A business model is defined as a company’s plan on how it will generate revenue and make a profit. It is a plan that tells the products or services the business hope to manufacture and market, and how it plans to do so, including what expenses it will incur.
It lays out a step-by-step plan of action for successfully operating the business in a specific marketplace. To understand what a business model is and to create a good one, you need to know the value proposition of the business.
What is a Value Proposition?
A value proposition is a straightforward statement of what a company offers in the form of goods or services, that is of value to potential customers or clients that differentiates the company from its competitors. Your business model would also include projected startup costs and sources of financing, the target customer base of the business, marketing strategy, competition, and projections of revenues and expenses.
Note that one of the most common mistakes leading to the downfall of business start-ups is the inability to project the necessary expenses to fund the business to the point of profitability, i.e., the point in time when revenue exceed expenses.
13 Types of Business Model With Example of Companies Using Them
Indeed there are various types of business models. Direct sales, franchising, advertising-based and nickel and dime are all traditional business models. But with the advent of the internet, there is also a click-and-mortar business model, which combines a physical presence with an online presence.
Note that even if two businesses function within the same industry, they most likely won’t have the exact same competitive advantages and disadvantages and, therefore, need different business models. Below are the types of Business models and the companies that use them.
Table of Content
- 1. Distributor Business Model
- 2. Freemium Business Model
- 3. Aggregator Business Model
- 4. Franchise Business Model
- 5. Brick and Click Business Model
- 6. Direct Sales Business Model
- 7. Subscription Based Business Model
- 8. Manufacturer Business Model
- 9. Retailer Business Model
- 10. High Touch Business Model
- 11. Low Touch Business model
- 12. Multi-level Marketing Business Model
- 13. Pay What you Can Business Model
1. Distributor Business Model
A distributor business model, also known as a profit model, is a formal plan for earning a profit on your company’s income. Establishing a business model for a distribution company is important especially when making sure that the vast range of costs in distribution services consistently come in below sales revenue.
Before creating this model for your business, you will have to choose the types of distribution services you will offer your customers. Note that this will affect your cost structure, your pricing structure and the profit margin that you can expect to achieve.
Know the types of goods you will transport for customers, including the maximum sizes and weights, and whether you will offer special services for refrigerated, highly perishable and fragile goods and hazardous materials. Select the modes of transport you will use to serve your customers, whether by truck, rail, ship or air transport. Do not forget to analyse and understand your cost structure.
After laying out all of the services you wish to offer, consider the equipment you will need to provide those services. Determine how many trucks you will need to reliably cover your service area for ground transport. Have it in mind that a business model is all about bringing in more sales revenue than you pay out in total costs.
Determine whether you will accept cash, checks, outside credit, supplier credit or any combination of these. Decide on your payment terms, including the amount of time you will offer your credit buyers to pay, what incentives you will offer for early payment in full and what penalties you will assess for late payments.
Create a plan that will let you leverage economies of scale to steadily increase profitability over time. Economies of scale are an integral part of any distribution business mode. Examples of companies that use this business model: Longo Toyota, Automation Inc. etc.
2. Freemium Business Model
Freemium is used to describe a business model that offers both free and premium services. This business model functions by offering simple and basic services for free for the user to try and more advanced or additional features at a premium.
Note that this is a common business model for many software companies, who provide basic software free for trial but with limited capabilities, and is a popular model for game companies as well. All people are welcome to play the game for free, but additional lives or special game features are only unlocked when the user pays for them.
Have it in mind that this business model allows users to utilize basic features of a software, game or service free, then charges for “upgrades” to the basic package. It is a popular tactic for companies just starting out as they try to lure users to their software or service. Examples of companies that use this business model: Skype, Dropbox, Candy Crush Saga, YouTube etc.
3. Aggregator Business Model
This unique business model is a network model where the company collects the information about a particular good/service provider, make the providers their partners, and sell their services under its own brand. Note that because the aggregator is a brand, it has to offer the products or services which have a uniform quality and price.
This is done by signing up a contract with the partners. It’s important to state that the good/service providers never become aggregator’s employees but continue to be the owners of the good/service provided. Aggregator just helps them in marketing in a unique win-win way.
Also note that the aggregator business model runs on a two-fold customer’s strategy where the service consumers as well as the goods/service providers act as the customers of the company. The business is built in such a way so as to attract both of the parties to use this platform rather than the competitors.
The good/service providers are not the employees of the aggregator. They act as partners to the business. Partners always have the freedom to accept or to reject the offer provided by the aggregator. Have it in mind that aggregator spend most of their revenue in building up a brand.
This brand has certain notable features like – quality, price band, on-demand delivery, etc. All the goods/services are provided under a single brand but by different providers. It is then the job of the aggregator to provide a standardized quality to every user. Examples of companies that use this business model: Airbnb for Hotels, Uber for taxis, and Oyo for hotel rooms, etc.
