Business Model

What is a Business Model?

The term business model refers to a plan made by the company for making profit. It identifies the products or services the company plans to sell, also its targeted market and anticipated expenses.  It is an outline for how the company plans to generate profit. It explains four basic things which includes

• Product or services of the company
• Marketing Intentions of the company
• What kind of expenses the company will face
• Profit expectation of the company

Types of Business Models

The most common Business Models Type are explained below

1. Retailer Model

The first type of Business Model is Retailer Model. A retailer is the last and main person in business.  He is the last entity of the supply chain.  They often buy finished goods from manufacturers or distributors and interface directly with customers.                  

2. Manufacturer Model

The Second business model type is Manufacturer Model. A manufacturer is responsible for sourcing raw materials and producing finished goods with the help of internal labour, machinery and equipment.  They sell those products to distributors, retailers, or directly to consumers.

3. Fee For service Model

The Third business model type is Fee for Service Model. In a fee for service model, the business charges a set fee for a specific services provided by them. A business set up on this model can increase its earnings by doing work for additional customers or by increasing its price rates. It depends on the business model and it might charge an hourly rate, or monthly commission. It may also create fee schedule with a set rate for different types of services.

4. Subscription Model

The fourth type of business model is Subscription Model. A subscription model is followed by brick and mortar stores and e-commerce business. Essentially the customer makes a recurring payment for ongoing access to a services.  A company here can charge a subscription fee for its products and services delivered.

5. Bundling Model

The fifth business model type is Bundling Model. The Bundling Business Model involves companies selling two or more products together. It is sold as a single unit often a price lower than what actually they charge selling the products separately. This type of business model helps companies to generate a greater volume of sales of market services or products that are more often difficult to sell.  Bundling capitalizes on existing customers.

6. Product as well as Service Model

The sixth type of business model is product and service model. Product as a service business charge their customers to use their products. Companies may charge a subscription fee as per use.

7. Leasing Model

The seventh type of Business Model is Leasing Model. Under a leasing businesss model, the company buys a product from the seller and then allow the other company to use the product they purchased for a recurring fee. Leasing business are done for longer period days or weeks. In leasing business subscriptions are not charged.

8. Franchise Model

The eight business model type is Franchise Model. Franchise Model is an established business blueprint that a franchisee purchases.  The franchiser that is the owner of the company helps to finance the franchisee.  In return the franchisee ensures that the business functions smoothly. In return the franchisee pays a percentage of profits to the franchiser.

9. Distribution Model

The ninth business model type is Distribution Model. A distributor is responsible for ensuring that manufactured goods reaches the market. To make a profit, distributors buy the product in bulk and then sell it to retailers at a higher price. A chain of beauty salons that buys supplies in bulk and sells some of them to other salons.

10. Freemium Model

The tenth business model type is Freemium Model. In  a freemium Model the customers use some parts of the products or services for free. But for advanced access the customer needs to pay. This model is observed in software or applications.  News and Internet publishing companies use this freemium model or special content features.

11. Advertising or affiliate marketing model

The eleventh Business model type is Advertising or Affiliate Marketing Model. Business use Advertising to grab attention of the customers. Advertiser pay for magazines or TV ads or for posters to be stuck on the side of any vehicle. Through this business sell their products to their customers and earn commission. The best example is the podcaster encouraging to use specific codes when you buy a product they are promoting.

12. Razor blades model

The twelfth business model type is Razor Blade Model. In razor blades model there are two products which are affiliated with each other. The price of one product is less than the other. This marketing strategy helps business generate profit by locking the customer for a longer period. When razors are purchased razor handles are typically received free whereas the blades cost is high and expensive.  Another example would be video game industry where the device price is less than price of the games. Through this strategy consumers buy the product thinking that it is a one time expense and can be used for longer time.

Example of Business Model

Business Model example are companies like Uber, Airbnb, Amazon, YouTube, and Facebook. They use Freemium Business Model to promote their business where in they provide both free and paid services.  Companies that use Subscription Business Model include Netflix, Spotify, Adobe, and Peloton.  Companies like Gillete use Razor blades model, whereas companies like McDonalds, Subway, and Monginis use franchise model.

Importance of Business Model

The main purpose of Business Model is to assist the company in developing a plan which will establish and validate critical points of line in the business. This includes activities such as resources, customer relationships, revenue and expenses.

