Business Models: An In-depth Understanding of the Types of Business Models
Business is an implementation of an idea to serve potential customers with an innovative product or service. Though most people focus on business ideas to start on a successful foundation, a rightly chosen business model is what gives that idea a defined pathway. A single business idea might complement one or more types of business models. Businesses are continuously changing their shapes and have evolved tremendously in the past few years because of the ever-changing market needs and evolving technology.
Businesses have always played an important role in driving the economies of nations. An economically prosperous country always has strong businesses at the back of it. A business can be commercial, industrial or professional activity and can vary from a sole proprietorship to an international corporation – This is where a Business model comes in, which helps in determining the pathway and ultimately the success and failure of a business idea.
Business Idea and Business Model
Starting a business with a comprehensive business idea, covering all aspects of it, in this era is convenient like never before! The only steps you need to take with caution and care are selecting the right business model and charting out a plan to ensure stability and long term success. But, the ever-evolving market dynamics and constantly changing business trends require a thorough study of almost all business models which operate within these evolving dynamics and changing trends. Therefore, our business advisors have designed this guide to elaborate on a business model along with a plan.
But, we highly recommend that you seek professional counselling for your business model as this document provides you with an omnibus insight into business models and a business plan. However, the information provided in this document is for general use and it is advisable to seek professional help according to your business idea.
What is the Business Model?
A business model is an outlook of what a business looks like. It helps you determine which domain your business belongs to among the categories explained below. It also helps you draw clear lines and fix limits for your business. For example, if you want to sell jewellery online, e-commerce will be your business model or if you want to start the distribution of goods or services, your business will belong to the category of distribution based business model. And once you have clearly defined all of the above, it will be far easier for you to explain how to generate profit, your position and your mode of dealing both with your vendors and customers etc.
Therefore, through a business model a company determines how it will generate profits, ascertains how exactly it is positioned within its industry’s value chain and the lines along which it is going to be dealing with its suppliers, clients and partners etc.
Importance of the Right Business Model in a Startup
Imagine building a house without a preliminary sketch! No matter how hard you try, you cannot build it. Or you may end up building one but it will lack a finished and refined look, goes without saying. For the startups, this opening remark suffices to attach due importance to a business model. A business model not thoroughly worked upon may help you start a business yet it will lack sophistication in its outlook and precision in its operations. This analogy is drawn for a better understanding of the readers who are familiar with the idea of intricacies involving sketching wherein minute details are given due diligence.
What to Determine?
In a carefully drafted business model, an entrepreneur draws lines for the business and through it determines:
- What product or service do you want to deliver?
- Who are you selling your service or product to?
- What is your value proposition?
- How will you create value?
- What issues have you identified and how you ensure the provision of solutions to your target customer segments?
- Why would people resort to the solutions you provide them?
- How will you keep the interest of your customers intact so that they do not switch to others for the same products or services?
- What marketing strategy will you adapt according to the market conditions?
- How are you going to finance your business initially?
- What tools will you apply to market your product effectively?
- What criterion have you set for the selection of personnel?
- How are you going to finance your business initially?
- What is your forecast for the starting few months?
- Are you prepared to craft a business plan for your business model along with a business model canvas?
- What place are you selecting for your business which is convenient to have access to?
And so on. After you have answered all these questions in detail, be assured that your business model is almost ready with, of course, some margin to add more questions to answer, which differ from case to case.
This critically important stage will be followed by creating a business plan.
What is a Business Plan?
Before defining a business plan, it is important to note that it is considered a living document, prone to changes taking place owing to the evolving market and business dynamics.
Therefore, keep tweaking it!
A business plan, in principle, is an extension of the questions you have answered in the business model section. This will help you detail out the minute details of your business startup model. After allocating your model’s different parts to their pertinent domains, here you delve even deeper into charting out the how’s. And mind you! You need to be extremely careful as you proceed with this document because leaving any hole, thinking you may plug it later, will definitely render it difficult for you to plug, on the one hand, and may also prove to be detrimental for your business itself, on the other. It comprises a few necessary steps which are briefly looked into, in order for you to have a better understanding of it.
But, before we proceed we need to know that business plans are divided into a) Lean one-page plan, which is used for getting started and building ideas and b) a More formal long plan, which is needed when you are trying to answer how to fund your business. But, here we are focusing on the first type so as to give you an insight into it considering you may already have taken care of the finance and budgeting.
Necessary Steps to Craft a Business Model
Here you make sure that your reader clearly understands the unique value you are offering. Use simple, concise and clear sentences, avoid verbosity and get to the point right away.