4. Franchise Business Model
The franchise business model allows a business owner to expand and grow a business by selling the rights to use his/her brand and business model instead of building new units. A franchise can be a good way for a novice entrepreneur to get started because he can follow a successful business blueprint. Note that in a franchise operation, the owner of the original business, known as the franchisor, literally sells the rights to use his brand to an entrepreneur called a franchisee.
This franchisor also provides the franchisee with business support in areas such as business operation, marketing and obtaining financing. While in return, the franchisee agrees to follow the franchisor’s business model and to pay the franchisor royalties based on a percentage of unit sales. This particular business model allows business owners to grow their businesses without having to spend substantial amounts of their own money to establish new units or branches.
Therefore, the risk of possible failure is transferred to the franchisee that is responsible for coming up with the initial capital. But before you decide to franchise your business, ensure your business is the type of operation conducive to franchising.
To be a good candidate for franchising, a business should offer something unique in its industry and have a model that is easy to replicate. It should also be adaptable to a variety of geographic areas, especially if your plan is to franchise on a large scale. Examples of companies that use this model: Pizza Hut, McDonald’s etc.
5. Brick and Click Business Model
This business model brings together the various benefits of having a store that customers can visit while selling products and services over the web. However, by contrast, it also shares many of the drawbacks that come with each business strategy. One of the key benefits of this business model is that established retail stores are able to leverage advantages developed over the course of their years spent as an entirely physical presence.
Many businesses are able to develop trusted brand names and a reputation that translates well onto the Internet. Also the brick-and-click business model is an improvements in supplier networks. The Internet offers retail stores a wider range of suppliers, potentially allowing for the ordering of new products and equipment, plus more competitive pricing. Just as a business that goes online can boost its supply network, it can also widen its distribution.
Products that could previously be sold only to the local community can now be placed online and shipped to people around the world. But, by maintaining a physical store, prospective customers can still come in and browse the store’s merchandise. This is especially good for businesses in which customers are allowed the physical inspection of goods before purchasing them, such as clothiers.
Note that one of the disadvantages of this business model is that the business has higher overhead costs than both pure dot-coms and traditional brick and mortar businesses, as it has to maintain both a physical space and an Internet presence. Examples of Companies that use this business model: Christian Dior, Inditex and Nike etc.
6. Direct Sales Business Model
Direct selling is marketing and selling products to consumers directly, away from a fixed retail location. Sales are typically made through party plan, one-to-one demonstrations, and other personal contact arrangements. Have it in mind that no fixed retail location exists under a direct sales business model.
Instead, individual salespeople are connected with a large parent company and given the tools to become individual entrepreneurs. Sales takes place through presentations or demonstrations of the product or service in a one-on-one setting or during a hosted party at a prospect’s home or business.
Business owners in direct sales earn a portion of their sales, while the company providing the product retains the remaining revenue. Examples of Companies that use this business model: Avon, Arbonne and Herbalife.
7. Subscription Based Business Model
This is a business model where a customer must pay a recurring price at regular intervals for access to a product or service. In this business model, instead of selling products individually, it offers periodic (monthly, yearly, or seasonal) use or access to a product or service, or, in the case of performance-oriented organizations such as opera companies, tickets to the entire run of some set number of (eg., five to fifteen) scheduled performances for an entire season.
Thus, a one-time sale of a product can become a recurring sale and can build brand loyalty. Note that the renewal of a subscription may be periodic and activated automatically so that the cost of a new period is automatically paid for by a pre-authorized charge to a credit card or a checking account. Examples of Companies That Use this business model: Netflix, Birchbox, Dollar Shave Club etc.
8. Manufacturer Business Model
Manufacturing is simply the production of merchandise for use or sale using labour and machines, tools, chemical and biological processing, or formulation. Manufacturing to a larger extent may refer to a range of human activity, from handicraft to high tech, but is most commonly applied to industrial design, in which raw materials are transformed into finished goods on a large scale.
Note that these finished goods may be sold to other manufacturers for the production of other, more complex products or to wholesalers, who in turn sell them to retailers, who then sell them to end users and consumers. Manufacturing process begins with the product design, and materials specification from which the product is made.
These materials are then modified through manufacturing processes to become the required part. Examples of Companies That Use this business model: General Motors Corporation, General Electric, Procter & Gamble, General Dynamics, Boeing, Pfizer, and Precision Castparts.
9. Retailer Business Model
This business model sells consumer goods or services to customers through multiple channels of distribution to earn a profit. Retailers satisfy demand identified through a supply chain. This business model is typically used where a service provider fills the small orders of a large number of individuals, who are end-users, rather than large orders of a small number of wholesale, corporate or government clientele.
