Business Models (2021 Edition): The Ultimate Guide
November 24, 2020
Table of Contents
If you are thinking of starting your own business, or own your own company, then thinking carefully about your business model is absolutely vital to your business success.
In this article, you will learn more about what a business model is, why they matter, how to understand them, how they differ from technological innovation, some tips on developing your own, and all the different business models that are out there.
What is a business model?
A business model refers to the strategy a business develops to make a profit. It is an explanation of how a company plans on delivering value to clients within a reasonable price range. The company will determine which goods or services are to be sold, which market to target, as well as any costs that might be incurred to the business. It is important for any company to have a business model, regardless of size or how long it has been around.
A business model will help new and growing companies to gain investors, find quality staff, and motivate managers and employees. Companies who are already well established should also have a business model which they review and update regularly. If they don’t, they will risk missing out on trends and will not be prepared for any eventual challenges. Furthermore, having a solid business model will help any potential investors evaluate and understand the businesses that interest them.
When developing their business model, entrepreneurs will test out different ways to structure their costs, revenue model and revenue streams.
A business model will generally be divided into three different parts:
- Everything to do with the product and production side of things, such as raw materials, labour, design and manufacturing.
- Everything to do with sales and getting the product in front of customers. This will include distribution, service delivery, marking and sales processing.
- Everything to do with payments and cash flows, such as payment methods, pricing strategy and payment timing.
Put simply, a business model is the result of the research done on a business’s expenses and costs, as well as how much will be charged for goods and services provided. If a business model is well done, there will be more money from clients coming into the business than coming out of the business for production costs.
When reviewing their business model, companies can finetune anything within these three categories of the business model. For example, they could choose to decrease the costs incurred by manufacturing and design. Or they could find better ways of marketing their products. They could also find new ways of making their customers pay.
However, it is important to remember that there is no need to create a whole new business model in order to have an effective strategy. It is possible to use an existing business model and present it to different clients. For example, catering companies generally operate on a standard business model but will target different audiences.
Why is a business model important?
Having a business model will enable you to extract value out of your ideas. It is good to have new business ideas of products or services you can offer. However, you need to be able to back these ideas up and be able to explain how you plan on implementing them. Discussing these with colleagues will help you spot potential issues and challenges associated with your idea.
A strong business model can pave the way to business success. Preparing a business model is like laying down the foundations for your company. It will help you take an objective look at your business idea and realistically evaluate your chances of success. By doing this, you should be able to figure out your business concept, how you will create customer value, how you will position your product in front of potential clients, how you will manage competition, as well as the costs and revenue you can expect.
Understanding business models
One of the main elements of a business model is its value proposition. A value proposition refers to the description of services or products offered by a business and why they bring value to customers. This will be presented in a way that will contrast the goods or services from the competition.
For a start-up, the business model will generally also take into consideration how much it will cost to actually launch the company and how this will be financed, as well as the target customer audience, how it will be reached, what competition looks like and projected revenue and costs. The business model might also include information about potential opportunities for partnerships with already established companies.
A successful business model will allow a company to offer its customer base a solution to its needs whilst remaining competitive price-wise sustainably. Companies will generally reevaluate their business model over time to allow for changes in market demand and business environment.
When looking into a business for potential investment, investors need to know exactly how a business plans on making money. This means they will look at the business model. Of course, the business model might not provide all the financial information. However, an investor who is presented with an effective business model will be able to get a good understanding of a company’s prospects.
Experimentation is key to business modelling
Developing and implementing business models is for an entrepreneur what experiments are like for scientists. However, whilst scientists are generally looking for lasting truth, entrepreneurs generally look for solutions and strategies that will work in a particular setting at a particular time.
Many people make the mistake of thinking that by just writing down a business model, it will work in the real world. However, most often, that is not the case. For a business model to work in real life, it will need a lot of consideration, testing and modifying. A successful business model will emerge from a process of experimentation.
Indeed, entrepreneurs will generally have to develop and test out a whole range of variations of one business model within a real-life environment. Only once they have tested different variations out can they determine which model is most effective.
That implies that often an entrepreneur has to design multiple variations of the same business model and test those in the marketplace. For instance, if you’ve built a company that offers software but you positioned yourself with a freemium model, thus bringing them closer to business success.
The difference between technological and business model innovation
The misconception that technological and business model innovation are the same thing comes from the fact that advancements in technology have led to new ways of doing business. Internet technology is allowing new and untested models to be adopted. One example is Netflix and other similar companies. Their business model would not exist if internet technology had not created new ways of delivering and streaming content, which is how they make money come into their business.
