Types of Business Models
A Business Model is simply a design for the successful operation of a business, identifying revenue sources, customer base, products, and details of financing.
In its simplest form, a Business Model is how a company plans on making a profit.
What is a Business Model?
Business models are important for new and established businesses because they are used to represent the core aspects of a business.
These core aspects include the purpose of the business as well as business process, target customers, offerings, strategies, infrastructure, organizational structures, sourcing, trading practices, and operational processes and policies including culture.
Business models are high-level plans for profitability and are not only used to fulfill client needs at a competitive and sustainable price, but they are also used by investors when evaluating a company.
A business model shows how a company makes money and although it doesn’t tell you everything about that company, it can help investors and business owners better understand how the business works and how it makes money.
A good business model will explain the following four things about a company:
- What product or service is this company selling or offering?
- How is this company marketing their product or service?
- What kind of expenses will/does this company have or will they face?
- How does this company expect or how do they turn a profit?
Business models are constantly changing and a business may change their business model throughout its lifetime.
Today we are going to talk about the most common business model types and give a few examples of real companies that are using these models.
Types of Business Models
Subscription Business Model
The subscription model has been around for a long time and is one of the predominant business models for software companies.
When done correctly, the subscription model is a powerful tool for growth.
In a nutshell, the subscription business model charges customers a recurring fee -typically monthly or yearly – to have access to a product or service.
This leads to recurring revenue because of monthly subscription fees that customers sign up and they are usually charged automatically.
Some examples of subscription based businesses are Netflix, Hulu, Disney+, and HelloFresh.
You may also say a gym uses a subscription business model because you sign up to use their facilities or online workout videos.
A subscription business model can be applied to both traditional brick-and-mortar businesses and online business alike.
Bundling Business Model
Bundling is a marketing strategy that facilitates the convenient purchase of several products and/or services from one company in a “bundle.”
Examples of businesses that use the bundling model include AT&T, fast-food companies like McDonalds or Burger King that offer Value Meals, Adobe Creative Suite.
Other examples of bundling are computer packages that offer a monitor, mouse, keyboard and pre-loaded software at a single price.
Companies may choose to bundle goods for several reasons, including cost efficiency, market opportunities to enhance profits, and competitive strategy.
As a competitive strategy, a marketer of a successful product may bundle a newer or less successful product with its stronger product as a means of edging its way into a new market.
Perhaps the most famous example of this is Microsoft Corporation’s bundling of various software applications.
First they bundled Access and PowerPoint with Word and Excel.
Later they bundled their Internet browser with their market-leading operating system.
When they did this they increased their market share from 7 percent to 38 percent in one year.
Freemium Business Model
The Freemium business model has been around since the 80’s and gained its popular early on with software companies.
The freemium model works in a few different ways but most popularly companies use it by offering a “free trial” of their product or service or a “limited free version” of their product or service.
Some examples of companies that use this model include Pandora (free listening with ads and limited song choices), Skype, and Spotify.
With Pandora, at some point the idea is that users will pay the subscription to get rid of ads and have more flexibility with their playlists.
Software as a Service (SaaS) companies like to use this model to offer a free trial of their software for a short period of time, usually 30 days, with the idea that the user will sign up for the product.
Popular examples include SolarWinds and Skype.
Leasing Business Model
The Leasing Model doesn’t work for every business type but definitely has its place and can be a very profitable model.
Under the leasing model, a company buys a product and then leases it to customer for a periodic fee.
Examples include U-Haul and Enterprise Rental Cars.
Other companies that use this model include computer and equipment leasing companies and companies that lease manufacturing and medical equipment.
You can also say that wedding rental companies use the leasing model because you are “leasing” chairs, perhaps a coffee machine, or other wedding venue items for a period of time.
Leasing models are great because once a company pays off any debt that they own on the equipment or products they are leasing, they are making pure profit after that.
Product to Service Business Model
This model has been around for a while not but has gained popularity with companies like UBER and Lyft gaining huge success using this model.
Essentially, this model allows customers to purchase a result rather than a product.
Take Uber as an example, a customer needs to get from location A to B but doesn’t have a “product” (transportation) to get there.
Uber provides their product (transportation) as a service to achieve a certain end result for their customer.
ZipCar is another example of a company that uses the Product to Service Model.
Razor Blades Business Model
The Razor Blades model got its name from the actual razor blades that you may find at your local drug store.
The way this works is that companies offer a cheaper product that includes more expensive accessories.
When you purchase a razor from the drugstore, you will notice that the replacement razor blades cost more than the razor itself.
Apple iPhones and Mac Computers also use this model in a slightly different way.
They will sell you a high ticket item like a phone or computer and then push their additional products and services such as cases, screen protectors, and Apps.
More companies that use this model include Keurig, Printer and Ink companies, and Xbox.
Franchise Business Model
The Franchise Model is one of the most well known models because we most likely visit franchise businesses on a regular basis such as restaurants, fast food joints, and stores.
A franchise is an established business blueprint that is simply purchased and reproduced by the buyer, the franchisee.
The franchiser, or original owner, works with the franchisee to help them with financing, marketing, and other business operations to ensure the business functions as it should.
