Business models keep evolving with the advent of new technologies. Business models change as the mode of communication between buyers and sellers change and the way value is derived, captured, monetized and realized by the buyers and sellers. Before money was invented, people bartered goods and services. Money helped people to fix value for the goods and services using a common scale. Particularly with Information Technology, the capturing of data at granular level and ability to communicate instantly and at low cost became feasible, this led to many new types of businesses. Many traditional business models arrived at the scene and people started focusing on specific niches to capture value and exchange between them.
More importantly, those who can capture the attention of customers became the centre of business transactions. To obtain customers’ attention, companies engage in different types of activities, including providing lots of free services. Essentially, these are made possible because the cost of transactions is reduced. The ability to identify those customers relevant to specific markets or products and services became possible, increasing the value of lead generation, that is identifying more accurately the target buyers. In this article we will briefly discuss the various business models and how they work briefly. Any entrepreneur who is interested in innovating must learn about various business models and possibly innovate a business model to differentiate him or her.
A business model is a strategic plan for how a company will make money. It describes the way a business will take its product or service, offer it to the market, and drive sales. A business model determines what products make sense for a company to sell, how it wants to promote its products, what type of people it should try to cater to, and what revenue streams it may expect.
Some interesting business models do not directly charge the end users of their services, offering their services for free, they let their partners leverage their user’s attention.
Here are some key elements of a business model:
- Value Proposition: Describes the unique value a company offers to its customers. It answers the question: Why should a customer choose your product or service over another?
- Customer Segments: Defines the specific groups of people or organizations a company aims to serve. It answers the question: Who are your target customers?
- Channels: Describes the various means through which a company delivers its products or services to customers. This could include online platforms, physical stores, or direct sales, among others.
- Customer Relationships: Defines the type of relationship a company establishes with its customers, such as personalized service, self-service, or automated services.
- Revenue Streams: Specifies the ways a company earns revenue, such as through sales, subscription fees, advertising, or affiliate marketing.
- Key Activities: Describes the primary things a company must do to make its business model work. For example, a manufacturing company might list “production” as a key activity.
- Key Resources: Lists the main assets required to operate and deliver the business model. This could include intellectual property, capital, or human resources.
- Key Partnerships: Describes the external organizations, resources, or activities that a company requires to operate. Partnerships might be forged for various reasons, like risk reduction, access to resources, or economies of scale.
- Cost Structure: Outlines the major expenses and costs associated with operating the business model.
A founder must be able to explain all these points in his or her business model. This understanding helps founders build strategies to fine tune their operations and study the impact of their actions and focus on specific areas, for example, how they acquire customers and what channels they use etc.
A template conversing all these aspects is called Business Model canvas: https://en.wikipedia.org/wiki/Business_Model_Canvas
There are a multitude of business models, each tailored to the specific needs and characteristics of particular industries, market conditions, and individual company strategies. While it’s difficult to exhaustively categorize every business model, here are some common types:
1. Bricks and Mortar: Traditional physical business model where customers come to a physical location to make purchases. Examples include retail stores and restaurants. This is the oldest model that is employed in both manufacturing and trading. The seller manufactures the goods or services and sells them through their physical stores.
2. E-commerce: Businesses that sell goods or services online. Amazon and Flipkart are classic examples. These ecommerce companies in most cases act as platforms. They do not manufacture these items. They help sellers and buyers find each other and also provide them fulfillment services. They also have a technology platform, using which both sellers and buyers are able to transact easily. The platform owners take a cut on the price of the goods sold. They also use Data extensively to improve efficiency and provide lots of value to both sellers and buyers.
3. Subscription: Customers pay a recurring fee to get access to a product or service. Examples include, in selling entertainment content, Netflix, Spotify, and in Software Zoho, Freshworks, Kissflow, Salesforce and many SaaS (Software as a Service). Some of these services could be expensive to own. One need not own them, instead pay for usage like electricity or other utilities. For example, if one has to purchase a movie which people may watch once or twice, the cost of the purchase is high. Instead people can only pay for usage. This opens up the market which otherwise many users could not have afford to purchase the software service or listening to a song or watching a movie. For the company which offers these services, they are able to produce or procure content or software spending larger investment. The cost of these high value items are effectively shared by large users for a fee.
4. Freemium: Offers basic services for free while charging for premium features or services. Examples are Dropbox, LinkedIn, and many mobile apps. Many services take long sales cycles to identify and sell them to customers. These freemium products have a character in which they have a high probability of being purchased, if the customer experiences the services of these products. Also, when the customer uses these free tier they get addicted to the service.
5. Affiliate Marketing: A business earns commissions by promoting and selling another company’s products or services. Many bloggers and online influencers use this model.
6. Franchise: The franchisee pays to operate a version of the business, using the branding and business model of the franchisor. Examples include McDonald’s and Subway.
7. Agency Model: Acts as an intermediary between the buyer and seller and takes a commission for each sale. Real estate agencies and travel agencies operate on this model.
8. Brokerage: Brings together consumers and providers, often taking a commission or fee from each transaction. Stock brokers and marketplaces like Uber or Airbnb use this model.
9. Advertising: Generates revenue by offering space or time for advertisers to reach its audience. TV channels, magazines, and many websites rely on this model. In these models, the content providers monetize the users attention, by selling advertisement space to other sellers.
10. Razor and Blades: This model involves selling a main product at a low price (or even at a loss) and then selling consumable complementary products at a high margin. Razor companies often use this model by selling the handle cheaply but the blades at a high margin.
11. Crowdsourcing: Uses the input of a large number of people (the crowd) to provide services, ideas, or content. Examples include Wikipedia and Kickstarter.
12. Direct Sales or Multi-Level Marketing (MLM): Products are sold directly to consumers without a fixed retail location. Representatives earn commissions on their sales as well as on sales made by people they recruit. Companies like Eureka Forbes use Direct Sales model in India to sell Vacuum Cleaners and Water Filters in India. Amway uses a multi level marketing model to sell their products. Eureka employs their own sales force. Whereas Amway enrolls independent entrepreneurs to sell their products.
13. Licensing: Allows others to use intellectual property (IP) like patents, trademarks, or copyrights in exchange for a fee or royalty. This is common in industries like fashion, music, and technology.
14. Peer-to-Peer (P2P): Enables individuals to interact directly with each other instead of through a third-party intermediary. Platforms like P2P lending or file-sharing sites operate on this model.
15. B2B (Business-to-Business): Companies that primarily sell products or services to other businesses, like software solutions or manufacturing equipment suppliers.
16. B2C (Business-to-Consumer): Companies that sell directly to end consumers. This includes most retail and many service industries.
17. B2G (Business-to-Government): Companies that primarily sell products or services to government agencies.
This list is by no means exhaustive, and many businesses operate using a combination of different models. It’s also worth noting that as the business environment evolves (particularly with digital transformation), new business models continue to emerge.
A J Balasubramanian is a serial entrepreneur, with over three decades of startup experience in founding companies, mentoring / incubating startups and writes regularly on topics of interest to startups.