You are here because you want to launch a business. You might have a clue as to what kind of business you want to run, but you’re not entirely sure. If you’re totally new to all this, you might even be wondering, what’s a business model?
That’s perfectly normal. The birth of a business involves tons of excitement and uncertainty – it can’t be helped. That said, to maximize the chances that you’ll succeed, there are some things you need to be sure of before you start.
- You need to identify the problem that you’ll solve for your customers
- Find a market where your customers will actually pay for what you’re giving them
- Create or choose a business model that makes your business money.
Throughout this post, we’ll focus on that third point – finding a business model that fits your market and makes you profit. You’re going to learn what a business model is, what it isn’t, and the most common business models available. You’ll also learn to choose a model that suits your business.
What is a business model?
At its simplest, a business model is a strategy that you use to make money. It’s how you deliver value to your customers, through services or products, for a specific amount of cash. A business model is crucial for any startup because it will help you understand your long term value.
You do need to remember, though, that your business value isn’t set in stone. Take it as a means to try out different ways to make your business profitable, think of it as something like a revenue model.
Take Facebook, for example. They started out with a completely free platform. Once the audience got big enough, they monetized through advertisements. And that’s just one of the options they could have chosen. Others would have added a monthly subscription, or sold products and services.
Many times, the business model you’ll adopt will depend on your market and what they are willing to pay for. Likely, your final business model will not resemble what you started with. Amazon is a perfect example here. Today, Amazon AWS is one of the corporation’s most significant sources of revenue through the provision of scalable cloud infrastructure services. But at the time of its creation, it was meant to serve an entirely different purpose.
Remember: your business model is not a business plan. A business model is your blueprint to generating revenue. A business plan, on the other hand, is an in-depth document that states your future and how you intend to reach it. If all this is starting to feel a little overwhelming, there’s no need to worry. After you choose a model, you can customize and flesh it out via business model canvases and templates.
Popular business models
There are lots of models out there. Most times, companies will pick out a general strategy, then refine it to suit their purposes. The route you’ll take depends on your industry, but even more so, it will depend on what your customers are ready to pay for.
Here’s a list of the most popular business models.
- Affiliate marketing
- The Freemium model
- The Razorblade model
- The Reverse Razor Blade model
- The Agency model
This model has been around for quite a while. Although print media used to be the most prominent advertising platform, nowadays, the industry has mostly shifted to online and mixed-media formats. The approach is simple. You create content that people will want to consume and use display advertisements to generate revenue. You’re not charging your visitors or readers but profiting by charging relevant parties for advertising space.
If you’re running a website, there are several kinds of advertising networks that would be willing to pay for your ad space. In this kind of model, you’re usually paid by clicks or views.
The affiliate model has gained enormous popularity in recent times and is lucrative, mainly when it’s used online. With affiliate marketing, you’ll be recommending products or services in exchange for a commission. A widely known example is the Amazon Associates program. Once you’ve joined the network, you can recommend amazon products relevant to your niche or audience and get paid for it.
Besides Amazon, there are many other affiliate marketing platforms you could join based on your audience and niche. There also an overwhelming number of successful case studies, so you’ll have several real-world examples for reference.
This model is commonly used by businesses that aren’t based online, and it’s highly useful for expansion. Nearly all the single 7-eleven, McDonald’s, and other fast-food restaurant chains are franchises. Over 90% of McDonald’s stores are franchised.
The franchisor will license most aspects of its business to a franchisee, which then sells the franchisor’s services or products for a commission. Sometimes, the franchisor will also get part of the revenues.
The freemium model is another that you’ve probably come across many times. This is where you give away part of your service or product for free, then charge for advanced or additional features.
There’s one thing to note though: with this model, you could find yourself with a large group of users who never switch to the premium and advanced versions. There are countless examples, particularly in the software industry. Evernote is a great example. This productivity app has a free version that will satisfy most user’s needs, while the business and premium plans offer advanced features.