In return, the franchisee pays the franchiser a percentage of the profits.
Popular examples of franchises include McDonalds, Subway, Starbucks, 7-Eleven, and the UPS Store.
Crowdsourcing Business Model
Crowdsourcing involves receiving opinions, information, or work from many different people using the internet or social media.
These types of business models allow companies to tap into a vast network of talent without having to hire in-house employees.
Some traffic apps, for example, encourage drivers to report accidents in real-time for the benefit of other users.
Companies that use the crowdsourcing model include YouTube, Wikipedia, and IMDB.
One-for-One Business Model
One popular company that uses the One-for-One Model is Toms Shoes.
For every pair of shoes they sell, they donate one pair to someone in need.
Like Toms Shoes, the One-for-One Model works when a company donates one item to a charitable cause for every item that is purchased by a customer.
This model appeals to customers who like giving back or are socially conscious.
This model allows the business and customers to participate in philanthropic efforts while also purchasing a product that they want or need.
More examples of companies that use this model are Warby Parker and SoapBox.
Distribution Business Model
A company operating as a distributor is responsible for taking manufactured goods to the market.
For example, a chocolate brand might manufacture and package their own chocolate but the distributors are the ones that transfer and sell the chocolates to the retailer or factory.
The distributor makes a profit by marking the product up to the retailer or selling it in bulk at a higher price.
Manufacturer Business Model
The Manufacturer Model is perhaps the most traditional business model out there.
In simplest terms, the manufacturer model refers to a manufacturer who converts raw materials into a product.
This type of business model might also involve the assembly of prefabricated components to make a new product, such as automobile manufacturing.
Retailer Business Model
The retailer model is another popular model used by businesses.
Essentially, these businesses purchase goods from distributors and then sell them to customers for a price that covers their expenses and also turn a profit.
Popular examples include Nordstrom, Target, and Home Depot.
These large retail outlets basically purchase the product direct from the manufacturer and they resell them to their customers.
They do this both in store and online (e commerce business)
Affiliate Marketing Business Model
Affiliate marketing is one of the foundational business models that almost everyone who has made money online has some experience with.
Affiliate marketing is simply where you sign up with a company or a network to sell their products or services.
You get paid every time someone either buys something or executes the desired action (referral).
When browsing the internate you may have come across sites that promote certain products or services, often times if you sign up through their site, they get a commission or a referral fee.
Affiliate sites often use banner ads and other monetization methods to boost profitability.
Dropshipping Business Model
Dropshipping is a retail fulfillment method where a store doesn’t keep the products it sells in stock.
Instead, when a store sells a product using the dropshipping model, it purchases the item from a third party and has it shipped directly to the customer.
As a result, the seller doesn’t have to handle the product directly.
Dropshipping requires less capital, is fairly easy to get started, has low overhead, and you can do this business from any locationas long as you can communicate with suppliers.
Some examples of companies that dropship are Oddity Mall, Bidet Genius, and many busineses on Shipify use the Dropshipping model.
Components of a Good Business Model
As you can see, there are many types of business models and they are being used by actual companies, even large Fortune 500 companies.
Some companies create their own business model based on how they plan on operating and making a profit.
There is no one size fits all approach to business models.
When deciding on or creating your own business model for your company, you want to make sure it includes a few key components:
- Value Proposition – what makes your product or service attractive to customers. What value can you add to an already existing market.
- Target Market – identify the specific consumer who would be interested in your product or service.
- Competitive Advantage – what is unique about your product or service compared to other similar products or services.
- Cost – this includes the fixed and variable expenses your business requires to function and how it affects the bottom line.
- Key Metrics – Key metrics are how your company measures success.
- Resources – these include all resources including financial, physical, and intellectual.
- Problem and Solution – how you intend to solve your target customers problems or pain points.
- Revenue model – framework that identifies variable income sources to pursue.
- Revenue stream – the ways your company can or is generating income.
- Profit margin – the degree to which a company or a business activity makes money, essentially by dividing income by revenues.
These key components will help you develop a solid business model and cover some of the important aspects of running a successful and profitable business.
When a business is first starting out, a business owner may not have a clear idea of what each of these components look like, but they will become more evident as a business gets into the daily operations.
As your business grows and progresses, you can change and fine tune your business model.
Choosing the Right Business Model for your Business
Now that you have some solid knowledge about business models, you may be wondering how to choose the right one for your business.
As mentioned before, there is no one size fits all business model but there are a few questions you can ask yourself to help you narrow down which business model is best-suited.
- Who is my target audience?
- How will my product or service benefit my target audience?
- How will I generate revenue?
- What are my startup costs?
- What are my fixed and variable expenses?
- Do I need investor support?
Once you have answered these questions, you may be able to identify a business model that you fit right into.
You can also look at similar companies and see what business models they use and how they structure their operations.
Launching a business is stressful and there are so many things to consider.
Mapping out your business model can seem overwhelming but when done early on, it can really help you focus on your business goals, growth and profitability.
Just remember, a business model is simply a plan that shows how your business is going to make money.
If a business is not profitable, it cannot grow and be sustainable.
Outlining your business model early on will help you set your business up for growth and success by focusing on your profitability and how you plan on making money.
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