Mar 212009

If you were to start a business today, what business model would be right for you?

For anyone who has contemplated (or pursued) entrepreneurship, the type of business you want to run has to be the number one consideration before embarking on any new adventure. And it can also be the most difficult decision to make.

These days, there are multiple routes by which one can start a business, and they all have benefits and drawbacks, and no one type of business will be right for everyone. (Maybe I should start a Facebook app: Which type of business are You?) So today I’m going have a little fun and explore the main business routes for a startup, and explain why you might decide to choose one business structure over another.

Internet Business

OK, I’m obviously more than a little biased towards this type of business, considering that it what I have been exploring for a little while now. Right now, you can structure your business in essentially any way you want in an “internet business” but the #1 characteristic that truly defines an internet business is the lack of a physical location. It is possible to do 100% of your market research, product creation, product distribution, marketing, advertising, and transactions entirely within the Intersphere. Netspace. Interwebs. Cyberspace. Online.

This divorce from a physical place of business has many consequences (or benefits, I should say) but the most significant benefit is the ridiculously low overhead. Typical cost for 1 year of domain registration and hosting is around $100. Everything else can be done yourself, for free. Which means your only currency in the internet economy is time.

In the last ten years, online business have flourished, with everything from traditional retail clothing outlets selling their wares in online shops, to 1-man run single-page internet sites that have no content other than a stack of Google Adsense ads.

And then of course there are the insta-millionaires: the “internet marketers”, whose main talent is in being able to use search engines and targeted ads to drive worldwide traffic to their web sites. They target very specific niches and often create an informational product laser-focused and relevant to that niche. And then using the power of the internet to serve a global economy, they make oodles of money based on near-100% profit margins and high conversion percentages. All this translates to this: the use the internet to focus on one specific market, have a product relevant to that market, and then draw members of that market to the product, which then sells.

It’s brilliant in its simplicity, and completely antithetical to traditional business. And to me, it sounds like fun.

But I’m getting a little off topic here, so let me just summarize by saying that the benefits are no physical location needed and easy distribution if you are selling an e-product. The downsides are that if you ever decide to sell a physical product, you immediately hit up against a big problem in that now you need some sort of physical location for product manufacturing and distribution. The internet is very good at marketing, advertising, and information distribution, but very bad at getting you actual products. It takes the real world to do that. And entering the real world means losing out on a lot of the benefits of an internet business. So there is a major limitation of the internet only model.

Traditional Business Model

So in the traditional model of business, we have a physical location for our company. We have employees. We are selling a good or service that must be physically delivered to a customer. And you have a lot more of what I wouldn’t necessarily call respect, but, because people understand that business model, a majority of the population tends to take you more seriously. An actual physical location, and not just a P.O. Box, tends to carry some weight.

Consequently, it may be much easier to put together business partnerships or agreements because other companies will feel much more comfortable with your mode of business. And let’s face it: physical products are just nicer. They are substantial. They have weight. You can collect physical products. They clothe you and nourish you. I have plenty of digital music (some of which I have actually purchased, if you can believe that), but I still prefer a cd. Which in many ways is crazy, because first thing I do with that CD is rip it to MP3s, and then it gets put on my shelves likely never to be touched again.

And of course a traditional business creates jobs for others. In a way, this can be a major benefit, because now you can get input from many people, you can have other people making money for you, and your business can also start to feel like a community filled with people all working towards a similar goal. Everyone needs to feel like part of something larger than themselves, and for many people the business they work in fulfills that need for them.

So in the end, the benefits of a traditional business are a greater degree of respect awarded to you from other businesses, the ability to create and deliver tangible goods, and job creation. Those are pretty big positives. The downside, of course, is that you have to have a physical location, you actually have to deliver goods or services physically to your customer, and in most cases you need to employ others, which creates a host of issues. Manging employees and dealing with payroll, taxes, and benefits are just a few of those issues.

Even recognizing those potential downsides, there is something very compelling to me about the notion of owning my own traditional business. To be an internet entrepreneur, you may end up only owning a website and a piece of intellectual property. But to be a business owner, you are the real deal.

So Why Choose One Type of Business Over Another?

You know, it’s really hard to answer this question. Setting up an internet business is really a lot easier when you know how to do it, and requires almost no capital. Setting up a traditional business generally requires an investment of at least a few tens of thousand of dollars, because you almost inevitably will have to begin paying overhead before you ever generate revenue. For myself, I think my ideal situation would involve the creation of an internet business that becomes profitable first. And once I had that income source established, I would begin considering the creation of an actual traditional business with a specific brand and product that I could be proud of. But maybe that would just be too much of a pain in the butt.

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