Whether you’re looking to start a new business or grow an existing one, having a business model is crucial.
It lets you streamline every aspect of your business, including your offers, staffing, marketing, sales, etc. For established businesses, it lets you keep up with the trends that will earn more investment and develop a strategic employment system.
In this blog post, we’ll discuss major business models that can be just the magic your business needs to succeed.
What is a Business Model?
A business model can be defined as an outline of how your business generates revenue and stays profitable. It describes the roadmap you will take at the beginning of your journey and outlines how you will reach your goal.
- Your target market
- Your distribution channels
- Your promotion or marketing strategies
- Your pricing and revenue model
Here are the primary types of business models:
- Product-based (also known as direct): The company sells directly to customers without any intermediaries.
- Service-based (also known as indirect): The company provides a service to customers and then charges them for the service.
- Market-based (also known as networked): The company creates value for customers by providing access to markets and/or information.
7 Types of Business Models for a Small Business
Different models can apply to each business depending on the revenue streams, the type of customers, and how this target segment is served.
Of all the models out there, the specific tried-and-tested ones you can consider are:
Also known as the Business-to-Customer (B2C) model, the manufacturer model is ideal for businesses that turn raw materials into actual products or services their customers can use.
Companies can also assemble or sell their products to other manufacturers, as long as it’s a finished good for the buyer.
Example: Apple, Samsung, Ford, Audi
In a distributor or marketplace model, you act as the go-to between sellers and buyers. The manufacturer or seller will use you or your platform to sell their products or services, enabling you to get a share of the profit.
Example: Amazon, eBay, Flipkart, Walmart
A franchise business model is where the franchisee owns the business or creates a blueprint that they can use to build their own business and leverage the brand name to boost sales.
Franchise businesses use the same products, logistics, processes, and products, acting as an extended branch of the main company.
Example: McDonalds, 7-Eleven, Pizza Hut, Subway
Applicable to brick-and-mortar and online businesses, the subscription model is one where customers can pay a fee weekly, monthly or annually to continue using a product or service.
The principle is to distribute one-time payments into recurring easy-to-pay and light-on-the-pocket subscriptions, so customers don’t feel a big pinch in their wallets.
Example: Netflix, Amazon Prime Membership, Hello Fresh
An on-demand model is where customers may have a need from businesses at any time and can request to obtain a product or service at any time.
This model is similar to a marketplace but requires a robust framework and quick turnaround time.
Example: Uber, Netflix, Muvi, Grab, Zomato
The freemium model is one of the aptest models for software or SaaS companies, as they can give out a free or yet-to-be-tested version of their product to end-users to test out and use.
The freemium model allows customers to understand your product and its benefits before they move to another model (ideally subscription) and pay to get the premium features.
Freemium is also a great acquisition tool for businesses, no matter how old their product is.
Example: LinkedIn, Dropbox, Zoom, Hulu
Razor Blades Model
As the name suggests, a razor blade model is based on the model used by companies selling razors. You start by selling a key product or service, which will need replacements from time to time to be used efficiently.
Thus, businesses can sell a product to make a one-time profit while continuing to make money using the razor blades model for a continuous revenue stream.
Example: Gillette, HP, Fitbit
How to Design a Business Model for a Small Business
Which model is the right one for your business? A business includes several elements, and the same model that can apply to a retail business may not be the right fit for a SaaS startup.
To design the business model that best fits your needs, here are a few questions you need to as yourself:
What are the key metrics for your business?
While generating profits is a critical business metric, it doesn’t happen overnight.
It would be best to focus on realistic and actionable metrics to help define the success of your business, such as customer lifetime value, customer acquisition cost, profit per sale, conversion rate, etc.
Who is your target customer?
Who does your product or service ideally target such as their age and location? What are their problems and interests?
Knowing the answers to these questions is essential to creating a business model that is apt for the particular industry, segment, or user base you are focusing on.
How does your product or service benefit the customer?
Your business model has to have a clear value proposition, which is why it’s imperative to know exactly what challenges your customers are facing and how your company or its products/services can solve these issues.
This will make you attractive to your customers and help you create a business model that’s hard for your competitors to replicate.
How does your business make money?
Outline how you can make money by selling your customer the solution to their challenges.
Identify streams such as one-time payment for the product, recurring subscription model, add-on options, and other ways to generate income.
What expenses will you incur, and what’s the best method for your customers to pay this amount?
Make sure you factor in the variable costs for your businesses to keep running and make a profit. This includes not just the current prices but also future costs.
For example, you should see if your team is expanding to double its size to help cater to your business needs or build upon the existing product to give your customers more features.
Build Your Business on a Powerful Model
There’s no one-size-fits-all answer to choosing the right business model for your small business. However, the models discussed in this blog post have been proven effective in helping businesses get off the ground and grow.
If you’re feeling stuck, take a look at these options and see which could work best for your company. With a little hard work and dedication, you can make your small business idea into reality.
With the right fit, you’ll be on your way to achieving your goals in no time!