pie is
going to be is what investors find most attractive.

Four: ​Determine the growth rate of the market​

Having a big market is not enough; it also needs to be a growing market. A high-growth industry
means that not only is there great demand but also a lot of room to scale.

You don’t want to get into a stagnant industry. Very often, stagnant industries don’t have a lot of
players – that’s something you should look out for.

The best way to determine this is to see how your potential competitors are growing year on
year. If you are entering a market with enough research done, you will know the compounded
annual growth rate or CAGR for that industry.

All these numbers will give you a clear understanding of the ​size​ of the industry and how
lucrative it is. It’s now time to size up your competition and figure out whether it’s a battle worth
fighting.

Competitor Analysis

When it comes to competitor analysis, pick your battles wisely. This dramatically increases your
chances of not just survival but also success. You don’t want to enter a battlefield full of
heavyweights.

Large corporations with large budgets can easily squash your efforts before you even get
started. You should be looking for the low-hanging fruit, but don’t let a little competition bog you
down.
It’s great to have competition. The first one through the door always gets shot, and your
competitors would have led the way for you. Enjoy the second-mover advantage.

Analyzing your competition also helps you understand all the gaps in the way they are serving
the audience, and if your offering can fill the gap, that would be ideal.

You need to be methodical with your approach and logical with your decisions. That’s why I’ve
created a competitor analysis canvas which will give you an extremely good view of your entire
industry.

You can choose what data points you want to populate, but there are plenty of options for you to
choose from. Check the downloads sections for a template for competitor analysis and perform
it for the industry you are planning to enter.

With that we come to the end of this video. To summarize, we learnt what kind of business you
can start, whether to sell to consumers or companies, the different business models you can
have, how to understand the size of your market and how to perform competitor analysis.

Thank you for watching this video, I will see you in the next one.