Starting a business means asking two primary questions: What problems are you solving for your customers? How to choose the right business model that strengthens and multiplies your revenue channels? Only a realistic and executable business framework can translate your marketable ideas into a profitable venture that sustains long-term success. So, let’s look into what goes behind making a business model and which among the many templates best suits your business needs.
What is a Business Model?
A business model refers to a set of approaches and decisions to monetize your business, deliver value to your customers, and improve products or services accordingly. A business model differs from a business plan and is inherently flexible to accommodate changes in your long-term revenue goals.
Types of Business Models and Examples
Knowing how to choose the right business model means discovering the most prevalent ones and analyzing each for its key elements. Here are some of the most common business models:
This is the most widely prevalent business model. It comprises direct interaction with customers who are sold finished products by the last entity in the supply chain—the retailer. Also known as a business-to-customer (B2C) approach, retail businesses offer high-profit margins but come with significant distribution risks.
Walmart is the largest supermarket chain in the U.S. with a retail business model that comprises supercenters, discount stores, neighborhood markets, etc.
Utilizing or procuring raw materials and leveraging internal resources such as labor and technology to produce finished goods is known as a manufacturing business model.
Large-scale assembly line product building falls under manufacturing. The products can range from shoes to cosmetics to cars. Ford General Motors is a strong case in point for this business model.
This model has been around since the early days of the newspaper. The process involves creating content tailored to your consumer base and displaying product ads on content pages.
Google Adsense is a perfect example of an advertising business model.
It is a lucrative business model that thrives on commissions and networks. To put it simply, affiliate marketing involves charging a specific commission in exchange for recommending a product or service.
One such example is the Amazon Associates Program which has become a giant networked space for affiliate marketers to promote any Amazon product of their choice.
This kind of business model is the most favorable to expansion. Franchising a business means licensing your products to another seller on a mutual agreement of acquiring royalty behind every successful sale.
The United Parcel Service (UPS) store franchise system is a highly profitable venture much like McDonald’s.
The world of digital transformation has made this the most prevalent model due to its convenient and cost-effective paradigm. Subscription models ask customers to pay a monthly fee for uninterrupted use of a product or service.
Netflix, Amazon Prime, or any online/offline magazine subscription are a case in point.
Unlike paid subscriptions, freemiums allow customers only a specific aspect of a product for free usage, and one has to upgrade to the premium version to enjoy all the perks. Freemiums offer the freedom of choice to their subscribers, increasing the bandwidth of user experience.
Spotify, for instance, has a user base of 456 million as of 2022, of which 236 million use its free version.
Razor Blade Business Model
Thanks to Gillette, this business model has spread like wildfire. It has two parts—selling a dependent good such as a razor handle at a loss or very low cost, and generating profit from pairing the former with a costly consumable product such as premium razor blades.
Computer part manufacturers, peripherals, and car part manufacturers fall under this category.
Reverse Razor Blade
As the name suggests, this upends the traditional razor blade model by selling the expensive product first and then selling incremental improvements or less expensive products consistently over time. Nowadays, video game companies follow this model where they club freemiums with reverse razor blade models to generate a network of revenues.
Apple products utilize a reverse razor blade business model.
How Many Business Models are There?
In reality, there are as many business models as the number of businesses worldwide. A business plan determines the underlying business model by prioritizing its needs and the requirements of the consumer base. While some business models, such as the manufacturing model, have flourished for hundreds of years, others have cropped up recently in the era of seamless digital connectivity and rapid technological innovation. The freemium model is a very recent business phenomenon.
How to Choose the Most Profitable Business Model
Here are some steps on how to choose the right business model tailored to your needs:
Step 1: Consider the Market Potential and Competition
Understand the current market potential surrounding your brand or product to accurately gauge its stand-out features and USP. This sharpens your ideas on what is currently selling in the domain you want to enter. With steady research on competitors’ progress, one can innovate and keep adding value to the market by choosing the appropriate business model.
Step 2: Consider How Your Customers Buy
Adding value to your market also means aligning unique monetizing strategies with your customer base. Convenience and uninterrupted user experience aren’t the only aspects worth your attention. If you have a high-end customer base and want to boost sales traffic on your website, an advertising business model can be your best asset. If you have a low-paying but populated market, a cheap subscription model might prove more attractive to your customers.
Step 3: Consider Your Customers’ Needs
A well-defined problem is what lies at the heart of any business proposition—a problem that the venture seeks to solve and thus deliver value to customers. A clever business model choice equips you with a flexible roadmap that connects the company’s vision with customer needs and expectations.
Step 4: Experiment with Various Business Models to Find Out What Works
When approaching uncharted markets, grabbing the first hundred consumers, or even the first thousand, marks the first checkpoint of success. If you have a business plan in place, test surveys and launches can be a sound strategy to test the waters. The question of how to choose the right business model depends on experimenting with a network of efficient channels to monetize your business.
Step 5: Think About Multiple Revenue Streams
If you look at the consolidated base of products of successful multinationals such as Apple’s iPod or Microsoft’s Xbox, you will find a mix of strategic pricing choices, smart product development models, etc., all of which are integral parts of your business model. The idea behind multiple revenue streams and combinations of business models is to ultimately create a virtuous cycle that continually boosts the business model.
Step 6: Study the Competition, Their Strengths, and Weaknesses
Regular SWOT (strengths, weaknesses, opportunities, threats) analyses of competitors will inform your product development choices and asset utilization strategies. Some markets will be difficult to monetize without incredible field intelligence and knowledge about where your competitors are targeting their resources. Often, patterns are found by keeping track of competitors’ talent pools, any interdepartmental exodus, or people leaving the company.
How to Carry Out a Business Model Analysis
In a landscape of innovation, business model designers ask the following questions to determine the correct course of action:
- What are the different revenue sources of the company, both potential and current?
- How much value does the business deliver to its clients?
- What is the cost to ensure value to the customer base?
- Are the key activities and resources providing this value? Are they as important as perceived? Are there any new additions to the list of activities and resources?
- How does any change in the prevalent business model affect each of its elements?
These questions will help you learn how to choose the right business model by understanding the relationship between all the stages of a model, its important elements, and their respective implications.
Acquiring strong business acumen is the primary step to forging a successful model that influences and penetrates all the aspects of your domain. Stay updated on how to choose the right business model and optimize business potential with Emeritus’ business management courses. Find a course that meets your objectives and set down a successful career path!
By Bishwadeep Mitra
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