At the core of every business and successful startup, there needs to be a solid and rewarding business model. This article discusses the definition and types of business model and how to know which model is right for you.
Choosing the right business model, while drafting your business plan, is one of the major steps in your business building process and it is the framework which will guide you and largely influence all your marketing and advertising efforts, as well as ultimately determine if your business fails or succeeds.
Definition of a Business Model
A business model in its simplest definition is about how you intend to add value or generate profit from your business. How does the business make money? The business model refers to your business’ processes, operations, how it acquires customers and how it intends to achieve its business goals.
Types of business models
There are numerous types of business model and more have even cropped up at the advent of the digital age. This article is only going to discuss a few of the well-known ones.
- The middleman model: This is where a business deals directly with traditional distribution channels and middlemen such as distributors, wholesalers, brokers or agents, without having any direct dealings with customers.
- The subscription model: The subscription business model lets you charge your customers a subscription fee to gain access to a service. You keep customers over a long-term contract and get recurring revenues from them on a monthly/ yearly basis through repeat purchases. Examples – magazine subscription, Netflix, Cable channel subscription businesses.
- The Brick-and-mortar model: is a traditional business model where the sellers deal with customers face-to-face in an office, a shop, or a store that the business owns or rents.
- Customize everything model: This is when you make your product or service unique, personalized to each customer, making them feel special and valuable.
- Sponsorship model: Sponsorship is essentially when a brand/company supports an event or program by its resources. For example, a media sponsor can give free advertising slot on its radio station to support an event or a brand can support a popular sports team by putting their logos on the jerseys. Sponsorship are often sold on the audience/attendee size, getting noticed by as many people as possible.
- Franchise model: Franchising is the practice of leveraging a popular brand’s success story and working business model. For the brand (franchisor), the franchise is a cost-effective marketing strategy for expansion, and preferable alternative to the huge investment and liability of building and running physical stores all over. In this model, a franchisor licenses its knowledge, procedures, system, intellectual property, use of its business model, brand, and the rights to sell its branded products and services to a franchisee. In return the franchisee pays certain fees and agrees to comply with certain obligations, typically set out in a Franchise Agreement. The popular, Mr Biggs, Nigeria’s fast food restaurant owned by United Africa Company of Nigeria PLC is an example of a business that uses this model.
- Reseller model: This model is about buying an already sold and maybe used goods and selling it at a profit.
- Leasing model: This is when an equipment, machinery, cars or building is rented out, rather than sold.
- Pre-order model: This is when you order for the goods or services before its available to the market. Popular phone manufacturing companies like Apple and Samsung use this model.
- Freemium: This is a common business model, especially with online/digital companies. These businesses offer basic services to customers for free while charging a premium for additional and special services. Generally, the basic service comes with certain restrictions, or limitations, such as in-app advertisements, storage restrictions, less capabilities etc., which the premium plans do not have. For example, the basic version of Dropbox comes with limited storage. If you want to increase that limit, you will have to pay a fee. Some online image/stock photo sites allow you to use only a restricted number of images in the free basic plan while an unlimited number of images in the paid plan.
- Monopoly model: The monopoly model is a market structure characterized by a single seller, selling a unique product in the market. In a monopoly market, the seller faces no competition, as he is the sole seller of goods with no close substitute.
- White labelling: A white label product is a product or service produced by one company that other companies can re-brand to make it appear as if they had made it. This model is often used for mass-produced generic products such as electronics, consumer products, software packages, televisions etc.
- Disintermediation: Here, in this model, you cut out completely traditional distribution channels and middlemen (such as distributors, wholesalers, brokers, or agents) and sell directly to your customers.
- Pay-Per-Use: Here, in this model, your customers pay for only what they use. An example of this is an Electric power company.
This is not an exhaustive list. There are still several more business models not discussed.
How do you determine which business model is right for you?
These are a list of questions you need to ask yourself to determine the right business model for you. These questions can come in any particular order.
- Determine your target market. Who are your customers? Do they want what you are selling? You need to narrowly define your target customers. What are their characteristics and qualities and how can you best reach them?
- Competition. What are your competitors doing? Which business models have they adopted?
- Revenue stream. Your need to be able to determine your business’ core way of making money and additional ways of adding value.
- Value proposition. Does your business add value? What value are you delivering to your customer? And why would they chose you over the competition?
- Distribution channels. What channels are you using to reach the desired customer segment? E-commerce sites, retail shops, sales representatives, distributors etc.
- Customer needs. What are the customers willing to pay and for what value? How would they prefer to pay? How are they currently paying? How does each stream add up to the total revenue?
- Strategic partnerships. What strategic relationships are you fostering for your business? Many business models hinge on building strategic partnerships with other businesses that have products or services or competencies that are central to your model. For instance, software development companies do partner with phone and computer manufacturing companies to build their business.
Now, you have all the information necessary for developing a winning business model. Your business model is as important as your product, if not more. A business model is not only the foundation that carries everything your business stands for but it also lets you compare yourself with your competition and identify underlying market trends. Hence it needs careful consideration from your side to develop one.
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