What Are the Main Types of Business Models?
One of the most important steps to starting a business for the first time is planning. Although it may be tedious, you need to take the time to determine what you will sell, to whom, and how you will make money. So you will have to complete a business model to study all aspects of the project.
In this article, we’ll walk you through the definition of a business model, break down the different types of business models (with examples), and discuss how you can determine the best business model for your business.
What is the business model?
A business model is a detailed outline of how a company intends to make money through its products and customer base. The business model revolves around four things:
* What product or service will the company sell?
* How you intend to market this product or service.
* What kind of expenses will you face.
* How do you expect to make a profit?
Business models are constantly changing as there are many types of projects. Although we will discuss some of the more common types below, there is no single template that applies to all businesses.
Example of a business model
One common example of a business model is the subscription model, where companies charge a subscription fee (monthly, yearly, etc.) to customers for a service. This type of business model can be modified and customized by each company, but let’s take a look at Netflix as an example and break it down based on the four points we outlined earlier:
* What type of product or service will the company sell: Netflix sells an online streaming service.
* How do you intend to market this product or service: Netflix uses a multi-channel marketing strategy. They market their service through social media, email, advertising, and even word of mouth.
* What kind of expenses you’ll face: As a Fortune 500 company, Netflix’s expenses are high and include the costs of producing or getting content on its platform, as well as the technology and staff needed.
* How you expect to make a profit: Although Netflix is a large organization (and has several different ways of making money) it expects to make a profit from its subscription sales.
It is essential that you understand how your business will earn enough money to turn a profit after adjusting for expenses and additional costs. You cannot accurately achieve this mission without creating a business model.
Basic components of a business model
Business models vary in form and function, but they always have the same basic components that include a unique value proposition, a viable target market, and a competitive advantage.
Business models are not just about income, you also need to consider production costs and other factors in order to see the full picture. Here are the 10 components you must include in a business model:
* Value proposition: A feature that makes your product attractive to customers.
* Target market: A specific group of consumers who are interested in the product.
* Competitive advantage: A unique feature of your product or service that competitors cannot easily copy.
* Cost Structure: A list of the fixed and variable expenses your project will require, and how they will affect prices.
* Key metrics: The ways your company measures success.
* Resources: Your company’s physical, financial, and intellectual assets.
* Problem and Solution: The pain points of your target customers, and how your company intends to address them.
* Revenue Model: A framework that identifies viable sources of revenue to pursue.
* Revenue Streams: The multiple ways your business can generate income.
* Profit Margin: The amount that exceeds the costs of the business.
These are the fundamentals that make up the business model, and they are likely to change as your business matures. You may not have a clear idea of what each of these components will look like at first, but they will become clearer as you write your business plan. As the latter is not static, you can change and adapt your strategy according to your project changes.
The most common type of business model
There are a variety of types of business models that can be customized or changed based on a particular company or industry. While we’ll review 12 of the most common types of business models, you’ll find additional types beyond those listed here.
Subscription form
The subscription business model can be applied to both traditional businesses and online businesses alike. A customer makes a recurring payment on a monthly basis (or other specified time frame) for a service or product. A company can ship their product directly through the mail, or a customer can pay a fee to use an app.
Examples: HelloFresh, Beer Cartel, StitchFix, plus other streaming services like Netflix, Hulu, HBO Go, and Disney+.
assembly model
The aggregation business model involves companies selling two or more products together as a unit, often at a price lower than they would charge for selling the products separately.
This type of business model allows companies to generate a higher volume of sales and potentially market products or services that are difficult to sell. But profit margins often shrink because these products are sold at a lower price.
Examples: AT&T, Adobe Creative Suite, and Burger King, as well as other fast food companies that offer meals or value deals.
Free business model
The free business model has gained popularity with the proliferation of online businesses and software as a service (SaaS).
A software company provides a special tool to its users that can be accessed for free. But they block or limit the use of some of the key features that users are likely to need to use. To access these main features, users have to pay for a subscription.
Spotify follows this model, giving users free and open access to its entire music database while sprinkling ads between songs. Many users choose to pay a recurring monthly fee for the premium service so they can stream music without interruption.
Examples: Spotify, LinkedIn, Skype, and MailChimp
Razor blade model
Have you ever noticed that replacing razor blades costs more than the razor itself? Companies offer cheap razors thinking that you’ll keep buying more expensive razors in the future. For this reason, this model is referred to as the “razor blade model”.
In addition to the traditional razor blade model, you’ll see some companies use the reverse razor model, where they offer customers a high-margin product and then promote sales of the lower-margin product that accompanies that initial product.
Classic examples of this model are the Apple iPhone and Mac – you buy a high margin item, phone or computer, and then pay for additional products, tools and services that come with that item.
Examples: Keruig, Brita, Xbox, printer and ink companies.
product-to-service model
Imagine that you are the owner of a company that makes motorcycles. Let’s say you need two pieces of metal welded together. You might ask a company to weld pieces of metal together instead of buying a welder yourself. In essence, this example shows how this type of business model works.
Companies with this type of business model allow customers to purchase an outcome rather than the equipment that achieves that outcome.