Problem You Are Solving
Here, throw ample light on the problem you are trying to solve and elaborate on it. Consider if you are talking to people to whom your entire idea is alien. Explain what it is that your solutions carry and others do not. By applying this technique you will be able to understand the problem yourself and in turn, make it understood to others eloquently too.
Target Market and Competition
Here, you will conduct market research to study your competitors. Do you also identify who you sell to? And what other choices do they have in the same field? Be mindful of the uniqueness other businesses are offering and create a distinction that attracts your target customers by ensuring to maintain quality in the longer run.
Sales and Marketing
How do people know about your existence? Do they use social media? Do they read traditional trade publications? What medium will you use to market yourself? How do you ensure the efficacy of your marketing strategy? Will you meet people in person? You need to figure out where your target audience is and reach out to them.
Budget and Sales
Conduct forecasts for sales. Define what will your margin be on each sale? Will it be sufficient? How many sales will you require to make a profit? And most importantly, clearly set figures to determine success, do all it takes by taking necessary steps to be successful.
Setting milestones helps you keep a closer eye on the bigger picture. While setting a milestone, think about why it is important, what and/ or who you need to make it happen, and stipulate a time frame for it. The exercise of setting milestones helps you break down everything into manageable pieces.
Who are you hiring and why? Who is going to be the part of your business and in what capacity? You need to write a few lines about every person to briefly define them and their roles and responsibilities. You need to do this even for the positions you are still to fill.
You need to identify what capital you require (or already have) and what for? When will you make repayments and set a tentative time frame to have paid it all back?
A business plan has to be short and simple and if you feel you have more details for any of the steps elaborated above, you should be using a separate sheet after stating a brief about the same here. This will keep the interest of the readers intact.
Types of different business models
Following are the different types of business models which are further divided into three categories for better understanding.
Physical business models
Physical business models are the ones for which you need to have tangible assets, an occupied area wherein you are physically present and personnel etc.
Franchise Business Model
In this model, a franchise can license its resources and brand name as well as intellectual property and rights for a franchise to sell its products and services in exchange for a royalty. McDonald’s and KFC can suffice to explain it.
Peer-to-Peer Business Model
In this model, a company serves as a middleman between two parties by creating value for both the demand and supply side. Airbnb and Uber are examples of it.
One-for-One Business Model
Also known as (aka) Social Entrepreneurship business model, it is a hybrid solution and a combination of both profit and non-profit services. The best example to explain this model is the TOMS shoes that provide shoes to underprivileged children globally for every pair of shoes sold.
Razor and Blade Business Model
In this model, also known as (aka) printer and cartridge business model, a company sells one item (razor) at a lower price than the other associated item (blade) which is priced higher. This model works best for a loyal customer base. Examples are Gillette and Xbox etc.
Reverse Razor and Blade Business Model
As the title implies in this model a company sells low price items to attract customers to buy high price products. Take Apple, for example, which sells apps, songs and movies etc., at low prices but iPhone, iPad etc., are sold at premium prices.
Direct Sales Business Model
In this model, the products are sold directly to the end customers either in one-on-one conversations or small gatherings and the salesperson gets a share of every sale. Tupperware house parties explain this model amply.
Consulting Business Model
In this model, the companies hire experienced people to assign to a client for his project for consultation and charge either on an hourly basis or take a predetermined percentage share based on a project’s success. Examples are Mckinsey and Boston consulting group.
Agency-Based Business Model
In this model, a company hires an outside firm to complete a specific task. Outside companies come up with a customized solution for the needs of their clients. Advertising agencies, contractors, and accounting services providers explain this model.
Multi-Brand Business Model
Here companies market more than two products. Albeit manufactured by the same company these different products compete with each other with different brand names. Examples are Unilever and Nestle.
Distribution Based Business Model
By applying this model a company works by using different distribution channels to reach its final customers such as dealers, brokers, retailers etc. examples are Unilever and Procter and Gamble etc.
Enterprise Business Model
This model only focuses on large clients built on complex sales with a few potential clients. Examples are Boeing, Raytheon and SpaceX etc.
Social Enterprise Business Model
In this model, a company operates on the principle of not harming others with a part of its profits bound for a humanitarian cause. An example is Brunello Cucinelli.
Direct-to-Customers Business Model
Companies operating in this model sell products directly to the end customers. An example is Unilever.
Vertically integrated supply chain Business Model
In this model a company owns and manages supply chain activities such as manufacturing, distribution and retail. And with this, the company can provide products at a lower price as with such control over the supply chain the margin for pilferage reduces substantially. Examples include Luxottica and Apple etc.
