“Today’s idea that a business idea plus venture capital equals instant riches might be misguided. While many start-ups overlook it, the customer is still king and in more ways than one”, says John Mullins, Associate Professor of Management Practice in Marketing and Entrepreneurship and author of The New Business Road Test- What entrepreneurs and executives should do BEFORE launching a lean start-up.
“Getting cash from customers to support a business is extremely helpful. It eliminates the need to spend precious time attracting investment dollars which are hard to come by these days and investors often want control in exchange for their financial support which doesn’t always align with the founders’ vision for the company or their customers’ interests”, he continues.
In the latest edition of The New Business Road Test Dr Mullins identifies five customer-funded business models.
1. Matchmaker models: Match making buyers and sellers. Fees or commissions earned from customers provide cash to launch the business. (Airbnb, Dog Vacay).
2. Pay-in-advance models: customers pay the supplier for at least part of the good or service before receiving anything (Via, Costco, Threadless).
3. Subscription models: Allows for a steady income with new customers turning profitable almost immediately (TutorVista, Yammer).
4. Scarcity-based models: customers buy now and pay now, motivated by scarcity of good or service (Zara, Vente-privee, Gilt Groupe).
5. Service-to-product models: developing and providing a service for individual customers from scratch which gives you raw material to develop products later (GoViral, MapmyIndia).
Customers are the key to a company’s success and by involving them from the start of an entrepreneurial venture it can help to work out the kinks and improve the business for future growth, say John. “In my analysis, the companies that had customer-funded businesses shared two attributes. They required little to no external capital to get started and having proven their concept to existing customers all of the businesses raised institutional capital eventually,” says John, “and on much better terms!”
The New Business Road Test - What entrepreneurs and executives should do before launching a lean start-up, fourth edition, plus an accompanying app for Apple and Android devices, will available from 20 September.