What is the importance of Business Models?
A business model answers three basic questions:
- What value does the company provide for customers?
- How does the company deliver that value?
- How does the company make money and make profits?
The right business model makes clear what is to be done, what kind of strategic decisions are to be taken, and how will profitability be assured. The choice of a model will depend upon knowledge of an organization’s market and type and is subject to analysis, and consideration of economics. Organizations that align their choice of a model with market opportunities are more likely to grow, develop, and sustain competition over longer horizons.
Common Business Models
1. Product-based
In the product model, companies generate revenues by selling products and services, either physical or digital, directly to the end consumers. These businesses sell via retail outlets, through e-commerce platforms, or, in some cases, a combination of both.
Examples:
- Apple-with its iPhones and Macbooks;
- Amazon-generating revenues through retail sales and product-subscription services (Kindle Unlimited).
Growth Focus: Product innovation, supply chain optimization, distribution channel extension.
2. Service-based
This Business Model relates to the provision of professional services, such as consulting, healthcare, or software services, with revenues generated primarily from time, expertise, or completion of tasks.
Examples:
- Consulting and advisory services-Deloitte.
- Subscription service-SaaS providers like Zoom.
Growth Focus: Enhanced service delivery, building lasting client relationships, and scalable service offerings.
3. Subscription Model
The subscription model is a business model where a customer pays a repeated fee or price for a defined period to access a product or service. In return, the company ensures a predictable source of revenue and builds a long-term relationship with its customer.
Examples:
- Netflix bears a monthly streaming fee.
- Spotify charges subscriptions for premium music streaming.
Growth Strategy: Customer retention, adding new features, and introducing tiered pricing to easily segment customers.
4. Marketplace Model
Marketplaces facilitate transactions between buyers and sellers, generating revenue by means of commission and/or fees derived from an overt transaction or through advertisements.
Examples:
- Airbnb connects property owners to travelers.
- Uber connects drivers and passengers, receiving commission on rides.
Growth Strategy: Increase the number of users, create more utility through furnaces to boost supply and demand dynamics.
5. Freemium Model
Freemium is a combination of free and premium. In this model, the service is free but from a broken point in the service, it starts charging a very small amount for premium features. The core idea is to get a large user base in season one and then convert some of these users into paying customers.
Examples:
- LinkedIn allows the creation of free accounts but charges to upgrade to premium versions.
- Dropbox offers limited storage space for free, while storage can be purchased for a small fee.
Growth Strategy: Increase the number of users, raise conversion rates, and introduce compelling new premium features.
6. Franchise Model
Franchising allows businesses to grow by granting other businesses the ability to license their brand, operations, and business model to serve a new location.
Examples:
- McDonald’s and Subway are both based on a world-spanning franchise model.
- Marriott International partners with hotel franchisees to manage hotels under the Marriott brand name.
Growth Strategy: Maintain brand consistency, take care of franchise partners, and enter new markets through strategic partnerships.
7. Direct-to-Consumer (DTC) Model
DTC companies cut out traditional distribution pipelines, effectively selling their products or services all the way from the manufacturer to the consumer, often using e-commerce as the primary sales method.
Examples:
- Warbly-Parker provides eyeglasses, either through its website or in retail shops.
- Dollar Shave Club sells grooming products directly to consumers through a subscription model.
Growth Strategy: Invest in digital marketing, increase brand loyalty, and streamline logistics delivery.
Choosing the Right Business Model
Choosing a befitting business model requires the assessment of several aspects:
- Market Demand: Is there a proven need for the product or service? What are customers willing to pay?
- Competitive Landscape: What do existing players in the field do and which gaps your business will fill?
- Revenue Potential: Are you looking into the model that matches your longer-term profitability expectations?
- Scalability: Can this model be scaled efficiently in case demand escalates?
- Operational Complexity: Do you have the resources to manage the model’s requirements(such as but not limited to logistics, technology)?
Adapting Business Models for Growth
Markets are always evolving, and so must companies. Companies that thrive more often than not stay relevant by modifying or merging a combination of models over time. Here are a few ways they can adapt:
- Hybrid Models: Many companies use a combination of models, such as product + subscription. For example, Amazon sells retail products and also offers Prime.
- Pivoting: A business that finds one model ineffective may pivot. For instance, Slack started as a gaming company but became a successful SaaS company.
- Leveraging Technology: Businesses use digital tools such as AI, data analytics, and automation, which unlock new business models or make existing ones more effective.
Conclusion
Choosing the right business model is a crucial step toward sustainable growth for any company. It duly serves as a framework to generate revenue, deliver value, and scale up operations. With a plethora of models to choose from-such as subscription services and marketplaces-businesses will typically need to assess their strengths, market conditions, and customer needs. Such companies being successful will invariably remain flexible and grant themselves some leeway to change and adapt their models as situations change. In other words: Be prepared to pivot.
