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A business model is an outline of how a company plans to make money with its product and customer base in a specific market. At its core, it explains what product or service a company will sell, how it intends to market that product or service, what kind of expenses it will face, and how it expects to turn a profit.
Because there are so many types of businesses out there, business models are constantly changing; there is no one-size-fits-all model that can be applied to every business. For this reason, it’s imperative to understand how your business makes money — and enough of it to remain profitable after costs are factored into the equation.
To learn more about the different types of business models and how you can apply them to your own business, jump down to our infographic, or keep reading for a deep dive.
While there are many innovative types of business models out there, the majority of them adopt characteristics from more established archetypes.
Here are 12 of the most common business models:
A subscription business model can be applied to both traditional brick-and-mortar businesses and online businesses alike. Essentially, the customer pays a recurring payment on a monthly basis for access to a service or product. A company may directly ship you their product in the mail, or you may pay a fee to use an app.
Exactly as it sounds, the bundling business model involves companies selling two or more products together as a single unit, often for a lower price than they would charge selling the products separately. This model allows companies to generate a greater volume of sales and perhaps sell products or services that are difficult to sell. However, profit margins shrink since companies sell the products for less.
The freemium business model has gained popularity with the prevalence of online and Software-as-a-Service (SaaS) businesses. The basic framework goes like this: a software company hosts and provides a proprietary tool for their users to freely access, such as an app or tool suite. However, the company withholds or limits the use of certain key features that, over time, their users will likely want to use more regularly. To gain access to those key features, users must pay for a subscription.
To understand the razor blades model, take a stroll in your local drugstore. You’ll notice that replacement razor blades cost more than razors themselves. Companies offer a cheaper razor with the understanding that you’ll continue to purchase more expensive accessories—in this case, razor blades—in the future.
Imagine you are the owner of a company that makes scooters. Let’s say you need two pieces of metal welded together. You might ask another company to weld the pieces of metal together instead of purchasing a welding machine yourself. Companies that follow the product to service model allow customers to purchase a result rather than the equipment that delivers that result.
Under a leasing model, a company buys a product from a seller. That company then allows another company to use the product for a periodic fee. Leasing agreements work best with big-ticket items like manufacturing and medical equipment.
Crowdsourcing involves receiving opinions, information, or work from many different people via social media or the internet. It allows 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 app users.
As the name suggests, the one-for-one business model means that a company donates one item to a charitable cause for every item that is purchased. Blake Mycoskie, the founder of TOMS, pioneered this form of social entrepreneurship.
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.
A company operating as a distributor is responsible for taking manufactured goods to the market. Hershey’s, for example, manufactures and packages their chocolate, but a distributor is the agent that transfers and sells the goods from the factory to a retailer. To make a profit, distributors buy the product in bulk and sell it to retailers at a higher price.
One of the most traditional business models, a manufacturer model occurs when a manufacturer converts raw materials into a product. Companies like Dell Computers or Hewlett-Packard, both of which assemble computers with parts manufactured by other companies, would still be considered manufacturers.
A retailer is the last link in the supply chain. They purchase goods from distributors, and then sell it to customers for a price that will both cover expenses and turn a profit. Retailers may specialize in a particular niche, such as kitchenware, or carry a range of products.
To better understand how these business models work, it helps to take a look at relevant products and services we all use on a daily basis. Here are a few examples of some modern companies and how they apply these business models:
Intel is a long-standing computer manufacturing company. They fabricate their own computer chips with silicon wafers and other key computer components, like CPUs and Processors, in the U.S., China, Ireland, and Israel. Their products can be purchased online and in big-box stores, such as Best Buy.
Cheney Brothers is a leading food distributor that supplies the Southeastern United States and other locations with items like poultry, pork, fresh and frozen seafood, produce, and even beverages, among others. As for their infrastructure, they currently own and operate three distribution centers in the U.S. and ship bulk orders to other customers.
Home Depot is one of the most well-known specialty retailers in the U.S, carrying a wide range of home improvement supplies from a plethora of companies. They are a great example of a retailing company that provides the means to sell manufactured products to the masses.
Subway is a classic example of a franchise: each location looks and operates the same with a different franchise owner. They have an established system in place to ensure employees at every location are trained the same way — to quickly and satisfactorily serve their customers.
Spotify is a great example of the freemium business model. They give their users free and open access to their entire database of music while sprinkling in ads between songs. At some point, many users opt to pay a monthly fee for the premium service so they can stream music without interruption.
NatureBox ships healthy snacks in boxes to their customers’ doorsteps for a monthly fee. Over the years, they’ve accrued a large inventory of healthy, nutrient-rich food alternatives that meet the requirements of just about any diet. When you order through NatureBox, you have the added benefit of adjusting your box each month so that it better accommodates you.
Although business models may vary in their form and function, they all consist of the same basic ingredients. Essential elements of a business model include a unique value proposition, a viable target market, and a competitive advantage. Without them, you don’t have a way of generating revenue.
However, business models are not just about income. You also need to consider production costs and other factors in order to see the full picture. So, what all goes into creating a business model? Here are the 10 components you need to think about:
These are the essentials of a business model, and they are likely to change as your business matures. From the outset, you may not have a clear idea of what each of these components will look like for your business. Ultimately, they will provide a vision and direction for your idea.
So, how do you choose the right business model for you? Again, there is no absolute answer. It depends entirely on the scope of your operations and the costs you may incur along the way, but you can start by determining what type of business you want to run.
For example, if you want to run a manufacturing business, then you should research business models of successful manufacturers. From there, you can ask yourself the following questions to gain a better understanding of how to structure your business model:
With the answers to these questions, you can start to formulate a better idea of what you will need to get started. Reference the components mentioned earlier and start filling in the blanks.
You may feel overwhelmed when mapping out your business model, and that’s to be expected. If this happens, just remember that a business model is simply a plan that shows how you will make money. Thinking in this way will simplify the process.
Sources: FourWeekMBA | Investopedia | Entrepreneur | Engineering.com | Investopedia