Most modern retailers without doubt make a variety of strategic level decisions including the type of store, the market to be served, the optimal product assortment, customer service, supporting services and the store’s overall market positioning. Note that once the strategic retail plan is in place, retailers devise the retail mix which includes product, price, place, promotion, personnel and presentation.
Also note that in this modern age, a growing number of retailers are seeking to reach broader markets by selling through multiple channels, including both brick and mortar and online retailing. Digital technologies are also changing the way that consumers pay for goods and services.
Retailing support services may also include the provision of credit, delivery services, advisory services, stylist services and a range of other supporting services. Examples of Companies That Use this business model: Walmart, Kroger, Costco, Amazon, Tesco etc.
10. High Touch Business Model
This business model is one in which a customer places trust and partnership with a company, and in many cases, a specific individual or team at the company. Note that this is more of a “person-centric” model in which the relationship between a salesperson and other individuals have a major impact on the sale and retention of the customer.
On a brighter note, high-touch businesses tend to see be sticky, and therefore very profitable. Clients rely on you as individuals to deliver a critical result. They value the relationship and are willing to pay for it. There is a clear link between price and value, so paying less doesn’t necessarily create a better result. While on the not so brighter side, high-touch businesses tend to be difficult to grow.
A product or service can be replicated across multiple customer segments, geographies, and use cases. A high touch service, by comparison, is hard to grow because the value created tends to be specific to each customer and doesn’t always translate as you add sales and service people.
Example of businesses that use this model: consulting or advisory firms, wealth management and other financial services businesses, accounting and legal firms, and other specialty professional services such as public relations and insurance brokerage. Also included are real estate brokerage and personal services such as hair salons or athletic training.
11. Low Touch Business model
This business model is the opposite of the High Touch model. This business model involve selling a product or service that can be consumed on its own, without much “touch” from a salesperson or other employee. As a customer, you are buying the product or service, and don’t place much value in the individual selling it to you.
Low Touch model requires minimal human assistance or intervention in selling a product or service. Since as a company, you do not have to maintain a huge sales force, your costs decrease, though such companies also focus on improving technology to further reduce human intervention while making the customer experience better at the same time. Example of companies that use this business model: Ikea, SurveyMonkey.
12. Multi-level Marketing Business Model
This is a marketing strategy for the sale of products or services where the revenue of the MLM Company is derived from a non-salaried workforce selling the company’s products/services, while the earnings of the participants are derived from a pyramid-shaped or binary compensation commission system.
Have it in mind that each MLM company chooses its own specific financial compensation plan for the pay out of any earnings to their respective participants. The common feature which is found across all MLMs is that the compensation plans theoretically pay out to participants only from the two potential revenue streams.
Note that the first stream of compensation can be paid out from commissions of sales made by the participants directly to their own retail customers. The second stream of compensation can be paid out from commissions based on the sales made by other distributors below the participant who had recruited those other participants into the MLM; in the organizational hierarchy of MLMs, these participants are referred to as downline distributors.
Example of Companies that use this model: Jeunesse, 5Linx, ACN Inc., Ambit Energy etc.
13. Pay What you Can Business Model
This is a non-profit or for-profit business model which does not depend on set prices for its goods, but instead asks customers to pay what they feel the product or service is worth to them. Note that this model is often used as a promotional tactic, but can also be the regular method of doing business.
It is a variation on the gift economy and cross-subsidization, in that it depends on reciprocity and trust to succeed. Have it in mind that giving buyers the ability and freedom to decide what they are willing to pay for can be very successful, as it eliminates the issues of conservative pricing.
Buyers are attracted to the fact they are not obligated to pay a certain price for a product, this eliminates all issues of an item becoming overpriced in the consumer’s eyes, and the customer can then make their own decisions based on what the product is actually worth.
When striving to choose the best business model for your business, study the above existing models carefully and consider how your business idea may fit into one or more. Take the time to research existing companies to get a clear idea as to how they make money on their products and services.
Note that many types of business models are more popular now because of technology and consumer trends in spending. For example, trends such as, SaaS, online banking and shopping greatly affected the business models that companies use.
A great example is Amazon FBA model of business. Another is Netflix, which is far more popular now than Blockbuster because it sells its subscription-based movie rental services to customers online as opposed to in a physical storefront. When starting your business, consider a business model that will minimize startup costs and attract customers from new markets.
Note that making use of social media to reach audiences can indeed save on traditional marketing activities. In this modern era, you can tweet to your customers, use Facebook, twitter and blogs instead of using costly websites. It’s also important to state that businesses based on niche markets can successfully capitalize on serving new customer markets.
Have it in mind that the goal in these types of businesses is to know the needs of the customers well and keep business and operating costs as low as possible.