A business model outlines revenue generation. If you want to start a business, determine what model will support your goals and incorporate its design into your business plan and market research.
Business models, examples, and how to choose one are here.
What is a business model?
Your business model describes how you make money. Business models explain four things:
- Company offerings.
- Marketing strategy.
- The company’s costs.
- Profit projections.
A business model is a strategy for making money in a specific market. Value propositions are key to business models. This describes a company’s products and services and why customers want them, ideally in a way that sets them apart from competitors.
Types of business models and examples
Business model types change because there are many businesses. 12 common business models can be customized for a company or industry.
Disruptive business models change these fundamental structures. Many businesses have several of these revenue streams.
Retailers complete the supply chain. These companies buy and sell goods from manufacturers or distributors for profit. Retailers may specialize or sell many products.
Manufacturers make goods. They sell to distributors, retailers, or consumers.
Fee-for-service means exactly that: A service has a set price. This model can boost profits by adding clients or raising rates.
Depending on work, the business may charge hourly, monthly, or commission rates. It may also set fees for different services.
E-commerce and brick-and-mortar stores can use a subscription model. The customer pays recurringly for a service or product. A company may mail its product or charge for its services.
Bundling involves selling two or more products together for a lower price than selling them separately.
This business model lets companies sell more and market harder-to-sell products. Since businesses lower prices, profit margins shrink.
Product-as-a-service companies charge for physical products. They may charge a subscription, per-use or per-mile fee, or both.
Companies lease products from sellers. That company rents the product to another company for a fee. Some companies lease smaller items, but manufacturing and medical equipment are the most efficient.
Leasing is like product-as-a-service, but leases last days or weeks instead of minutes or hours. Leasing companies rarely charge subscription or membership fees.
Franchisees buy and copy business models. The franchiser, or original owner, assists the franchisee with financing, marketing, and other business operations to ensure success. The franchisee pays the franchisor a percentage of profits.
Distributors market manufactured goods. Distributors buy in bulk and charge retailers more to make a profit.
Customers pay for advanced features in a freemium model. Spotify has a free ad-supported tier, but subscribers can listen ad-free.
Advertising or affiliate marketing model
Advertising and affiliate marketing use customers as assets.
Advertising sells audience attention. Advertisers pay for space in magazines or on vehicles based on their audience size.
When a customer buys a product or service a business recommends, it gets a commission. If a podcaster encourages you to use a specific offer code when you buy a product they’re promoting, they likely use affiliate marketing.
Razor blades model
Your local drugstore can explain the razor blades model. Razor blades can cost more than razors.
Companies sell cheaper razors, knowing you’ll buy more expensive accessories, like razor blades.
Companies also use the reverse razor blades model, where they sell a high-margin product and then promote lower-margin products that go with it.
How to design a business model
Business models vary. Yoga studios that bundle classes may also sell retail products in their lobby.
Answer these questions to create your business model:
How will you earn?
List your company’s revenue streams.
Business success takes time. How much it costs to acquire a customer or how many repeat customers are other ways to measure your company’s success.
Your target customer?
Your product or service should address a particular consumer need. Your business model should consider customer size.
How will it benefit them?
Your business model’s value proposition should make it stand out to customers. Your value proposition should be distinct enough to deter copycats.
List your business’s fixed and variable costs, then calculate the prices you charge to cover them. Consider your company’s physical, financial, and intellectual asset costs.
Your business’s components may need to be clarified first. Business plans can highlight them.
Researching similar businesses and how they operate may also be helpful. Market research may show you things to copy and gaps your business can fill.
Operations depend on the business model. Your strategy can evolve as your business grows.