Examples: Zipcar, Uber, Lyft, and LIME.
leasing model
The company buys a product from the seller, and then allows another company to use the product they purchased for a periodic fee. Lease agreements work best for expensive items such as manufacturing and medical equipment.
Examples: U-Haul, Enterprise, and Rent-a-Center.
Crowdsourcing model
This form involves receiving opinions, information, or action 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 internal employees.
Examples: Wikipedia, YouTube, IMDB, and Indiegogo
individual business model
The solo business model means that the company donates one item to a charitable cause for every item purchased. This model appeals to the philanthropic nature and social awareness of customers to encourage them to purchase a product or service, while also allowing both the company and the customer to actively participate in charitable efforts.
Blake Mycoskie, founder of TOMS, has pioneered this form of social entrepreneurship.
Examples: In addition to TOMS, SoapBox, Smile Squared, and Warby Parker are all companies that use this type of business model.
franchise model
The franchise business model is the most common of all the different types of business models. It is likely that we visit or see franchise companies quite often during our daily lives.
A franchise is a well-established business scheme that is purchased and reproduced by the buyer, i.e. the franchisor. The franchisor, or original owner, works with the franchisor to help him with financing, marketing, and other business operations to ensure that the business functions as it should. In return, the franchisor pays the franchisor a percentage of the profits.
Examples: Starbucks, Domino’s, Subway, McDonald’s, UPS Store
distribution model
The company acting as distributor is responsible for transporting manufactured goods to market.
Hershey’s makes and packages the chocolate, but distributors are the agents who move and sell the goods from the factory to the retailer. Distributors buy the product in bulk and sell it to retailers at a higher price to make a profit.
Examples: HD Supply, Avent, Cheny Brothers, ABC Supply Co.
Manufacturer model
This is one of the most traditional business models. The manufacturer model refers to the task of converting raw materials into a product on the manufacturer’s end.
Companies like Dell Computers or Hewlett-Packard bundle computers with parts made by other manufacturers.
Examples: Intel, Magic Bullet, Black + Decker, LG Electronics.
retailer model
The retailer is the last link in the supply chain. These companies buy goods from distributors and then sell them to customers at a price that covers expenses and makes a profit. Retailers may specialize in a specific niche, such as kitchen appliances, or in a range of different products.
Examples: Nordstrom, Home Depot, Target, and Best Buy.
How to choose the right business model for you
With all of these different types of business models, how do you choose the right one for your small business? There is no absolute answer to this question. The business model that is best suited to you will depend entirely on your scope of operations and the costs you may incur along the way. To scope out your options, start with your small business idea and then ask yourself the following questions:
* What is the benefit that I will provide to the customer?
* How will I generate revenue?
* Who is my target customer?
* What startup costs am I looking at?
* What are the fixed and variable costs?
* Do I need support from investors?
By answering these questions, you will be able to gain a better understanding of how your business model is structured.
It may also be helpful to research other companies similar to your project to see how they have organized their operations, as well as how you can differentiate your business from others.
Conclusion
Planning your business model can be overwhelming, but the thought of doing it is just one part of the planning.
You can think of a business model simply as a plan for how you will make money. The amount of time and effort you devote to defining your business model now determines the success and growth of your project in the future.
Business plan and business model are two completely different concepts. what’s the difference between them?
The difference between a business plan and a business model
The business model is the mechanism through which the company achieves its profits while the business plan is a document that presents the company’s strategy and expected financial performance for the coming years. So the business model is only the focus of the business plan.
A business model describes how a company organizes its relationships with its suppliers, customers, and partners in order to generate profits. The business plan translates this situation into a series of strategic actions and outlines their financial impact.
Examples of business models
production business model
It is the basic business model, where the company sells the products and services it produces. For this business model to be viable, a company needs to generate enough sales to cover production, distribution and warehousing costs.
Advertising business model
The goal here is to generate revenue by selling ad space. This form can be divided depending on the type of advertisement:
CPM: The advertiser pays the publisher a fixed amount for 1,000 impressions.
CPC: The advertiser pays the publisher each time someone clicks on the ad. The amount paid can be set or determined through the auction process.
Action cost: The advertiser pays each time a certain action is performed. The action could be a sale or a lead for example. The amount can be specified or set as a percentage of the action value.
This business model is more complex than the production model because the company first needs to invest in order to build a large audience before it can attract advertisers.
Commission-based (or distribution) business model
The company acts as an intermediary between the seller and the buyer and takes a portion of each sale it helps to bring about. This business model is less risky than the previous two and therefore less profitable, so the level of investment required can be minimal.
Subscription business model
The Company receives revenue from its subscribers at regular intervals. This business model has the good advantage that the company knows in advance how much revenue it will generate. The flip side is that it often takes several months to recover your subscriber acquisition costs resulting in less cash generation at the start of the cycle.
Free business model
The company offers two versions of its products. Free version with a limited set of features intended either to increase awareness of the product or to create an impact on the network. And a paid version, which includes more features, with which enough margin can be generated to cover the cost of free users.
Razor blade model
The company offers one product for free or at a price close to the cost of production and makes a profit from the sale of accessories. The classic example of this business model is selling razors. Razors sell for next to nothing but you have to keep buying expensive blades to be able to use them.
This list of business models is far from exhaustive. So if you have questions related to these business models or another, feel free to ask them in the comments section below.