What is a business model?

Understanding how your product or service helps your customers is one of the hardest challenges you’ll face when starting a business. Whatever you’re selling needs to solve a real problem and this problem must be applicable to your customers.

Making sure that your product fits the needs of the market is just the beginning of what it takes to start a business. One of the most key parts you must figure out is how you will make a profit and this is where a good business model can help.

DEFINING A BUSINESS MODEL

A business model is a description of how your business will earn its money and how you deliver a valuable product to your customers at the right cost.

In general, most business models can be broken down into three types, which are:

• What it takes to make your product (your raw materials, manufacturing, labor, etc.)
• What it takes to sell your product (marketing, distribution, delivery, and processing sales)
• How the customer pays (payment methods, payment timing, pricing strategy)

So, a business model basically boils down to what expenses you have and how much you can charge for your product or service. A successful business model simply needs to collect more money than it costs to make the product.

DIFFERENT TYPES OF BUSINESS MODELS

By no means do you have to come up with a new kind of business model to have an effective strategy. The vast majority of businesses will use already existing business models and simply tweak them to cater to their customers. Here are a few example of commonly used business models:

Advertising

The advertising business model has been around for as long as business models have been a thing and, since the world has transitioned from print to online, this model has changed drastically over the years.

This central point of this model revolves around creating content that people want to read or watch and placing some form of advertisement in them.

Advertising business models will have to work with two customer groups, which are your viewers and your advertisers. More times than not, the viewers will not be paying you, but the advertisers most certainly will be.

It is important to find the line between keeping your viewers or readers entertained and making sure you get your advertisers message out effectively for this business model to be successful.

Affiliate

These business models are similar to advertising but have some key differences. The affiliate model is usually used online and makes use of links embedded in content rather than visual ads.

If you run a website and wish to use this model, you could embed affiliate links to sites like Amazon that allow people to buy a product you’ve been using or talking about. Then, Amazon will pay a small commission based on the sales that you refer to them.

Franchising

Franchising is a common business model in the restaurant and fast food industries. With these, you are selling the method to start and run a successful business to others. Also, for national brands, you are selling support services that help the new franchise owner get going.

Franchising is essentially selling access to a successful business model that you’ve developed. It is a business model that sells itself because of its success.

Customization

Customization businesses models will take existing products or services and add a custom element to the purchase that makes every sale different for the customer.

Businesses like custom travel agents who book trips for wealthy clients find success with this model and even large companies like Nike use this for things like their custom sneakers.

Brokerage

Brokerage business models will connect buyers and sellers to help encourage making transactions. They will usually make a profit off of charging a fee for each transaction to the buyer or the seller.

You will often see real estate agencies use this type of model, but there are many other types of brokerages that can find success as well.

Crowdsourcing

If your business is bringing together a large amount of people to produce content for it, then you’re using a crowdsourcing business model.

These are most often used in conjunction with advertising models to make a profit, but there are all kinds of ways you can tweak this model to make it work for you.

However, the main way to create a successful crowdsourcing business is to provide the right rewards to encourage people to create content, while also enabling you to use that to generate revenue for your business.

Disintermediation

Businesses that sell their products in stores will usually have to work through some middlemen to ensure their product can get from the factory to the shelves. This can make for some lost time and general hiccups along the way.

The disintermediation business model allows you to get around the supply chain and sell your product directly to your customers. This can possibly lower costs to your consumers and allow for a more direct relationship with them as well.

SUMMARY

There are many, many more business models than the ones outlined above but hopefully this list has pushed you into the right mindset in how to create a successful business model.

Again, keep in mind that you do not need to create a completely new business model when you’re starting up your own company. It is perfectly fine to use existing models and, what’s more, these can help lead you to success because the model is proven to work.

However, it is also important to put your own spin on these already established business models and, with enough work and innovation, you could create your own business model and leave your mark on the world of entrepreneurship.