To understand a business better, you first need to familiarise yourself with its business model. Every organisation has a unique business model, yet they all follow the same core principle. That is how a business creates and delivers value to its end customers. A business model encompasses all sorts of internal and external processes involved in the development of a product/service and its delivery to the end consumer. Ultimately, generating revenue.
Here’s a brief guide on everything you need to know about a business model.
What Is a Business Model?
A business model can be defined as a structural and strategic framework that lays the groundwork for revenue generation and value creation in the market. It highlights all of the products or services a business offers, along with their target audience, cost structures, revenue streams, and processes involved.
The basic purpose of a business model is to define;
value proposition.
The benefit offered to the customers through a product or service that adds value to their life, eases processes and/or solves a problem.
targeted consumer markets.
The group or type of people the business is targeting for selling its services or goods for maximum revenue generation. Therefore, designing and marketing accordingly.
revenue streams.
It defines how the business earns money, i.e. whether there’s a sale, a subscription fee, a rental income, and/or anything else.
Cost structures.
All of the expenses involved in keeping the business up and running come under this category.
Channels.
The platform’s business uses to deliver its products or services to the customers.
Key activities and operations.
The essential resources and administration required to run the business.
Customer relationships.
Attracting new customers, retaining previous ones and exploring new markets.
Types of Business Models.
There are numerous types of business models, each having its unique set of characteristics, but serving the same purpose. Prominently including the product-based model and the service-based model. The former one deals with a physical product, while the latter primarily includes services to both the B2B and B2C markets. These models are then further divided into;
Sale-based model.
Sales-based models usually charge a one-time upfront payment from the customer for complete features and capabilities of the service or product. For example, supermarkets, retail stores, etc.
Subscription model.
In the subscription-based model, you charge an hourly, daily, weekly, monthly or yearly recurring fee from the client in return for the services/products offered to them. For example, Netflix, Spotify, etc.
Freemium model.
The freemium model allows access to basic features of a product/service free of cost, while the advanced benefits come with a fee. For example, LinkedIn, Zoom, etc.
Marketplace model.
The marketplace model connects buyers and sellers on a single platform and generates revenue by charging a fee/commission from either or both sides. For example, Airbnb, Amazon, etc.
Affiliate model.
Businesses earn money in the Affiliate model by promoting other businesses’ products or services. For example, bloggers, influencers, etc.
Franchise model.
A business allows others to operate under their name and exact services or products in exchange for a royalty. For example, KFC, McDonald’s, etc.
On-demand model.
This type of business model offers services to customers on demand only. For example, Uber, food delivery, etc.
Hybrid model.
In a hybrid model, a business uses different combinations of these models to generate revenue. For example, a company using subscription + freemium models along with upselling strategies.
How Business Models Work?
All of the business models have the same basic work purpose. That is to create value for the customers by solving a problem, bringing a market gap and/or improving efficiency. In addition to it, business models also help to optimize costs and productivity for an organization.
These business models work step by step:
- Identify a market gap (create value).
- Deliver the product or service to fulfil that gap and deliver it to the end user (deliver value).
- Generate revenue by charging a fee or an upfront payment for the service/product offered (capture value).
An ideal business model not only streamlines the company’s processes for maximum revenue generation but also;
- Finds scalability potential.
- Identifies opportunities to penetrate into new markets.
- Adapts the business to ever-changing industry trends.
Examples.
Some of the popular examples of business models in today’s world are;
- Apple (Product + Ecosystem Model).
- Dropbox (Freemium Model).
- Amazon (Marketplace + Retail Model).
- Netflix (Subscription Model).
- McDonald’s (Franchise Model).
- Uber (On-Demand + Marketplace Model).
Frequently Asked Questions
Why is a business model important?
A business model is very important because it lays the foundation of how a company operates and grows. It is essential for:
- Getting Clarity and Direction in your business goals.
- Generate revenue consistently.
- Take Investors into Confidence.
- Get Competitive Advantage in the market.
- Implement Scalability.
- Simplify and strengthen Decision-Making.