What is a business model?
At the core of your business model is a description of how your business operates for money. It's an explanation of how you provide value to your customers at an appropriate cost.
According to Joan Magretta in the program 'Why Business Models Matter', the term business model is widely used with the advent of personal computers and spreadsheets.
These tools allow entrepreneurs to experiment and model in different ways that they can structure their costs and revenue streams. Spreadsheets allow entrepreneurs to make quick, hypothetical changes to their business models, and instantly see how the change can affect their business now and in the future.
In their simplest forms, business models can be divided into three parts:
1. Everything necessary to make a product such as: design, raw materials, production, labor, etc.
2. Everything it takes to sell that product: marketing, distribution, service delivery, and handling of sales.
3. Customer payment method: Price strategy, payment method, payment time.
As you can see a business model is simply a poll of how much your costs and expenses can be charged for your products and services.
A successful business model is the fact that you make more money from customers than you cost to create products. This is your profit.
New business models can be refined and improved at any of these three components. Perhaps you can reduce costs in the design and production process. Or, perhaps you can find more effective marketing and sales methods. Or you can find an innovative way for customers to pay more conveniently and quickly.
Remember, though, that you don't need to come up with a new business model to have an effective strategy. Instead, you can take an existing business model and offer it to different customers. For example, restaurants mostly operate under a standard business model but focus their strategy by targeting different types of customers.
Why is the business model important?
The business model serves as a detailed plan of the business and a roadmap for success (or failure) as it explains how the business creates and captures value through its decisions and processes.
A business model is a more efficient way to compete because it is difficult for competitors to copy a business model but it is relatively easy to copy a product or service.
If you are starting a new business and want to immediately attract customers then you need to have the most competitive business model.
Likewise, if you've managed a business but need to grow, then an effective way to kick-start your idea is to focus on innovation of your business model.
In this article, I'm going to show you what a business model is and how to create a business model. This simple guide will help you master the art and science of designing your own business model.
This is why the business model has become so popular. The business model helps you to come up with business ideas and think deeply, explore different options and then choose the best solution.
What is the best solution? Ideally, we want a business with unique features – an unfair advantage – that others can't easily replicate. Later in this article, we'll look at why some business models are more successful than others.
Let's dive deeper into what a business model is and why it matters.
17 types of effective business models
Below is a low-cost and low-cost and very low-cost business model suitable for young people looking to start a business. 17 business models have been tested and proven effective.
The business model through advertising has been around for a long time and has become more and more sophisticated when it comes to moving from printing on paper to online forms. The model's fundamentals revolve around creating content that users want to read or view and then showing ads to your audience.
In your ad business model, you must meet two groups of customers: your readers or viewers and advertisers. Your readers may or may not be able to pay you, but your advertisers certainly do.
An advertising business model is sometimes combined with a community service model where you get your content for free from users instead of paying content creators to develop content.
Affiliate business models are related to the advertising business model but there are some specific differences. Most often online, the affiliate model uses links embedded in content instead of visual ads that are easily recognized.
Assuming you're running a book review website, you can embed links to Amazon in your reviews that allow people to buy books you're reviewing. Amazon will pay you a small commission for each sale you recommend to them.
Brokerage businesses connect buyers and sellers and help create a transaction. They charge per transaction to buyers or sellers and sometimes both.
One of the most popular brokerage businesses is a real estate company, but there are many other types of brokers such as freight brokers and brokers that help construction companies find land buyers.
4. Customer support staff or craft according to the customer's own needs
Some businesses take products or services that now add to some special factors and make this purchase unique to a particular customer.
For example, check out some tour agents that only make experience trips for wealthy customers. Or some famous brands that only make some samples for a certain individual or limited editions that you have money can hardly own.
5. Use the crowd
If you can gather a large number of people to contribute content to your website, you can provide community service. Crowd business models are often combined with advertising models to generate revenue, but there are many other iterations of the model. Threadless, for example, allows designers to submit T-shirt designs and gives designers a percentage of sales.
Companies that are trying to solve difficult problems often make their problems public for anyone to try and solve. Successful solutions receive rewards and the company can then grow their business. The key to a successful crowd service business is to provide the right rewards to entice crowds on social media while allowing you to build a viable business.
6. Delete the intermediate distribution process
If you want to do and sell something in stores, you usually work through a variety of middle people to bring your products from the factory to the shelves of the store.
Deleting the intermediary delivery process is when you ignore everyone in the supply chain and sell directly to consumers, allowing you the ability to reduce costs for customers and also have a direct relationship with them.
7. Product Segmention
Instead of selling an entire product, you can sell only part of it with a decentralized business model.
Franchism is popular in the restaurant industry, but you will also find it in all other service industries in the world.
In the franchise business model, you are selling formulas to start and run a successful business for others. You also often sell access to a national brand and support services that help new franchise owners get up and down.
9. Paid Sale (Freemium)
With a semi-paid business model, you can give away part of your product or service for free and charge for other premium features or services
Freemium models allow unlimited use of basic features for free and only charge customers who want access to more advanced functionality.
Rentals may seem similar to product segments, but they are actually very different. Rentals are most commonly used for high-priced products, where customers may not be able to afford to buy fully but can instead afford to rent products for a while.
11. Low touch
The Low touch business model offers fewer services, the best example of this model is low-cost airlines and household items such as IKEA
companies lower prices by offering fewer services. Some of the best examples of this type of business model are low-cost airlines and furniture sellers such as IKEA. In both of these cases, the low touch business model means that customers need to purchase additional services or do some things themselves to reduce costs.
Marketplace allows sellers to list items for sale and provides customers with easy tools to connect with sellers.
Marketplace business models can generate revenue from a variety of sources, including fees for buyers or sellers for successful transactions, additional services to help advertise seller products, and insurance for buyer peace of mind. The market model has been used for both products and services.
13. How much to pay
Instead of pre-purchasing a certain quantity, such as electricity or cellular charges, customers will be charged an actual usage fee at the end of the billing period. The pay model is the most popular among home gadgets, today some other services such as printer ink are also applied.
14. Razor blade
The razor blade business model named after the product mainly invented the model: selling a durable product below the price to increase sales of a disposable product.
This is why razor blade companies have practically dropped the razor handle, assuming that you will continue to buy a large volume of blades for long periods of time. The goal is to engage a customer in one system, ensuring that there are more, continuous purchases over time.
15. Reverse razor blade
Turning over the razor blade model, you can offer a highly profitable product and drive sales of a low-profit companion product.
Similar to the razor blade model, customers often choose to join a product ecosystem. But, unlike the razor blade model, buying the original product is very expensive, where a company makes most of its money. Add-ons are only there to keep customers from using the original expensive product.
16. Reverse Auction
A reverse auction business model upsets auctions and has sellers giving their lowest prices to buyers. The buyer then has the option to choose the lowest price.
You may see reverse auctions in action when contractors bid to work on a construction project. You also see a reverse auction whenever you buy a mortgage or other type of loan.
Subscription business models are becoming increasingly popular. In this business model, consumers are charged a subscription fee to have access to a service. While magazine and newspaper subscriptions have been there for a long time, this model has now spread to software and online services and even appeared in the service industries.