However, business innovation and technological innovation are two very different things. Technological innovation most often takes place in laboratories and research centres. Business innovation takes place within a company or a business context. By extension, technological innovation requires a huge amount of investment and resources, as well as researchers and experts. These will experiment freely with different ideas that can take a long time to materialise results and will not necessarily follow business goals.
Furthermore, if a new technology happens to become commercially viable, then it can quickly become a commodity. This means technology in and of itself is not necessarily a competitive advantage. However, combining new technology, innovative ways of serving clients, effective distribution networks and a competitive monetisation plan will probably lead to strong competitive advantage. This is where business model innovation comes in.
7 top tips for developing an effective business model
When writing a business model, it isn’t just about copying and pasting your business plan or deciding what products or services you should go for. When preparing your business model, you should be establishing a long-term strategy of how you will be providing value to your customer base in the long term.
Here are 7 tips on how you can make your business model a success.
Identify your target audience
If you choose to target a wide customer base, then you run the risk of losing focus on the customers you really need and who want your goods and services. When developing your business model, you should try to try to narrow down your target audience to focus on 2-3 specific client profiles. Outline each profile’s demographic, common challenges and what solutions your business can deliver.
Determine business processes
Before you can launch your business, you will need to know how your business will operate in order for your business model to work. Outline core business activities by firstly determining the main aspects of your business’s offering. Will your business be offering consultancy services, will you be providing a service or shipping goods? These are things you will need to consider before your company can go live.
Keep records of your company’s resources
Think about what your business will need day-to-day in order to carry out its activities, find new clients and fulfil its goals. You should make sure you keep track of your business resources. This will enable you to make sure that your business model is suitable for the long-term for maintaining your business activities. Resources can include things such as a warehouse, your website, intellectual property, your client list, and capital.
Create a strong value proposition
It is crucial for you to outline how your business will distinguish itself from competitors. By clearly determining what value your business can bring, and how your products or services are better than what your competitors have to offer, you are on the path to delivering a strong value proposition. Once you have written down a few value ideas, you should link each one to a product or service delivery system. This will help you identify who you will keep on providing value to your client base over the long term.
Identify key business partnerships
It is impossible for any business to operate effectively without having established a few key partnerships that will enable the business to keep on serving its customers. When establishing your business model, identify key partners such as advertisers, suppliers, your supply chain, and strategic allies that will help you bring value to your customers.
Create a strategy to generate demand
Unless you are planning to do something truly radical for the launch of your new business, you will have to think of ways to build up interest in your company and start thinking of ways to find leads and close deals. You should consider the ways in which customers will come across your business and what you want them to do once they have. By drawing up a demand generating strategy, you will be creating an outline of your customers’ journey whilst establishing what their key motivators might be for taking action.
Don’t be scared to innovate
When you start a business and create your business model, you will have to make quite a few assumptions as part of your business plan. Indeed, you won’t really know if your business model is a strong one until customers actually start paying. This is why it is crucial to leave space for innovation in your future plans. Your initial business model is not a static document. You should keep reevaluating it and making changes where needed.
The different types of business models
When thinking about your business model, there is no need to create a whole new one. Indeed, nearly all companies actually use existing business models which they then adapt to their own needs and to find a competitive advantage. Here is a list of business models you can use when starting your own company.
The business model for advertising is a very old one that has become increasingly refined as society has moved progressively away from print towards online. The core of the advertising model revolved around developing content that people want to consume and then setting it in front of this audience.
With the advertising model, one needs to please two different customer bases: the people consuming the content, and the advertisers. Although the consumers might not be paying, advertisers definitely will be.
An advertising business model can also be paired with a crowdsourcing model in which you will receive content freely from users instead of paying creators to develop content.
The affiliate business model is similar to the advertising model. However, there are a few differences. The affiliate model is most often found online. It uses links that are embedded in content instead of using visual adverts that are easily identifiable.
For example, a movie review website could embed an affiliate link to Amazon within the movie review. This means readers will be able to click on the link to Amazon and purchase the movie being reviewed. Amazon will then give you some commission for each purchase that was made through your referral.
A brokerage company is in charge of connecting sellers and buyers and then making sure the transaction runs smoothly. In exchange for these services, they will ask for a fee for each successful transaction, either to the seller or to the buyer and possibly both of them.
Real estate agencies are a common type of brokerage firm, although there are plenty more types of brokerage companies. Brokers and freight brokers are another example. They support construction businesses with identifying buyers for the earth that is dug out to build foundations.
Some companies specialise in customising existing goods or services so that each sale is specific to each client. One example is of high-end travel agents who take care of booking custom trips for their wealthy customers.
Crowdsourcing is when a large number of people all contribute content to a common website, space or platform. You will often find that crowdsourcing business models are coupled with an advertising business model in order to bring in revenue, although there are plenty more variations of the model.
