Road To Entrepreneurship - Business Models

Business Models

At its core, a business model is a description of how a business makes money. A business model describes the rationale of how an organization creates, delivers, and captures value, in economic, social, cultural or other contexts. The process of business model construction and modification is also called business model innovation and forms a part of business strategy. The two primary levers of a company's business model are pricing and costs. One can raise prices and reduce inventory costs to increase the gross profit of a company. A Business model consists of a lot of components. One of its primary component is the value proposition. It describes the goods or services that a company offers and why they are desirable to customers or clients ideally, it can be stated in a way that differentiates the product or service from its competitors. A business model for a new enterprise should also cover projected startup costs and sources of financing, the target customer base for the business, marketing strategy, a review of the competition, and projections of revenues and expenses. There are as many types of business models as there are types of business. Direct sales, franchising, advertising-based, and brick-and-mortar stores are all examples of traditional business models. There are hybrids as well, such as businesses that combine internet retail with brick-and-mortar stores. Within these broad categories, each business plan is unique. Consider the shaving industry. Gillette is happy to sell its Mach3 razor handle at cost or lower in order to get steady customers for its more profitable razor blades. The business model rests on giving away the handle to get those blade sales. This type of business model is actually called the razor-razorblade model, but it can apply to companies in any business that sells a product at a deep discount in order to supply a dependent good at a considerably higher price.

Different Types Of Business Models

There are different types of business models meant for different businesses. Some of the basic types of business models are:

Manufacturer: A manufacturer makes finished products from raw materials. It may sell directly to the customers or sell it to a middleman i.e another business that sells it finally to the customer. Examples – Ford, 3M, General Electric.

Distributor:

A distributor buys products from manufacturers and resells them to the retailers or the public. Examples – Auto Dealerships..

Retailer :

A retailer sells directly to the public after purchasing the products from a distributor/wholesaler. Examples – Amazon, Tesco.

Franchise :

A franchise can be a manufacturer, distributor or retailer. Instead of creating a new product, the franchisee uses the parent business’s model and brand while paying royalties to it. Examples – McDonald’s, Pizza Hut.

Brick-and-mortar :

Brick-and-mortar is a traditional business model where the retailers, wholesalers, and manufacturers deal with the customers face-to-face in an office, a shop, or a store that the business owns or rents.

eCommerce:

E-Commerce business model is an up-gradation of the traditional brick-and-mortar business model. It focuses on selling products by creating a web-store on the internet.

Bricks-and-clicks:

A company that has both an online and offline presence allows customers to pick up products from the physical stores while they can place the order online. This model gives flexibility to the business since it is present online for customers who live in areas where they do not have brick-and-mortar stores. Examples – Almost all apparel companies nowadays.

Freemium :

This is one of the most common business models on the Internet. Companies offer basic services to the customers for free while charging a certain premium for extra add-ons. So there will be multiple plans with various benefits for different customers. Generally, the basic service comes with certain restrictions or limitations, such as in-app advertisements, storage restrictions etc., which the premium plans shall not have. For example, the basic version of Dropbox comes with 2 GB storage. If you want to increase that limit, you can move to the Pro plan and pay a premium of $9.99 a month for it. Some online image editors allow you to edit only a certain number of images in the free basic plan while an unlimited number of images in the paid plan. Youtube’s free plan comes with ads while the premium (Red) plan has no ad interruption plus it has other benefits too. This model is one of the most adopted models for online companies because it is not only a great marketing tool but also a cost-effective way to scale up and attract new users.

Online Marketplace:

Online marketplaces aggregate different sellers into one platform who then compete with each other to provide the same product/service at competitive prices. The marketplace builds its brand over different factors like trust, free and/or on-time home delivery, quality sellers, etc. and earns commission on every sale carried on its platform. Examples – Amazon, Alibaba.

Advertisement business models are evolving even more with the rise of the demand for free products and services on the internet. Just like the earlier times, these business models are popular with media publishers like Youtube, Forbes, etc. where the information is provided for free but are accompanied with advertisements which are paid for by identified sponsors.

Crowdsourcing :

Crowdsourcing business model involves the users to contribute to the value provided. This business model is often combined with other business and revenue models to create an ultimate solution for the user and to earn money. Examples of businesses using the crowdsourcing business model are Wikipedia, reCAPTCHA, Duolingo, etc.

Hope you now know different types of Business Models. Now if you think you need any help do comment below .Our next topic is Revenue Model.