By definition, a business model describes the rationale of how an organization creates, delivers, and captures value, in economic, social, cultural or other contexts. The construction of a business model is part of business strategy.
A business model can be constructed using a wide range of components, parts that include a company’s target audience, product offering, service offering, policies, organizational structures, infrastructure, operations, trading policies and business processes.
The business model also includes projections, such as financing, marketing strategies, startup cost, revenue and expenses. With more and more inexperienced business owners entering the market, such projections are often overlooked, resulting in many businesses failing.
In short, a business model is a step-by-step plan how the company will generate revenue and turn a profit. It demonstrates how the company will operate the business in a specific market.
Business Model Types
There’s a wide range of business models used in the world, each being unique and specific to the marketplace that is served.
Traditional business models are likely the most well known despite many businesses changing models or using click and mortar business model. This business model combines a physical and online presence. Traditional business models include franchising, direct sales, brick and mortar and advertising-based.
What if two businesses compete in the same market, do they use the same business model? That depends, but just because two companies are in the same market doesn’t mean they use the same business model. Each company has unique benefits, features, competitive advantages and competitive disadvantages. Due to this, each company should have an unique business model according to their specific scenario.
Here’s some of the most well known business model types.
- Affinity Club – When you pay royalties to a company for the right to sell that product to their own customers.
- Brokerage – When you bring a buyer and seller together, charging a fee for your service.
- Bundling – This is when you package goods and services together.
- Cell Phone – When you charge different rates for different levels of services.
- Crowdsourcing – Bringing a group of people together to create content for free in exchange to see other’s content.
- Fractionalization – Sell partial use of something.
- Freemium – When you offer basic services for free and charge for premium service.
- Leasing – Rather than charging a premium, rent it out.
- Pay As You Go – Charging for actual metered usage.
- Product To Service – Rather than selling a product, sell the service the product provides.
- Reverse Auction – Set a price and have others bid to lower price.
- Subscription – Selling a product or service as a subscription routinely.
- User Communities – Giving network access to members and charging for membership and advertising.
What’s The Best Business Model?
You can learn a lot comparing business models. Just because a company is successful doesn’t mean that their business model doesn’t evolve or change. It’s quite the opposite, as businesses grow, they must keep up with the demands of the market.
As scenarios and circumstances change the business environment, business models must adapt.
While you can use other business models as a reference or for research, you shouldn’t view their success as a path to your own success.
There’s a lot of factors that contribute to a company’s success and while the business model is indeed a part of that, it’s not the complete reason one company is successful and another is not.
Comparing Business Models
Netflix has been on fire with their subscription based business model. YouTube has a crowdsourcing business model. This is when a large group of people are brought together to create free content. Walmart has a low touch business model. This is when you sell at a low price with less service.
You see, it all depends on your market and what you have to offer.
As for the best business model to use, wouldn’t you agree it’s advertising? After all, 2 of the biggest companies in the world use the advertising business model. Those companies are Facebook and Google.
What about the “become a marketplace” model, made famous by Amazon? After all, Amazon is the biggest company in the world.
The internet has disrupted business models in all industries and companies that didn’t adapt have been long forgotten. Due to the online marketplace, new business models have been formed.
Business Model Components
As it pertains to the core components of a business model, everyone has an opinion. Again, it depends on your business, your market and circumstances.
- Identify Your Target Market – Who’s your product or service for?
- Business Processes – Do you understand the key processes you need to have in place to make your business model work?
- Value Proposition Or Offer – How does your business stand out against the competition? Why is your offer the best?
- Documentation And Recording – What key processes, activities and KPIs should you be recording?
- Demand Generation – How will you build demand and interest for your products and services?
- Core Competency – What are the basic skills, knowledge and expertise required to build your product? Provide your service?
- Partnership – Who will you partner with to grow your business?
- Marketing – What’s your marketing strategy to reach your target audience? Grow your company?
- Revenue – How will you create revenue streams for your business?
- Organization – Which roles do you need to operate your business?
- Customers – How will you provide services current and future customers?
