What is a business model? All you need to know

types of business modelsAn outline of how a business aims to make money is known as a business model. We are here to walk you through the numerous kinds of business models that can be utilised today. Read on for more information in our detailed guide.

Perhaps the most important part of the process to starting a business is planning. The planning stage cannot be rushed or overlooked in any way, unless you want to risk future business-related difficulties.

Of course, this can be rather tedious while you impatiently wait to open your new venture to the world, but you’ll have to take the time to determine who your target audience will be and how your company will make money.

From the earliest possible stage, you will need to choose a business model and incorporate this into your plans going forward. Throughout the remainder of this guide, we’ll walk you through the different types of business models, break down the different types in detail, and let you know how which one would be best for your venture.

What is a business model? 

First of all, you are going to need to understand what a business model is. To put it simply, it is an outline on how your company plans to generate cash with both its products/services and customers, within a specific sector of the market.

A business model will explain these four key things:

  • What product will your company sell (or what service will it offer)
  • How you plan on marketing your product or service
  • What will be the biggest costs you will face?
  • How you will ultimately turn a profit

Business models are constantly changing, this is due to there being such a wide variety of different business types out there today. Therefore, you should be aware that despite what you read today, there is no perfect fit for every business around the world and no single model can be applied to all ventures. Keep in mind that different companies have different needs.

Business model example 

Here is an example of a business model to provide you with some context beside our previous definition.

Here, we are going to display the subscription model, as it is a popular business model architect in the modern world. Companies that utilise this charge customers a subscription fee (usually monthly but can also be annually) for access to a service. Perhaps the most notable example of this is Netflix, thus why we will be using it as a reference point.

  • What product will your company sell (or what service will it offer): Netflix sells an online streaming platform
  • How you plan on marketing your product or service: Netflix markets on a massive scale, including social media marketing, email marketing, online and tv advertising, and even word-of-mouth messaging.
  • What will be the biggest costs you will face?: The largest cost for Netflix is producing and acquiring content that users of the service will gain access to.
  • How you will ultimately turn a profit: In the most basic sense, Netflix aims to make money from subscription sales.

Hopefully here you have been able to see the four key stages applied to even one of the largest companies in the world. This same premise will be used to develop your small business model, too.

Main components that make up a business model

Business models do not act under a strict set of roles and are therefore largely varied from industry to industry. However, they are all built with the same key components that help to piece them together and develop them forward.

We will now walk you through each of the ten main components that make up a business model. You should aim to keep these in mind as you create yours.

Value proposition: This makes your product or service attractive to customers and will aid in sales.

Target market: We have already mentioned the target audience; a specified group of people you will be aiming your products and services at which cannot be easily copied by competing companies.

Cost structure: A list of the expenses, both variable and fixed, required to keep your business functioning properly. Also mention how they will affect any price points.

Competitive advantage: This is the unique thing about your products that won’t be able to be replicated by your fellow competition.

Key metrics: How are you going to measure your success? Whatever way you choose to do so, they will be known as your ‘key metrics’.

Resources: These are the physical, intellectual, and financial assets of your business venture.

Problem and solution: The potential issues your customer’s may run into, and how you propose to deal with them.

Revenue model: This will be the framework that provides you with viable income sources to investigate.

Revenue streams: Exactly how your company will generate income.

Profit margin: The amount of revenue you will have after business costs have been fully covered.

There you have it, the essentials that go into creating a business model. These will almost undoubtedly change as your business grows older and matures. Don’t worry if you are unsure of a few of these from the very beginning of the planning stage, as some answers must be uncovered in time.

Once you begin to put pen to paper and write out your business plan, more details will reveal themselves to you, and you will be able to fill in more of the blanks than you first could. Your business model will provide you with a direction to take your venture into and a vision for what it could potentially become over the coming years.

Don’t be sacred that whatever you put into your business plan will mean it is set in stone for all eternity. You are able to make changes as you wish, and if after getting some experience under your belt, you decide a change is necessary for higher amounts of success, you will be able to do as you wish. Your strategy can always change based on the things that you learn along the way.