Combination of Chains and Franchise Business Model
In this model, a company operates as a mix of chains and licenses stores (franchises). An example is Starbucks.
Discount with High-Quality Business Model
In this model supermarkets and departmental stores offer discounts on products they sell in bulk and at the wholesale rate. Examples are ALDI and Tesco etc.
Pyramid Scheme Business Model
Although considered somewhat controversial, this model recruits members and promises them a reward in payments or services if they enrol others into the scheme. An example is Amway.
Nickel and Dime Business Model
In this model, a company operates on the principle of the lowest price strategy in basic products or services. Additional amounts are charged for other perks and services offered with the principal service. Examples of this model include Spirit and Frontier Airlines.
Aggregator Business Model
In this model, companies provide collective information about a single service or industry under their brand names. The best example to understand this model is Uber.
Uber provides comprehensive information only about cab services for commuting. Other examples include Zillow and Oyo etc.
High Touch Business Model
In this model, customers build a deep and lasting relationship with the company and interact at a higher level to personalize the experience. It is almost the same as entering into a partnership with the business. Examples include buying a car or house.
Auction Based Business Model
As the title suggests this model offers a bidding option to buy a product or service mostly for antiques and real estate etc. Although it is a traditional method of selling, it is still prevalent and a brief study of eBay and Amazon can help understand how this traditional method has evolved into a modern form.
Reverse Auction Business Model
In this model highest prices are prior to bidding and then the bidders start bidding accordingly until prices begin to drop. Bidding to win government contracts explain this model sufficiently.
This model removes third-party intermediaries and a company deals directly with the customers through the internet. Examples include Dell and Tesla etc.
Fractionalization Business Model
In this model, a company divides products or services into further subcategories to create variety and charges separately for each category. Think about a complete pizza or a slice thereof!
Pay as Go (Utility) Business Model
In this model, a company charges according to the usage of a product or service. Examples are water and electricity bills etc.
Leasing Business Model
In this model, companies earn large profits by renting out huge machinery and electronic equipment etc., primarily to the governments or big companies. Examples include Home Depot (Tool rental) etc.
B. Virtual Business Models
Virtual business models are the ones that can be operated without being physically present with proper organizational paraphernalia and, by and large, conduct activities online.
1. Multi-Sided Platform Model
In this model a company serves both sides of a business and is called a multi-sided platform model. Consider that the people subscribe to LinkedIn for jobs and on the other hand HR personnel of different organizations use the same platform to find suitable candidates to fill vacancies.
2. Cash Machine Business Model
In this model, a company converts cash to goods and services and then again into cash. In it the company generates huge amounts of cash from its online store before paying its suppliers. Examples are Amazon and Alibaba etc.
3. Freemium Business Model
Did you ever wonder why certain mobile apps have a free yet limited version as well as paid yet upgraded version including full options? We explain it if you ever have! This is done through the freemium model in which a mix of free and paid services are offered. This model is mostly used by tech companies as these first offer limited and trial versions but customers pay to get the upgraded or full version. Examples include Zoom or Dropbox.
4. Subscription Business Model
In this model, the companies offer services in exchange for a fixed amount paid monthly or annually by the customers but companies ensure to maintain quality to keep customers’ interest intact. Examples are Netflix and LinkedIn. Both these platforms will lose subscribers if they fail to stay updated in a manner that keeps customers attached to them.
5. Hidden Revenue Business Model
In this hidden revenue model, a company earns from other sources while customers do not have to pay for the services they avail of such companies. Examples are Google, Instagram, Facebook and Twitter. Customers have easy and free of cost access to these services but they do not make payments for using these services.
6. Affiliated Marketing Business Model
In this model, the companies make money by featuring, reviewing and/ or recommending other company’s products or services. Examples are product review websites.
7. User-Generated Content Business Model
In this model, users create quality content for free or review or answer other users’ queries. It is a new yet fast-growing business model. An example of this is the YouTube channels which are being created all over the world by anyone and anywhere to undertake different activities briefly mentioned above.
8. Online Educational Business Model
This business model primarily caters to the online needs of students and teachers. Through this model, students have access to educational resources through stipulated course fees or subscriptions. This model has also helped connect students and teachers from afar by reducing the gap created owing to travelling and commuting etc.
9. Instant News Business Model
In this model, companies communicate news and announcements directly to the audience without any intermediary. But, such companies leave no stone unturned to ensure the source of news and the news itself is authentic because they know being oblivious to this fact can cause a dip in their customers. An example of this model is Twitter.
