One of the most important questions for an entrepreneur to answer is “what is your business model?”  This is often a puzzling question. Most entrepreneurs look to the current market leaders or their competitors to create their business model. This stems from searching for a proof point that their business is viable, and this implies existence today. But should an entrepreneur be thinking along these lines?

Thriving businesses flourish because they aren’t copying everyone else in the marketplace. They conduct businesses differently. If there is one business model that takes a large amount of backing, it’s trying to win market share away for the large, established incumbents by playing the game the way they do. So why do it? Think differently.

What is a business model anyway? The definition is how a company “creates value for the customer, entices customer to pay for the value, delivers the value to the customer, and converts those payments into profit.”

Entrepreneurs often begin with the free or freemium business model. The problem with these models is that there is unlimited demand for free, and free requires someone to pay your operating expenses while you are waiting for enough paying customers to materialize (which takes a long time).  When pursuing this method, ask yourself who is going to be supporting free-of-charge? Is it your savings, investors, or your spouse’s income? Many entrepreneurs mistakenly believe that if they have a free audience, this will eventually attract investors. However, savvy investors know enough to ask how many customers are paying ones and they are not impressed by free ones. Experienced investors also equate the free model with the notion that the start-up really has no idea how to capture revenue from their customer base. You may be thinking to yourself, what about all those high tech companies that have done well with the freemium? Venture capitalist know if you can build a very large audience that they can use their industry connections to sell the start-up to a company with the hope that acquirer may be able to capture sales – but I can tell you that while there is much fanfare surrounding an acquisition, most are shut down a few years later.

A variant of the freemium model is the open source model, which was a trend in the software industry. Software companies give away their software for free, hoping to capture revenue from training, support, or add-on features. Some use a dual-licensing approach, the free open source license and a propriety version with enhance features is offered under a more traditional licensing agreement. The open source is experiencing similar pains as those seen by the freemium model. It is viewed more as a means to an end, but isn’t the answer for companies that want to flourish.

Groupon is a recent start-up success story. Its initial traction in the marketplace is attributed to building a community and running ads on Facebook. Should an entrepreneur copy their strategy? No, because Groupon did it when Facebook was just getting into offering advertising and Facebook ads were cheap. In the past year, I’ve seen pay-per-click rates on Facebook quadruple and double in just the last couple of months. Facebook wants to become a public company, and their pricing is aligning with the mainstream media. Don’t try to copy a strategy unless you understand what circumstances made it work.

Ultimately, businesses are for-profit entities and unless you believe in charity and philanthropy, free is not a good idea for a business. Even retail stores have moved away from using the lost leader strategy and now believe every product in store needs to make money. So let’s move onto models that actually do produce sales because bringing in revenue shouldn’t be pushed into the background when you are running a business.

Cabletron started by selling cable is short lengths, everyone else required the purchaser to buy the entire spool. They started by building their distribution and sales channels first, and then they got into selling other companies’ networking equipment and finally, they developed their own line of products. The beauty of this model is that it brings in immediate revenue; you start by selling other people’s products and by the time your products are ready, you have a customer base and channels established. Websites often work in a similar fashion. First, they build an audience and then they offer product and services to their audience. This is the opposite of what most people think of high tech companies, which often spend years developing a product and build their marketing, sales, and distribution afterwards.

A lock-in scheme is a way of getting customers’ repeat business because they’ve already paid in advance or they’ve purchased a long term deep discount. charges customers a one-time, annual fee to be a prime customer and this gives the customer free shipping for the following year. Any on-line store knows shipping fees are a top concern of shoppers. Health clubs offer multi-year contracts so exercisers are obligated to pay a monthly fee for a long time. The reality is most exercisers only frequent a health club for the first 90 days, yet they pay for the next 3 years.

Opt-out schemes and memberships are popular among Internet websites. Opt-in scheme offer users a free trial and then ask them to pay for further usage. Opt-out schemes ask users to provide a credit card or a means of paying, usage is free for some time period and then the user is billed for continued usage. Websites have tripled their revenues when transitioning from an opt-in to an opt-out scheme. Websites transitioning from pay-as-you-go schemes to membership have experienced similar grow in revenue on this conversion.

How do you design a business model? Once again, it comes back to the customer. What really bothers your customer about current business models? Think about Zappos, it sells shoes on line. It doesn’t make them. Its motto is “Powered by Service”. Both Nordstrom and Disney are known for their legendary service; they are the benchmarks to which every competitor is compared.  Remember when software licenses were sold as perpetual licenses with huge upfront fees and continually annual maintenance and support fees. Then a start-up decided to break the mold and offer three year term licenses. In plastic surgery and cosmetic medicine, the availability of payment option for elective procedures has had a big impact on the revenue of these service providers. The growth in weight loss companies took off when Nutrisystem removed dieting from the physician’s office to a store front in shopping centers.

How do you get started with your business model? Many business models change over time. Some start one way, but the goal is to change over time. Consider a new ecommerce website, it difficult to build a shopping clientele with just search engine optimization. New online retailers offer their products on Amazon and eBay, as well as having their own website. Like it or not, these sites are top of mind with online shoppers and shoppers will search them first before looking elsewhere. Even with the fees they charge, new online retailers can build awareness of their businesses by starting out on the big shopping portals. There are many service firms that start out by offering services through elance, guru, 99designs, or fiverr. Once they become established, these companies may move away from offering their products or services through these sites.