Business Models are important because it helps because

1. The target market is clear

Business Model guides you through the process for determining value preposition and will make you understand how your product can satisfy the customer. The clear and simple business model helps to determine target which will prioritize.

2. The product created is fixed

By following a precise model, there is a lot of clarity in the business model and creating products. The system becomes transparent.

3. Preparing a strategy becomes easier

The business model helps to determine the business strategy automatically. The system does not attract consumers but it teaches how to significantly develop close relationships with producers.

4. Anticipating Competition

Without a business model, the companies will find difficult to find a business position in the market.  Due to this the company faces competition. With proper business plans , companies can make strategies for acquiring resources and selling best products to the consumers.  So it is very important to determine the right business model.

How to Create Business Model

1. Define the problem You are going to Solve

Every business is set up with the thought to solve a problem. So first the companies should understand the problem which it is aiming to solve. The problem can be emotional or functional the business model will depend on the type of problem. The companies must limit the choice up to three key problems your product or service will solve.

2. Define the customers for which the problem will be solved

This basically means who are the target audience.  Define a set of three types of customers whose problems are to be solved through your business model.  Ideally each problem has to be matched with the customer type. At the same time customers might face multiple problems. Or all customers might face a single problem. So according to the customer needs and their problems companies must design a business module.

3. Define the Key customers and the Key Problem

Now that you have choose three customers and three problems, the companies now have to decide which customer problem is on the top. A business model may evolve in many different ways and narrowing down the course of action will give much better results.  Thus at the end of this step the company will have one key customer or alternatively one key problem to focus on.

4. Define a Set of Possible Solutions

The next step should be to list down possible solutions for the problem. There can be ten or more solution to the problem. From these ten solutions narrow down to three which can be implemented  with ease. And lastly among these three pick one which suits the best.

5. Define a Set of Possible Monetization Strategies for that Solution

Once you pick up the best solution for the problem and the customers , the product and service which you want to provide will be clear.  For that product or service define maximum monetization strategies. Monetization strategy is a plan that aims to generate revenue through the products, audience, content or other sources. And out of the list choose two monetization strategy that can be put to test.

6. Test and Choose

Then test and choose the best monetization strategy among the two.

7. Business Model is Ready

Based on the key customer, key problem, key solution, key product and the best monetization strategy the business model is ready. The most valuable asset that an organisation has is its business model.

Evaluating Successful Business Model

The company’s business Model describes how the business uses its resources to provide products and services to its current customers while the company operations to serve future customer needs as well.  A model describes the types of customers, the ways customers use products or services.  The business model also defines operational tasks, resource requirements, and how revenue and profit are generated.

Evaluating Business Model includes following steps

1. Traditional Business Model where the customers purchase goods and services from the stores. This bricks and mortar model has evolved to include companies who maintain online website where customers purchase online from the local stores. In the subscription model allows companies to provide or service on an ongoing basis.
2. Using multilevel marketing model distributors buy products from the parent company. These distributors in a way create a network of distributors below them to sell the products to consumers earning a profit from their own sales and anyone below them.
3. The companies can examine Industry reports of leading companies in the same industry. Companies can calculate gross profit margin to evaluate and compare companies from industry reports and obtain sales and cost data about companies from industry reports or the company websites. Subtract the cost of goods sold from the revenues and determine the gross profit. Then Divide the gross profit by total revenues to obtain the value of gross profit margin.
4. Compare Gross Profit Margin results for different companies. A low profit margin indicates a less profitable company so it is better to choose a business Model that best suits your strategic goals.
5. Revise the company business Model based on Customer expectations. The model you choose to implement today may be ineffective tomorrow. The company’s must be prepared to adjust the market demands and economic conditions.

Advantages of Business Model

• A good business Model gives the company a competitive edge.
• Good Business Model provides good reputation in the market place encouraging the investors.
• Making the business Model strong leads to an ongoing business profit which increases cash reserves
• Proven business Model brings financial stability.

Disadvantages of Business Model

• Once a business model is created then it restricts to implement new ideas.
• Creating a business model is time consuming as lot of factors are involved
• Business Models are sometimes inaccurate.

Conclusion

It can be said that a good business Model is the one that provides a good competitive edge in the industry which leads to good business profits. Business Model is important because it provides the investors the knowledge about the competitive edge of the company and provides better insights. A strong business model leads to cash generation and future expansion. Business Model includes information about the company’s products its target market and its future prospect related to its business type. So understanding the business model helps the investors to have a better sense of financial data.