Businesses in need of a solution to a tricky issue might also make it public in order for people to help them solve it. People who find the solution might win a reward. The most important thing for any crowdsourcing company is to identify which rewards will be most appealing whilst remaining viable for the company.
If you plan on producing and selling goods in shops, you will most often work through a range of middlemen to get your goods from the production facility to the shop shelves. Disintermediation is when a business decides to sidestep all middlemen and sell directly to customers. This might lead to lower costs for customers as well as a closer relationship between the business and the client.
Fractionalisation refers to when a business, instead of selling a whole product, will only sell a part of the product. One example of a fractionalisation business model is a timeshare. Here people will be owners of a part of a holiday home, meaning they can use it for a specific amount of time of the year.
It is common to find the franchise business model within the catering industry, although it is also prevalent in other service industries such as recruitment and cleaning.
The basic principle of the franchise model is that a company sells the strategy for launching and running a successful business to another party. A company will also often sell access to a support service or brand that will enable the party who bought the franchise to actually start running. Put simply, one company sells access to a successful business model they have created.
Companies implementing a freemium business model offer a part of their goods or services and then will have a paying premium service or product.
The freemium business model is different from a company offering its customers a free trial, which only extends for a certain period of time. With the freemium model, clients have unlimited access to a range of basic features for free. Clients are only charged if they want to access a wider range of features.
The leasing business model seems in some ways quite similar to the fractionalisation business model. However, there are some major differences. With the fractionalisation model, a company will give access to a part of a product or service perpetually. The leasing business model is more like renting. Once the lease agreement is at an end, the client has to return the good they were renting.
It is mostly high-priced products that are leased because clients might not be able to afford a full purchase. Instead, renting the product for a certain period is more effective for them.
When companies are based on a low-touch business model, it means that they reduce their prices by offering fewer services. One of the most obvious examples is low-cost airlines and furniture stores such as IKEA. In both examples, clients have to buy extra goods or services, or they might have to do some things themselves in order to maintain lower costs.
With a marketplace business model, a company will enable sellers to post items for sale on their platform and provide consumers with easy tools to purchase items from sellers.
Marketplaces have different ways of bringing in revenue. This could be through fees to the seller or the buyer for every successful exchange, they could offer additional services for supporting sellers with the advertising of their products, or they could offer insurance to customers. Such spaces can be dedicated to both goods and services.
The concept of a pay-as-you-go model is that instead of paying for something upfront, clients pay for their actual usage at the end of a specific period of time. Home utilities, for example, most often use a pay-as-you-go model.
The razor blade model takes its name from the product that is as the origin of the model. The model entails providing a durable good below cost to grow the sales volume of high-margin, disposable components of the good.
This is the reason behind razor handles being so cheap. Companies bank on people purchasing large volumes of blades over the long-term. This strategy aims to tie people to the product, making sure that they keep on purchasing items over the long term.
Reverse razor blade
The reverse razor blade model flips the razor blade model around, meaning companies provide high-margin goods and promote sales of associated low-margin products.
Just like with the razor and blades business model, clients, by purchasing a particular product, make the decision to enter an ecosystem of products. However, with the reverse razor blade model, it is with the first purchase that the business will make most of its money. The extra items purchased by the customer over the long term are just there to keep the customer loyal to the initial product purchased.
The reverse auction model turns the auction model on its head. In this case, sellers are offering their lowest prices to buyers. Buyers can then choose the lowest price on offer. This happens, for example, in construction, when contractors bid to do work on a particular project. People who want to take out a loan or a mortgage are also seeing a reverse auction business model in action.
The subscription model is becoming increasingly popular. With the subscription business model, customers have to pay a subscription fee to be able to access certain services. Newspapers and magazines have been using this model for a long time. However, it is now spreading to other types of businesses such as software providers and online services.
Using an online platform for business growth
When you are thinking of what your business model will look like, it is vital to consider all the options that are open to you. Digitalisation has been happening for a while now. However, it has been drastically accelerated by the COVID-19 pandemic.
Online platforms are becoming more and more prevalent within the business world as a way of sourcing leads, clients and partners, and as a way of bringing in money for a business. Indeed they allow people to conduct business and find new opportunities from the comfort of their home.
CONNECTS is one example of a global business platform. Based upon a collaboration with Chambers of Commerce, it enables entrepreneurs to do business worldwide and with trust. Indeed, each and every member on the platform has been vetted and approved by a local chamber of commerce.
In current times, considering platforms such as CONNECTS when developing your business model will ensure you are putting all the odds in your favour.
If you found this article helpful, you might also be interested in reading our article How Business Continuity Planning Can Help Your Business and our article about How to Write a Business Plan.
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