The biggest challenge when starting a business is understanding the problem your customers are facing. Customers must want what you’re selling, and your product must solve a real problem. However, it’s only part of starting a business that ensuring your product meets the market needs. Another key ingredient is how you will make money. Your business model is critical here.
What is a business model?
Your business model is your plan for making money. It is a description of how your business delivers value to customers at a reasonable cost. It includes details of the products and services you intend to sell, as well as who your target market is.
Entrepreneurs can use the business model to experiment with, test, and create different revenue streams and costs. If you are starting, it can help you decide if your idea is feasible, attract investors, and guide your overall management strategy. It is a foundation for financial forecasts and milestones.
What are the essential components of a business plan?
A business model can be broken down into three parts:
- All the necessary ingredients to create something: design, raw materials manufacturing, labor, and so forth.
- Everything it takes to sell that thing: marketing, distribution, delivery of a service, and processing the sale.
- How and what the customer pays: pricing strategy, payment methods, payment timing, and so forth.
A business model is simply a way to determine what costs you have and what price you can charge for your product. It combines everything you have written in your business plan’s opportunity and strategy sections. It includes your target market, your value proposition, and sales and marketing activities.
How can you tell if your business model is going to succeed?
To be a successful business model, you must collect more money from your customers than it costs to produce the product. It is your profit.
Any of the components above can be improved by new business models. Perhaps you can reduce manufacturing and design costs. Maybe you can develop more efficient marketing and sales methods. You might even be able to find a new way for customers to pay.
To be successful, you don’t necessarily need to create an entirely new business model. You could instead take an existing model and make it available to different customers. Restaurants, for example, operate with a standard business model but target different types of customers.
17 types of business models
To start a business, you don’t need to create an entirely new business model. Most companies are familiar with existing business models that they have improved to be more competitive. It is a list of business models you can use when starting your own business.
1. Advertising
Advertising has been around for a while and has evolved as the world moves from print to digital. The model’s core principles revolve around creating content people love to read and watching, then showing advertising to them.
Two customer groups are essential to an advertising business model: your viewers or readers and your advertisers. Your advertisers may be paying you, but readers might not.
Sometimes, an advertising business model can be combined with a crowdsourcing model. It allows you to get your content free of charge from users and not pay content creators.
2. Affiliate
Although the affiliate model is similar to the traditional advertising model, it has some distinct differences. The affiliate model is most commonly found online. It uses hyperlinks embedded in content instead of visual aids that are easily identifiable.
If you have a book review site, you might embed Amazon affiliate links in your reviews. It will allow readers to purchase the book you’re reviewing. In addition, Amazon will pay a small commission for each sale you refer.
3. Brokerage
Brokerage companies connect buyers and sellers to facilitate transactions. The seller or buyer may pay a fee, sometimes both.
A real estate agent is the most popular brokerage business. However, other brokerages like freight brokers or brokers help construction companies locate buyers for dirt they excavate from foundations.
4. Concierge/Customization
Businesses may take pre-existing products or services and add an extra element that makes each sale unique for the customer.
Think of custom travel agents that book luxury experiences and trips for clients. With products such as Nike’s customized sneakers, customization can be done on a larger scale.
5. Crowdsourcing
Crowdsourcing is when you have a large group of people contributing content to your website. These models can be paired with advertising models to generate revenues, but there are many variations. For example, Threadless allows designers to submit t-shirt designs, and the designer receives a share of the sales.
Companies that work hard to solve problems are more likely to publish their issues for everyone to see. Companies that solve complex problems successfully get rewards, which allows them to grow their business. A successful crowdsourcing business offers the right tips and enables you to build a business.
6. Disintermediation
You will need to work with intermediaries to get your product from the factory to store shelves if you want to sell it.
Disintermediation means that you bypass everyone in the supply chain to sell directly to consumers. It allows you to potentially lower your customer’s costs and maintain a close relationship with them.
7. Fractionalization
You don’t have to sell the entire product. Instead, you can only sell a portion of it through a fractionalization model.
Timeshares are one of the most successful examples of this type of business model. A timeshare is a business model where a group of people has a small portion of a vacation house, which allows them to use it for a set number of weeks each year.
8. Franchise
Franchising is a common practice in the restaurant and food service industries. However, it can also be found in other service industries such as cleaning businesses or staffing agencies.
A franchise business model is selling the formula for running a successful business. You often sell access to a national brand and support services to help the new franchise owner startup. You’re selling access to the successful business model you have developed.
9. Freemium
A freemium business model allows you to give away a portion of your product or service and charge premium features.
Freemium doesn’t mean that customers get a trial of a product or service. Instead, they are granted access for a short time. In addition, Freemium models offer unlimited access to basic functionality for no cost and charge only for customers who need more advanced functionality. This article provides more information about the freemium pricing model and other popular SaaS business pricing models.
10. Leasing
Although leasing may seem like fractionalization, they are very different. Fractionalization is where you sell perpetual access to a portion of something. Leasing is, however, like rent. A customer must return the product they rented from you at the end of the lease agreement.
Leasing is often used to lease high-priced items that customers cannot afford to buy but can rent for a time.
11. Low-touch
Low-touch business models allow companies to lower their prices and offer fewer services. Budget airlines and furniture sellers such as IKEA are two examples of this type of business model. These models require customers to purchase additional services or perform the tasks themselves to maintain low costs.
12. Marketplace
Marketplaces enable sellers to list their items and customers to connect with sellers.
Marketplace business models can generate revenue from many sources. These include fees to either the seller or buyer for a successful transaction, additional services to help advertise the seller’s products, and insurance for buyers who want peace of mind. In addition, marketplaces can be used to sell products or services.
13. Pay-as you-go
Instead of pre-purchasing specific amounts of something, like electricity or mobile phone minutes, customers are charged for actual usage at the billing end. Although it is more common for home utilities, the pay-as-you-go model can also be applied to printer ink.
14. Razor blade
The business model of the razor blade is designed to sell durable products below cost to increase the volume of disposable components with high margins.
Razorblade companies give away razor handles assuming that customers will continue to purchase large quantities of blades. Therefore, it is essential to tie customers into a system to continue to buy blades over time.
15. Reverse razor blade
You can flip the razor blade model and offer a high-margin product while also promoting a companion product with a lower margin.
Customers are choosing to be part of an ecosystem, much like the razor blade model. However, unlike the razorblade model, the first purchase is where most companies make their money. These add-ons exist to ensure that customers continue to use the initial expensive product.
16. Reverse auction
Reverse auctions are a business model that turns auctions upside-down and allows sellers to present the lowest price to buyers. The buyers have the choice to select the lowest price.
Reverse auctions are used to find contractors who want to work on a project. Reverse auctions can also be seen when looking for a mortgage loan or another type of loan.
17. Subscribe
Subscription-based business models are more popular than ever. This business model charges a subscription fee for access to a service.
Although magazine and newspaper subscriptions are well-established, they have now been extended to software and online services. As a result, it is also being used in the service industry.
Innovation with existing business models
It is not an exhaustive list of all possible business models. But it should get you thinking about how to structure your business.
It is important to remember that you don’t have to create an entirely new business model for your startup. Because the model is proven to work, it’s possible to use existing models to help you succeed. However, to grow your business, you’ll need to innovate in more minor ways within the current business model.
While a new business model can be very lucrative, it also comes with higher risks. It is impossible to predict if customers will be open to the new model.
Disclaimer. The opinions and views expressed in this article are the authors Judge Napolitano.