Types of business models 

We will now run you through the most commonly found business models in the world today. One of these may apply to the business venture you are hoping to start up, but your idea won’t fit each of them like a glove. Keep your options open and conduct as much research as you can before finalising any of your choices.

Subscription model

We shall kick things off with a business model that you should be at least somewhat familiar with, due to us touching on it earlier. The subscription model can be applied to a wide range of business ventures, both online and offline alike. That’s right, it isn’t just the Netflix’s of the world that can utilise this, but also high street ventures as well.

The likes of gyms will normally work on a subscription model, charging a monthly fee to customers for access to the services they provide to them. Could this be the right answer for your business venture? It will all depend on the product type you are looking to offer.

Building model

This is pretty much exactly how it sounds. The building business model leads to companies selling two or more products together and shipping them as a single unit. This will often be for a reduced price when compared to the two items sold separately.

Here you will find that profit margins can fall because of the reduced price you are forced to sell at. However, this model is currently working well for the likes of Burger King and other fast food companies that offer value deals.

Leasing model 

With the leasing business model, the company will buy products from a seller. After which, other companies will be able to use the products for a periodic fee. You are basically loaning out items you have bought for a price and turning a profit on them.

Examples of this type of model are Rent-a-car businesses and Enterprise.

Franchise model

People are often familiar with the franchise model, as many of the largest corporations in the world utilise it today. If you have ever stepped foot in a McDonald’s, a Starbucks, Subway, Pizza Hut, etc. you have experienced a franchise business type.

A franchise is basically when a single business idea is replicated multiple times over, which is why you will find the likes of McDonald’s or Tesco, everywhere you go. They are success stories of the franchise world.

Distribution model

The distributor model is ideal for those that want their business to take manufactured goods to the market. In order to turn over a profit here, distributors will often buy stock in bulk and sell it on to retailers at a higher price.

Manufacturer model

This is one of the most traditional forms of business model, and it has remained popular for an exceedingly long amount of time. This is where a manufacturer uses materials to create a product for sale.

Freemium model

Getting a large amount of traction to the thing you’re selling is important, but how is it achieved at such an early stage? Freemium business models are becoming the answer to that question for so many ventures around the world.

Freemium models essentially that offer the customer a try before-you-buy type of transaction. As the consumer, you can normally expect to download a version of the application (or whatever kind of product it is you’re considering purchasing) you’re wanting to try out, absolutely free of charge, but without some of the extra features the full price version will be packed with.

There are many advantages to having a premium business model, though it’s extremely important to understand if it’ll fit your current business venture or not. If not, you won’t be able to cram it into your company for the single hope of it leading to new customers, that will actually likely backfire. There are multiple reasons why a freemium model may not fit your business, maybe you don’t have a product that makes sense to be offered free, perhaps your business isn’t located online, etc.

Crowdfunding model 

Crowdfunding has most certainly grown in popularity over the past couple of years, though it is not the most basic model to get to grips with.

With crowdfunding, unless you have a large audience that’s ready to back you up financially, it could be a very frustrating and tedious source of finance. Crowdfunding requires a lot of effort, and in most cases, a whole lot of luck as well; this isn’t the easiest route to gaining the funds your business so desperately needs.

Retailer model

Lastly, we have the retailer model, we should not be overlooked. This has proven to be a trusted model over the course of many years, and therefore, could be the way for your company to go.

Retailers are the final link in the supply chain. Businesses using this type of model buy goods from distributers and then sell them to customers for a price covers expenses and turns over a profit. Retailers will likely specialise in a niche, for example, kitchenware, etc.

The final word 

We appreciate that you have had to take in a lot of information here, which can be a tricky task all in one go. However, you should now be able to benefit from increased knowledge of the many business models there are out there, and just how they can fit to a company such as your own.

Remember to take your time when deciding on what will be the right fit for your venture and conduct some market research before you make any finalised decisions. Choosing the right business model for your organisation is the perfect way to ensure future long-term success in your chosen industry.

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