A multitude of things go into planning, building and growing a business, but few of them are as consequential as the business model. So, if you are a budding or aspiring entrepreneur who wants to understand businesses better, a business model is a great place to start.
A business model is a plan of action for running and growing a business profitably. It describes every part of the business’s operations—including the products or services it sells, who it sells them to, how it makes money and how it plans to grow with time.
An effective model can shape a company’s success, while a failing business model can bring a business down. That’s why learning about business models and identifying the one that fits your business idea is crucial for sustained success. This article will help you do just that.
Why Business Models Matter
The business model is like a skeleton. It’s not something you choose; it’s part of the very idea of a business. What you can choose, though, is the type of skeleton you want. In fact, choosing the right model is one of the most important decisions in running a business.
Your business model defines everything from your target customers to your operating model and revenue streams. These factors shape your business strategy, including customer acquisition methods, revenue projections and growth plans.
To a large extent, the business model also impacts your business’s ability to scale and adapt to shifting marketing factors and trends. It doesn’t matter whether you’re an old or new business; you must actively modify your business models depending on your future plans and vision. This will help your business to grow, scale effectively and stand out in your market.
Common Types of Business Models
Business models continue to evolve and emerge, and there is no single ideal model for a company. You can start with a single business model and later diversify to more models that cater to different revenue streams and customers.
Many modern companies run on a mix of models. Let’s go through some of the most common business models with examples:
1. Subscription
This model works best for software or other digital products. Customers pay for using your product for a fixed amount of time, such as a week, month or year. Their access expires when the time is up, and they must keep paying a recurring fee to continue using it. Subscription-based models are great for keeping customers for the long term.
Examples: Streaming services like Netflix, Cable TV Providers, Antivirus software
2. Freemium
As its name suggests, the freemium model works by offering customers a free version of your product with limited features. Customers have to pay for more features. You can offer the premium features for a one-time paid upgrade or via multi-tier subscriptions. Revenue kicks in when customers switch to one of the paid plans.
Examples: Slack, Trello, Amazon, Spotify
3. Direct-to-Consumer (D2C)
The D2C model works best for companies selling physical products. In this model, a company sells its products directly to its customers. Since no wholesaler or retailer is involved, this model allows companies to maximize profits. It also allows businesses to offer products at competitive prices to customers.
Examples: Warby Parker, The Blue Apron, Everlane
4. Business-to-Business (B2B)
A business may also sell products or services to other businesses. This model, aptly called the B2B model, can be core or supplementary. You can be a D2C company and also sell your products or services in bulk to other businesses that might need them for their customers or employees. Or, you can exclusively focus on selling to other businesses.
Examples: SAP, Intel, FedEx, Microsoft
5. Franchise
The franchise model is best for businesses that want to expand their physical store presence. In this model, a business (called the franchisor) allows a local business owner (called the franchisee) to run a store and sell products or services under the business’s brand name and trademark. The franchisee, in turn, pays the franchisor an initial fee, recurring licensing fees and a percentage of their earnings.
Examples: McDonald’s, KFC, Domino’s Pizza
6. Marketplace
Unlike other models we’ve discussed, the marketplace model allows you to do business and make profits without your own products or services. Your business assumes the role of a marketplace, where sellers list their products or services and customers buy them. As the intermediary, you take a cut from the sales completed on your platform and earn money.
Examples: Amazon, Fiverr, Uber, Airbnb
7. Fee-for-Service
In this model, companies that provide services charge customers a fee for a specific service, such as consulting or labor. The rates could be set hourly, per service, or in some cases, as retainer pricing.
Example Industries: Consulting, Home Repair or Cleaning, Marketing
Additional Business Models
There are also other business models that businesses can consider, including:
- Membership-based: Charging membership fees, such as at a gym
- Fees-based: For example, a credit card company that charges an annual fee to use the card
- Rentals: This could include anything from homes to products
- Insurance: Customers pay for protection from accidents or losses
- Resale: Reselling products for profit
- Affiliate marketing/advertising: Such as blogs or other websites
Using Multiple Models to Fit Your Business
Remember that depending on the specifics of your business, you can operate via multiple models to serve different business needs. For example, you can have a sauces and condiments company, selling your sauces via e-commerce marketplaces as well as directly to customers (D2C) via your website while also taking bulk business orders from Quick Service Restaurant (QSR) chains like Domino’s and McDonald’s.
Business Model Canvas and How to Use It
Coming up with a promising and (potentially) profitable business model is anything but easy. Equally demanding is documenting the key aspects of the model as your business evolves. Moreover, explaining everything to your board members and investors is another challenge.
Luckily, a business model canvas makes all of this much easier.
A business model canvas is a visual template used to plan, document, summarize and analyze business models. It was first developed and proposed in 2005 by Swiss business theorist Alexander Osterwalder.
The canvas is a single chart with nine boxes. It summarizes the following nine key aspects of any business:
- Key Resources: All the assets you need to run your business go here. This includes money, inventory, human resources and technology
- Key Activities: All the tasks that your business must do to run properly and efficiently go into this box.
