Business model: what is it and what types are there

Ensuring that the product meets the needs of the market is only one of the components of success. Another key factor is the answer to the question of how you are going to make money. And here the business model is important.

What is a business model?

At its core, a business model is a description of how a business makes money. It explains how you create favorable conditions for customers at the appropriate price.

The main components of a business model answer the following questions:

• What products or services will the business sell?
• Who will he sell them to?
• What marketing channels will it use?
• How much money will it take to run a business?
• How will the business make a profit?

A successful business model allows a business to meet the needs of a customer base with a clear cost structure and competitive pricing. It makes sense for incumbent companies to review their business model from time to time to understand how it fits the current economic situation and market needs.

A young business planning to attract investors needs a business model in order to show how it plans to make money. A detailed business model convinces investors that the company has a well-thought-out business plan.

Business Strategy, Business Plan, and Business Model – What's the Difference?

Even though a business model and a business plan are key elements of an overall business strategy, they are not the same thing. The business model shows how the company will generate revenue and achieve profitability, while the business plan analyzes how it will implement its business model. This means both operational processes and financial forecasts.

A business strategy explains how a company will earn more than its competitors. Let's say there is a boutique that offers customers designer clothes. This is a business model. When another business operates on a similar model nearby, a business strategy comes into play. The owner of the boutique will have to think about how he will stand out from the competition - perhaps with the help of a discount system, a loyalty program or the addition of new products to the line.

The decisions that are made regarding business goals make up the business model. At the same time, the solutions that are used to outperform competitors make up a business strategy. A model is usually more stable than a strategy. The first does not change at once.

There are many business models that can be used, for example, subscription model, freemium model, retail model, leasing, etc.

Business model structure

The business model includes two components:

• All activities related to the creation of something: design and development, procurement of raw materials, production, etc.
• All actions related to the sale of something: finding and attracting customers, making a sale, distributing a product or providing a service.

A business model is to some extent a study of what costs and expenses a company has, how much money it can charge for a product or service.

The essence of an effective business model is to get more money from customers than it takes to create a product.

Different business models can improve on any of these three components. Perhaps someone is able to minimize costs at the design and production stages. Or they have the resources for effective marketing and sales tools. Be that as it may, it is worth considering that an effective strategy does not require a new business model, it is enough to apply an existing one. For example, most restaurants operate according to a standard business model, but each establishment focuses its strategy on a certain category of customers.

How to evaluate the effectiveness of a business model

Business theorist and author of many bestsellers Alexander Osterwalder suggests answering several questions before choosing a business model. They will allow you to evaluate various aspects of the business.

The most popular types of business models

The vast majority of companies use existing and proven business models, only improving them to find competitive advantages.

Here is a list of business models that can be used to start a business.

Advertising business model

This business model involves forming partnerships with advertisers and key partners — they pay for the attention that the target audience gives you. This can be advertising in social networks, magazines. Partnering with payment service providers for small businesses enables customers to pay for subscriptions.

The essence of the model is to create content that the target audience wants to read or watch, and show them relevant ads. Therefore, it is actively used by online publications, YouTube, and social networks.

In the advertising business model, you need to meet the needs of two groups: readers or viewers and advertisers. Readers may or may not pay, but advertisers certainly do. The advertising business model is sometimes combined with the crowdsourcing format, when the creation of content does not require monetary resources, since it is provided by users.

Affiliate Program

The affiliate business model is related to the advertising model, but has some specific features. Most often, the affiliate model uses links (they are embedded in the content) rather than visual ads that are easily identifiable.

For example, on a site with a review of new books, you can insert affiliate links to online bookstores. If a visitor buys a book by clicking on the link, the affiliate pays a small commission to the site. The scheme works similarly on ticket aggregator sites.

Commission-based business model

The intermediary business connects buyers and sellers, thereby simplifying the transaction. Intermediaries charge for an action or outcome from either buyers or sellers, and sometimes both.

This model is suitable for real estate agencies, PR agencies, recruiting agencies and other businesses that provide services. For example, there are companies that help other companies find buyers.

Customization

Some companies use existing products or services, supplementing them with elements that make each sale unique to a particular customer. It is enough to pay attention to special travel agents who organize trips for wealthy clients. Customization is also applicable to products such as sneakers, bicycles.

Crowdsourcing

If, like YouTube, you've managed to bring together a large number of people who provide your site with content for free, then you're using a crowdsourcing model. This business model is most often combined with an advertising format to generate revenue, but there are other options as well. For example, you can allow designers to design T-shirts and pay them a percentage of sales.