10. Data Licensing Business Model
This business model is almost the same as Instant News Business Model, wherein a company requires critical information to carry out operations to generate revenue. These companies use such information either for dissemination or for company-defined and customised usage. An example of this model is Twitter.
11. Attention Merchant Business Model
In this business model, a merchant or influencer or blogger works to make money by grabbing the attention of the target audience. Through this model, these bloggers or influencers can collaborate with different brands and get paid either in cash or in kind. But they also ensure the authenticity of their content otherwise they risk losing their audience. Examples include Instagram and Snapchat.
12. API Licensing Business Model
API (Application Programming interface) licensing business model is meant for the community of developers through which they get licensing protocols to create third-party plug-in/ add-on-apps for established platforms. In this epoch it is important for any type of business to keep evolving in order to keep up with the joneses and for this to happen they have to adapt to changing needs and demands of customers which require them to look for new apps etc., to cater to them. examples for this are Microsoft and Apple etc.
13. CrowedSource Business Model
This business model helps companies with access to operational solutions like ideas and technologies, upgraded consumer interaction opportunities for co-collaboration, operation optimization, and reduced costs. Consider Wikipedia and YouTube etc., where you can learn about almost any technology and any subject free of the cost normally with some authentic and reliable sources.
14. Standardization Business Model
In this model, a company makes a service universal that may be customized previously. It is done to allow easy access to customers at a low price. Examples of this include Torrentz search engines which were customized previously with limited databases and restricted access but have now been transformed into a universal service.
C. Hybrid Business Models
Hybrid business models may rely equally on the physical structures as well as online and virtual setups.
1. E-Commerce Business Model
In this business model, the sellers and buyers connect online with each other without any middleman or intermediary on an online platform and carry out the transactions either of goods or services. The best examples for this model are OLX and eBay etc.
2. Drop-Shipping Business Model
In this model, a company contacts different suppliers to sell on the website. Once the order is placed on the site, the wholesaler drop-ships the product directly from the manufacturer to the customer. Dropshipping has also been found to be one of the topmost home-based business ideas of 2021. Examples for this model include Doba.oberlo and drop ship direct.
3. Family-Owned Business Models
In this business model, a family owns and runs a business with decision making being controlled by one or two family members. In such businesses the leadership transfers and travels down the family tree all the way from the top. Examples are Ford, Walmart and Prada etc.
4. BlockChain-Based Business Models
In this business model a decentralized network system globally. This model helps consumers to transact peer-to-peer. These businesses make a profit using tokens and offer Blockchain as a service. Examples include Bitcoin and Ethereum etc.
5. Low Touch Business Models
In this model, the products and services are delivered by minimum customer interaction. This model is convenient for low price software tools. Examples are Amazon and Zendesk etc.
6. Flex Pricing Business Models
In this business model, the final price of an item is kept negotiable, unlike a fixed price mechanism which paves the way for bargaining and creating a deep connection between the buyers and sellers. Its examples include Letgo etc.
7. Brokerage Business Models
In this business model, the service provider charges buyers and sellers for providing a single platform to strike a deal(s). The broker is supposed to look into the important aspects of the platform whose provision is upon the broker such as timings, ease of access, convenient commuting to and from the designated area etc. Examples include Expedia and Century 21.
8. Bundling Business Models
In this model, a company combines different products and services as a single unit and sells the same for a lower price. Consider the different apps bundled together and titled Microsoft Office Suite. In this, every single app can be sold separately but since the rising cost will shrink the customer base of it, therefore, they bundle all apps and sell for a cheaper price.
9. Product as Service Business Models
In this business model, a company sells the service of a product instead of the actual product itself. For example, if you need a computer printout or a scanned document you visit a company or a part thereof and get the required documents printed or scanned for a fixed amount. Because at times the customers find it costly to buy a printer or a scanner as compared to paying a paltry amount for the same services whose need may arise sporadically.
10. User Base Communities
In this business, model companies earn by developing an interactive platform where people communicate on their own with each other and carry out an advertisement of their products they have developed and wish to market those simultaneously. Examples of such a business model include Craigslist and Angie’s list etc.
Video: Understanding Business Models for Your Startup
Top 09 Trending Business Models
With the world at the cusp of rapid technological changes, most people are turning towards different business models which rely heavily on ever-evolving technologies with their deep impact on certain businesses. Here is a brief insight into a few new business models separately which are the most successful business models of current times.