- Key Partners: These are the people and entities you will work with to ensure the smooth running of your business. For example, suppliers, advertisers, distributors, etc.
- Value Proposition: This defines how you intend to offer unique value to your customers differently from your competitors. This includes your core offerings and unique selling propositions (USPs).
- Customer Segments: What is your target market? Who are your ideal customers? Include all the different segments you cater to.
- Customer Relationships: List all the ways you interact with your customers, from customer acquisition to sales and beyond—for example, support, communities, personalized assistance, etc.
- Channels: How do you sell your products or services? List all the ways you use to reach your target audience.
- Cost Structure: What role does money play in your business? Include all the primary costs your business incurs in different key processes, such as hiring, marketing, distribution, etc.
- Revenue Streams: In this box, place all the ways your business makes money—everything from one-time sales to subscriptions, licensing and so on.
Once you’re clear on these nine aspects of your business, you can include them in your business model canvas. Then you can use it to visually represent your business model in a simple, structured way.
How to Design a Winning Business Model
Every business is unique with its own needs and goals. The clearer you are on the specifics of your business, the easier it is to design a winning business model. So ask yourself these questions to understand your business better:
1. Customers: Whom Do You Want to Sell To?
Identify who you are targeting with your products or services. Depending on the product, you might want to target a specific gender, age range, income range, location or other demographics. The people you want to target define your acquisition strategy, marketing channels, messaging tone and many other details. Therefore, it’s important to ensure you are clear on this question.
2. Value Proposition: What Do You Want to Achieve?
You’ve identified your products and customers. Now it’s time to answer what you are trying to achieve for your customers with your products and business. Answer questions like these:
- What will your products do for your customers?
- What problems do you intend to solve with your products?
- If similar products are already available, how is your product better or different?
This is perhaps the most important aspect of your business. Clearly define your products’ USPs and the unique value they offer to customers.
3. Needs: What Do You Need for Your Business?
Setting up and running a business demands a lot of things. Typically, a business needs some funds to get started (often referred to as startup capital, working capital or startup funding). In the case of physical products, raw materials are crucial, as are reliable suppliers. Then come the distributors, marketers, franchisees and other partners who help you reach your customers. Finally, you need an efficient team of workers who can handle your business requirements well.
Every business also has unique requirements. A software-as-a-service (SaaS) company, for example, may need tech infrastructure components like cloud hosting solutions, product development tools and even patents (in some cases). Considering all the unique aspects of your business can help you arrive at a better picture of your needs.
4. Revenue: How Do You Plan to Make Money?
You can’t design a business model without factoring in money. Consequently, you’ll need to start by listing all the ways you plan to operate. Choose your revenue streams. Do you want to make money by product sales, subscription fees, service charges or a mix of multiple streams? What costs will you bear to operate your business this way?
Weigh your expected costs and develop a pricing plan that not only attracts customers but also drives profits for you.
The actual process of building an effective business model looks different for every business and can be a bit overwhelming. For this reason, it’s essential to consider each question. This can help you build a profitable business model.
Quick Tip: If you need some guidance, our certified coaches at SUCCESS Coaching can guide you towards clarity on your ideal business model.
Scalable and Sustainable Business Models
Your business model shouldn’t only reflect your present goals. It should also be designed with enough insight (and foresight) to keep your business thriving in the long term. However, playing the long-term game demands two things: scalability and sustainability.
Scalability
Scalability is a business’s ability to grow its customer base and revenue over time while also promising more profits in the long run. A business that can achieve this feat can handle increasing demand and a growing market without compromising on its product or service quality.
For example, consider a SaaS company witnessing positive feedback and recurring customers—signs that say the product is promising. The company can then double up on its marketing game and offer limited-time discounts periodically to attract more customers. This is likely a highly scalable business model since the product is digital, and customer acquisition costs are not very high.
Now, consider another company that offers one-on-one mental health consultations for people living in rural areas. In this case, scaling might be difficult or slow due to various reasons, including lack of awareness about mental health and financial challenges.
Sustainability
Sustainability in business means running and growing a business while minimizing any harm to the environment, society or the people involved in the business. A sustainable business not only grows and profits; it also ensures that its growth doesn’t come at the cost of resources. The keyword here is “responsible growth.”
While many businesses can grow quickly, not all do so sustainably. A clothing brand, for instance, can grow due to premium product quality, good designs and great marketing. But if it increases water pollution via its factories, has an increasing carbon footprint and isn’t transparent about its production processes, it’s the opposite of a sustainable business model and a threat to society and the environment.
Scalability and sustainability are two intertwined yet different pillars of long-term business growth. But both are equally important. So, try to ensure that your business model is not just scalable or sustainable but sustainably scalable.
What Makes a Good Business Model?
There’s no textbook definition of a good business model, yet many factors can tell you whether your model provides a solid foundation or requires changes. If you’re an entrepreneur, try to ensure that your business model sums up your business’s key aspects (Ostwerwalder’s nine boxes are a good starting point). You can have a single model or a mix of multiple, but either way, it must be reasonably sustainable and scalable.
Photo by Josep Suria/Shutterstock