The Razorblade business model
The razor blade model is named after the product that invented it. I’m sure you know what it is already
This business model offers a specific aspect of your product at a low cost – almost giving it away, actually – to sell large numbers of a particular component required for the product function. As you may have guessed, the most prominent example of this is disposable razors. The razor handle is offered free of charge, and the manufacture profits through the high volume of blades purchased over the product’s lifetime.
Another obvious example is the printer. You’ll buy it once but keep purchasing replacement cartridges.
The Reverse razor blade model
This approach flips the razor blade model on its head. Instead of starting with a barely profitable product, you sell one that offers a high margin right away, then sell low-margin products later. You’ll essentially create a product ecosystem. For instance, consider the apple ecosystem of products, once you purchase a MacBook, there’s a good chance you’ll buy apps from the AppStore, music, probably an iPhone as well. This model encourages single and repetitive high-end purchases and is followed by several smaller long-term investments.
The subscription model started back when magazines and newspapers were still popular. No doubt, there probably lots of products you still have subscriptions for. The process is quite simple. Clients pay a monthly fee to use your products or services. It is most common with Software as a Service and content-driven enterprises. Netflix is the most obvious example here. After you pay a monthly subscription, you’re granted access to the site’s streaming library.
The agency model makes revenue by gathering quality leads and using them for marketing campaigns and services. This model has thrived for more than two centuries – the first advertising agency was founded in 1786! The modern agency is obviously very different from the companies that existed at that time, but the process and objectives haven’t changed. Here’s an example; companies like OptiBrave, Sadja Web Solutions, and Kawande Digital offer web design and digital marketing services through their websites. We also run a blog that generates useful leads for our marketing campaigns.
Although this model lacks the scalability of subscription software and product sales, it can create some impressive revenue.
Ecommerce is the fastest growing sector in the retail industry. For most people, electronic commerce brings to mind the grandeur and sheer scale of amazon’s online sales platform. Often, this makes the strategy seem intimidating and unattainable. But with the right design team, a successful e-commerce store is only a call or click away.
There are numerous success stories to prove e-commerce is worth a try: Dollar Shave Club brought the age-old razor business to the modern world through its online platform. They sell individual products along with subscription packages and also offer door-to-door delivery. There’s also Minaal. The company owes its continued success to a highly successful e-commerce site that sells backpacks and other travel gadgets aimed at full-time travellers and digital nomads.
How to choose a business model that works for you
As you may have noticed, there are a lot of different choices you could make for a business model. This section is going to help you find one that will suit your new venture.
Your preferred model should match your customers’ needs and expectations.
For instance, if you’d like to use the subscription model, then it would be a disservice to subject your customers to annoying ads. It won’t work. Although it’s possible to integrate several models, above all things, they must not diminish the customer experience.
How do the customers pay?
Some markets are hard to monetize. If you run a content-driven website that draws massive amounts of traffic but doesn’t convert those figures into sales, then an advertising model is probably your best choice.
Does your target market make frequent high-end purchases? Or are they more likely to go for a recurring subscription or low-end product? These questions will help you choose an appropriate model.
Evaluate market potential and competition
Do some research to find out how other players in your industry are generating their revenue? If they’ve been running for a while, they’ve probably found a model that works. Regardless, there’s always room for innovation and market disruption. Don’t confine yourself to what’s been done before.
Consider multiple revenue streams
Most successful enterprises are built on numerous revenue streams. Also, the early days of your business are all about trying new things – it’s the best time for experimentation. Most of the business model examples given above can be integrated to draw more revenue for your enterprise.
As you may have gathered from this article, there are business models that have stood the test of time and delivered success for hundreds of years. Some are much younger, but they’re growing rapidly and will soon dominate the market place. None of them is perfect, but there’s at least one that will suit your business. Let your customers and market define how you’ll get revenue, and the right business model will come to you.