Companies that are trying to solve complex problems often talk about it publicly for someone to share advice. Creators of successful solutions receive incentives, and the company can use these tips to grow its business. The key to a successful crowdsourcing business is to provide a "decent" reward to attract a large number of people.

A model of work without intermediaries

If you want to produce a product and sell it in stores, then in order for the product to get from the assembly line to the store shelf, you will have to involve intermediaries.

Working without intermediaries means that you bypass everyone in the supply chain and sell products directly to consumers. This allows you to reduce costs and build direct and honest relationships with customers.

Sharing model

Instead of the entire product, only a part of it can be sold. It can be a joint lease of a property when a group of people owns only a part of the holiday home. There are other examples. For example, the American company NetJets Inc. sells fractional ownership of business jets. And Disney Vacation Club develops the principle of timesharing for vacations, allowing you to purchase a share in real estate through a flexible membership system based on points.

Franchise

The franchise business model is especially common in the restaurant industry, but often examples of its implementation can be seen in all areas of services - from cleaning to recruitment agencies. It involves selling a strategy to launch and run a successful business to someone else. Often, the franchisee receives a franchise concept, a financial plan, legal support, a brand book and a business book, as well as training materials.

In fact, a successful company gives the right to use its working business model, which it itself has tested over the years of the business's existence. Domino's Pizza, McDonald's, Subway, Shokoladnitsa work according to this model.

Freemium

This business model involves you providing a portion of your product or service for free and charging for additional options.

Freemium is not the same as a free trial (demo) that gives customers access to a product or service for a limited period of time. The freemium model allows you to have unlimited free access to basic features and pays only for additional functionality.

Usually, this business model is used by various Internet services.

Leasing

Leasing may seem like something similar to sharing, but in reality, these business models are very different. When sharing, you sell access to a part of something. And leasing involves a long-term lease with the right to buy, for example, equipment, at the end of the contract.

The leasing model is most often used for expensive products, when customers cannot afford to buy, but they can rent the product for a certain time.

Model

With a low-service business model, companies reduce their prices by providing fewer services. One of the best examples of this type of business model is low-cost airlines and furniture retailers like IKEA. In both cases, the low-touch business model means that customers need to either purchase additional services or do something themselves to keep costs down.

Marketplace

Marketplaces provide sellers with the ability to list products for sale and provide users with simple tools to interact with them.

This business model allows you to generate income from various sources, including commission for a successful transaction, additional promotion services, etc.

Bundling

With the bundling business model, multiple products are combined and priced cheaper than if they were sold separately. Thus, customers are motivated to buy more.

An example is florists who offer to add a box of chocolates or a soft toy to a bouquet of flowers. Bundling is also used by fitness centers that offer discounts on the condition of paying for several classes at once.

Razor and blade model

This business model is named after the product from which it was invented: sell a durable product at less cost to increase sales of a component of that product.

For example, razor companies can give customers a razor almost free of charge, hoping that he will become a regular buyer of a huge number of blades in the long run. The purpose of the sale is to lure the customer into a system of constant interaction and get a guarantee that there will be many additional purchases over time.

Razor and blade reverse model

By rethinking the previous business model, you can offer customers a high-value product and develop sales of additional low-cost products. Similar to the razor and blade model, customers are often motivated to join a particular product system. However, unlike the previous option, the initial purchase in this case becomes a big sale, as a result of which the company earns most of its money. Additional products are needed only for customers to use an initially expensive thing.

Reverse Auction

This business model allows buyers to tell sellers their price. For example, Priceline.com once revolutionized online booking thanks to this concept. Site users choose the area of the city they are interested in, the star rating of the hotel and name the price they are willing to pay. If this price is not lower than the room rates provided by the establishments, confirmation and the name of the hotel are immediately received.

Another American company, LendingTree, allows potential borrowers to contact several loan operators to find the best terms. The platform helps them shop and compare rates and conditions on different financial products.

Subscription

The essence of this business model is that consumers pay for access to the service. It has gained traction through online publications, and is now used by software vendors and online service providers. All online cinemas work according to this model: Start, Premier, KION, etc.

The above list is not exhaustive, it can be supplemented. But novice entrepreneurs should remember that in order to achieve success in business, it is not always necessary to invent a new business model, because everything new is associated with higher risks. On the contrary, the use of existing models can greatly simplify the situation, since these models have already proven to be effective.