The Servitization (Subscription) Business Models
In this model, instead of traditionally selling a product or a service as a one-off, servitization companies provide business based tailor-made needs of the customers. These companies operate on a subscription or nonstationary service model. Consider the following: Disney produces a film, releases it in the cinemas and then is oblivious to whether the film was a hit or scored average or below. But on the other hand, Netflix keeps track of which movies are watched mostly; or which actor the viewers want to watch most movies of; or even which series on Netflix is the most searched or which series or film was left midstream and the viewer replaced it with another one or which one for that matter. Netflix, unlike Disney, then ensures to keep its customers’ interests intact by corresponding to their needs based on the statistical analysis mentioned above.
A comparison between these companies will suffice to help you understand the servitization business model better.
The Platform-Based Business Models
In this model, a company provides a platform to the customers through which they can connect with each other from afar. But, these platforms can both be physical as well as online. In fact, the effectiveness of this platform can increase manifold if it is combined with the subscription model. These platforms deliver value to the customers by facilitating the connection and interactions and its success depends on how successful the network to the user is. Access to the data of the user community ensues from accessing and using the platform. It can be understood by studying Facebook, Twitter and Uber etc.
The Social, Authentic Business Models
The traditional corporate business structures are changing fast. We all remember that people working for companies were discouraged from voicing their company affairs outside of the working hours. But this is now a redundant way of operating! Now customers want to connect with the brands and the people behind them. The CEO of the company is active on social media platforms with employees in action as brand ambassadors. The brand itself has an engaging social media presence that is not time-bound. A few examples of this model are Adidas, Apple and Lego.
Employee-Centric Business Models
Gone are the days when people would search for job-for-life. Now the way we work is changing. From traditional ways of working, companies search for people for specific tasks with the opportunity to work for others also at any time anywhere. These companies are not contractually bound to only work for the companies hiring them but offer them flexibility and space to grow and build careers. Since companies have become more employee-centric, they are happy for people to come and go. Google is a prime example of such a business model.
Partner-Centric Business Models
Not only are businesses becoming employee-centric, but they are also becoming partner-centric. And in this model, companies depend on outsourcing and delegating certain tasks to outside companies. For example, a company may hire an advertising agency for marketing the brand and may hire someone from the developer’s community for creating custom-made apps catering to the company’s needs etc. For this to happen, a company has to adopt a partner-centric model. Advertising agencies could explain the point.
Customer Value-Obsessed Business Models
In this business model, the companies try to make it easy and convenient to fulfil customers’ requirements through deep market research to find solutions to their problems, anticipation of their needs and companies ensure that the process from placement of orders till the delivery of goods or services remains friction-free. Amazon and Stitch Fix are prime examples of this model. But, this model can be applied as a technique on other models too for performance optimization.
Constant Innovation Business Models
Being monotonous or stereotypical in any business for that matter could be detrimental even for a mere survival, let alone expansion or growth. Therefore, in this age technology is not only changing, the change is constant and successful business models keep evolving even if it means eliminating a company’s own products to replace them with new ones in line with the fast and constantly evolving technological advancements. iPods and iPhones are a case in point to understand it better.
Data-Driven Business Models
Time has become currency in this era and many businesses which consume time as they delve into assumptions and then establish plans. This has a margin for error and also consumes a lot of time. This has diverted the focus from assumptions to solid data and smart companies have the means to gather and analyse data at every level. Therefore, data-driven companies have measures to ascertain exactly what is happening now and be better placed to take accurate decisions in the light of solid data. Companies which value data are better placed to innovate faster.
Tech-Savvy Business Models
For a business to stand tall today in the world, it is important for companies to embrace technology in the midst of breakneck technological innovation. AI, Augmented Reality, 3D Printing and Virtual Reality are just some of the big changes which are taking place right now. This is why many of the most successful businesses are tech companies such as Apple and Microsoft etc.
This document created by our business specialists at Clear House Accountants, has hopefully helped you have a better understanding of almost all the businesses in vogue currently along with the 09 most successful models. It goes without saying that different models can be emulated as they are or tailored according to their needs. Also, different models could be merged whose fair idea can be had if you closely studied the hybrid models. Studying this document also reveals that the entire world is racing towards business models instead of looking for tedious and fixed jobs because this document covers almost all the areas of earning a living. And it is highly recommended that people start to look for business opportunities instead of jobs for the swift technological and ever-evolving scientific advancements that are shrinking the ground ever further by eliminating jobs.
Anam has a degree in accounting from the Prestigious St John’s University, and works as a senior director in Clear House.
Before working in Clear House, Anam worked in various commercial roles, the last one being the VP Operations for a prestigious business organisation,working on improving the organisation’s operational efficiency, growth and high level client management.
Anam manages clients ranging from software companies to large property developers and managers. Notably, she recently worked with a large property development company building large scale developments in London and the surrounding area.