A business model is how a business makes money. Balancing the books is the key to running a business, so businesses need to price their products or services competitively for consumers to buy or use. A few factors need to be taken into consideration while making the balance sheets are production and manufacturing costs, distribution and marketing costs as well as product pricing. A thumb rule for any successful business is to reach breakeven early and make a profit.
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Types of Business Models
What is Breakeven?
The amount of time or quantity needed to reach a position where total costs to produce the product are equal to the revenue generated by selling the product. The business is neither making a profit nor a loss. This is the critical state of any business. The faster you reach breakeven, the faster your business model is profitable. If you’re looking for a few tips on getting your business on track, here are 7 strategies you can apply:
1. Marketplace Model
It is one of the most profitable and effective business models currently available. You act as a middleman and connect the consumer to the seller. Uber, Airbnb, eBay are just a few examples of this model. Why provide a service when you can become a marketplace? No inventory or R&D costs are involved so, renting a large office space or storage facility becomes redundant.
You run the company virtually from anywhere so more mobility. Also, you don’t need to worry about production, manufacturing or shipment delays. You just facilitate the transaction between the buyer and the seller and take a percentage. Sellers make a profit and customers can get discounted prices. So, everyone wins.
2. Subscription Model
Consumers prefer a simple, hassle-free shopping experience. Nowadays everything is subscription-based. Netflix and Spotify are champions in this business model. Gone are the days of going to a local Blockbuster to rent out a movie or going to your local CD shop to buy the new, hot album. Rather than paying for a single product, you have a wide range of options available to you for a small monthly payment.
The model helps customers with the thinking process of ordering and reduces choice fatigue. They know they will receive the product each month at a certain time with a set, flat rate which does not make them go bankrupt. No trouble of thinking what to order and when you will run out, rather you’re always stacked with your favorites at affordable prices.
3. Pay-as-you-go Model
Instead of pre-purchasing or paying a monthly subscription fee, you can pay as you go. The prepaid cell phone model is a classic example. You are charged depending on your usage of talk time, SMS or internet. The customer has more choices which enable them to make an informed decision that is within their budget.
4. Freemium Model
A combination of “free” and “premium” has been the bedrock of capitalistic society for the last few decades. This involves offering a basic service to consumers for free and charging them for better features. This model acts as a marketing tool for your service allowing you to scale without extravagant expenditure on marketing campaigns and have a dedicated user base. Services such as LinkedIn, Tinder, Dropbox are a few successful startups who successfully have implemented the strategy. Even Microsoft with its Windows 10 free upgrade campaign has tried this strategy.
5. Franchise Model
The model involves selling or leasing the naming rights, product recipe or services that your company owns to other small businesses to use and scale the business. This is widely used in the restaurant and service industry. Examples include McDonald’s Dunkin Donuts, Coca Cola, etc. In essence, you sell access to your already successful business model to others at a price. This is more of a business to business (B2B) model.
6. Ecosystem Model
Instead of selling one product or service, you sell a multitude of different services. The best way to get customers to get into your ecosystem is to make them use a product or service as bait. And get them interested in using the rest of your services. Apple has been using this for years. The ecosystem has all the services that the consumers need or may want in the future e.g. music, streaming, mail, etc.
Google and Amazon have also taken to this model. This gives customers the ease of having all their services under one umbrella making it easier for them to use and interconnect all their devices and services. The company needs to have a range of different usable and important services that customers want to use.
7. Crowd-Sourcing Model
Crowd-Sourcing Model is an ingenious model that is a hub for knowledge and content sharing for others to use and benefit from. With the new shift towards the open-source platform in recent years, sharing hubs have become important for development and research advancements. Examples include YouTube, Wikipedia and GitHub. In short, the business is acting as a platform for other content creators to share their content and provide constructive criticism.
Linux and Android are two operating systems which use similar business models to develop their product and make it more user-friendly and bug-free for consumers. The model allows the business to profit without creating any new content but rather benefit from the community.
Consumers have a sense of belonging to the service as they contribute to making the service better with their invaluable input and community building. Quora and Reddit are problem-solving and knowledge-sharing platforms. Facebook too can consider us a crowdsourcing model.
In conclusion, these are just a few types of business models that are currently used by many successful businesses around the globe. There are many other successful models we did not divulge in this article. What types of models suits your business the best depends on what service or product you’re offering and the decision made by the management team. Know that no model is 100% full proof and you’d need to go through your share of troubles to be a success.