⏰ Estimated reading time: 9 minutes
Here, we'll take a closer look at the different business models, examples of each, and how to identify the right business model for you.
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What is a business model?
A business model is an outline of how a company plans to make money. Generally, a business model describes four things:
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What products and services does the company sell?
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How do you intend to market your product or service?
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What costs will the company face?
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How the company expects to make profits.
Types and examples of business models
Because there are so many different businesses out there, the list of business model types is constantly changing. Below are 12 common business model options. All of these can be customized for specific companies or industries.
“Disruptive business models” innovate these basic structures. And many companies generate revenue from multiple sources. In other words, a company's business model includes several of these types.
1.Retail store model
Retailers are the last link in the supply chain. These companies buy products from manufacturers and distributors and sell them to customers at prices that allow them to cover their expenses and make a profit. Retailers may specialize in certain areas or carry a variety of products.
example: Many of the businesses you work with every day are likely retailers, from grocery stores to pharmacies to florists.
2. Manufacturer model number
Manufacturers convert raw materials into products. They then sell those products to distributors, retailers, or directly to consumers.
example: Manufacturing makes everything from furniture to medicine. This applies to businesses of all sizes and in almost every industry.
3. Pay-as-you-go model
As the name suggests, pay-as-you-go pricing is where companies charge a fixed fee for specific services. Businesses founded on this model can increase their revenue by working for additional customers or increasing their rates.
Depending on the nature of your business, you may be charged an hourly rate, a monthly fee, or a commission. You can also create pricing schedules that include set fees for different types of services.
example: Hairstylists, accountants, and real estate agents all charge fees for their professional services. They may work independently or be affiliated with salons, offices, or brokerages that provide resources in exchange for a portion of their income.
4. Subscription model
example: Many local farms offer farm shares and community-supported agriculture subscriptions that give customers continuous access to fresh produce throughout the crop season.
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Once we have found your personalized match, our team will be happy to discuss the further process.
5.Bundle model
In a bundle business model, a company sells two or more products together as a unit, often at a lower price than if the products were sold individually.
This type of business model allows companies to generate more sales and, in some cases, sell products and services that are difficult to sell. However, profit margins often shrink as companies sell their products at lower prices.
example: Many class-based fitness centers and gyms employ a type of bundle model, where clients pay for a set number of classes per month. The more classes your client buys, the more your total spend will go, but the cheaper each individual class will be.
6. Product-as-a-Service model
Product-as-a-Service businesses charge customers for the use of physical products. We may charge subscription fees, per-use or per-mile fees, or a combination of both.
example: Bicycle rental companies offer products as a service. The customer may pay an annual fee and a per-mile fee for each ride, or he or she may have the option to rent the bike for the day.
7. Lease model
In a leasing business model, a company purchases a product from a seller. The company allows another company to use the product it has purchased for a recurring fee. Leasing arrangements are typically most efficient for big-ticket items such as manufacturing equipment or medical equipment, but some companies also lease smaller items.
Leasing is similar to the product-as-a-service business model, but lease terms are typically longer, days or weeks rather than minutes or hours. Leasing companies are unlikely to charge subscription or membership fees to access their products.
example: Businesses that rent machinery such as backhoes, augers, and bulldozers to individuals for home construction projects use the leasing business model.
8. Franchise model
A franchise is a blueprint for an established business that a franchisee buys and reproduces. The franchisor or original owner works with the franchisee to assist with financing, marketing, and other business operations to keep the business functioning properly. In return, the franchisor pays the franchisor a portion of the profits.
example: Domino's, Anytime Fitness, and Ace Hardware are all examples of franchise models.
9. Distribution model
A company operating as a distributor is responsible for bringing manufactured goods to market. To make a profit, distributors buy products in large quantities and sell them to retailers at higher prices.
example: A beauty salon chain that buys supplies in bulk and sells some of them to other salons uses a distribution business model, but there may be other sources of revenue as well.
10. Freemium model
In a freemium model, customers can use some parts of a product or service for free, but must pay to access more advanced features. This model is common in the Software-as-a-Service space. For example, Spotify has a free ad-supported tier, but subscribers can listen without ads.
example: Some news companies and Internet publishing companies have adopted a freemium model. In this model, some or all content is free, but premium content and special features are protected by a paywall.
11. Advertising or Affiliate Marketing Model
Advertising and affiliate marketing business models leverage a company's audience as an asset.
Advertising allows businesses to attract the attention of their audience. Advertisers pay for space, whether it's on the pages of a magazine or on the side of a car, and the price is usually determined by a company's audience size.
In affiliate marketing, a company receives a commission when an audience purchases a product or service that the company recommends. If you've ever heard a podcaster encourage you to use a specific offer or code when purchasing the product they're promoting, affiliate marketing is probably part of the podcaster's business model. It will be part of it.
example: Fashion bloggers who sell ads on their podcasts and websites use advertising models. If you post a photo of your outfit for the day with a link and a viewer clicks on that link to “see the look,” you may also earn Affiliate Marketing Hers a commission on that purchase.
12. Razor blade model
Visit your local drugstore to understand the razor blade models. You will find that replacement razor blades can be more expensive than the razor itself.
Companies offer cheaper razors with the understanding that users will continue to purchase more expensive accessories (razor blades in this case) in the future.
In addition to the traditional razor blade model, there is a reverse razor blade model in which a company offers a high-margin product to a customer and then promotes a lower-margin product to accompany that first product. You can also see it being used.
example: This business model is most common for companies that sell physical products. Printers that require a specific type of ink or water pitchers that require a specific type of filter are examples of razor blade models.
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How to design a business model
There is no one-size-fits-all business model. Many companies include elements of several models. For example, a yoga studio that bundles classes may also sell retail merchandise in the lobby.
To design your own business model, start by answering the following questions:
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How do you make money? Outline one or more revenue streams, which are the different ways your company plans to generate revenue.
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What metrics are important? Having a profitable business is great, but it usually doesn't happen right away. You'll want to identify other ways to measure your company's success, such as how much it costs to acquire a customer and how many repeat customers it has.
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Who is your target customer? Your product or service should solve a specific problem for a specific consumer group. Your business model should consider the size of your potential customer base.
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How will your product or service benefit those customers? Your business model must have a clear value proposition, which is what makes it uniquely attractive to customers. Ideally, your value proposition should be so specialized that your competitors can't easily imitate it.
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What does it cost? Make a list of the fixed and variable costs you need to make your business work, and figure out what prices you need to charge for your revenue to outweigh those costs. Keep in mind the costs associated with your company's physical, financial, and intellectual assets.
It may also be helpful to research other businesses similar to yours and see how their operations are structured. This market research may reveal something you want to emulate or a gap in the market your business can fill.
Business models can influence operations, and vice versa. As your business grows, you'll be able to change and adapt your strategy based on what you learn.
» NerdWallet's recommendations for setting up your business finances:
A version of this article originally appeared on JustBusiness, a subsidiary of NerdWallet.
