5 Customer-Funded Business Models

This week on the Serial Entrepreneur Club, we were joined by Verne Harnish, founder of Entrepreneurs’ Organization, and John Mullins, best-selling author of The Customer-Funded Business to discuss funding and scaling your startup without needing help from the VC world. It’s a lot more common in today’s business world than you might think, and a business model funded by customers’ cash can keep you from putting your business’s equity in investors’ hands. 

Companies like Airbnb and Uber don’t own any of the products or services being utilized– they’re just the middleman to connect buyer and seller.

-Verne Harnish

John laid out the 5 customer-funded business models he’s identified, emphasizing the importance of keeping the customer at the center of everything you do especially when it’s their money you’re using. 

1. Pay-in-advance models 

Having your customers pay you in order to begin production takes a lot of the guesswork out of manufacturing and preparing for sales. It also requires a little bit of convincing and a lot of trust on the customers’ end– solve a problem so pressing or create something so unique that they’re willing to pay for something that doesn’t yet exist. This is how Michael Dell got his idea off the ground in his college dorm room!

2. Subscription Models

Think Netflix, online news subscriptions, and Amazon Prime– they’ve brought in recurring revenue and are able to provide a service or product to those who pay. Spend time doing your research and asking your customers what they need from you… and bonus points for offering an upfront annual subscription, in addition to your monthly option. 

3. Scarcity Models

A favorite among popular clothing chains, these companies have created a scarcity mindset in consumers– they know that if they don’t act now, the product may be gone when they next check. It’s a way to sell less and earn more without having to pay your vendors up front. 

4. Service-to-product models 

Take a page from Bill Gates’s book and create a moneymaker that requires little (if any) upfront capital. This model begins with providing customized work before transforming that into a universally marketable product like software. 

5. Matchmaker models 

Companies like Airbnb and Uber don’t own any of the products or services being utilized– they’re just the middleman to connect buyer and seller. This is another model with hardly any need for external funding because they don’t need to buy what they’re selling, simply earning commission on sales. 

Small businesses and retailers can do this, you don’t have to be Amazon. 

Verne Harnish

By opting for a customer-funded model, John says, you are able to maintain a lot more control of your business, as opposed to having a team of investors with equity in your company; it allows you to scale your business how you want to. Another bonus is that your “investors” know what they’re getting from you instead of having to turn back to a team of VCs and say your idea with their money wasn’t a hit and hope for another chance. Customer-funded business models aren’t the answer for everyone, but consider opting for one of the suggestions above and make your next venture a little bit less risky! 

You definitely don’t want to miss the full session with even more great ideas for small business owners– check out the full episode above! 

Mentioned Reading Material:

The Customer-Funded Business by John Mullins 

How Fast Can Your Company Afford to Grow? by John Mullins and Neil Churchill

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