What is a business model?
The strategy a business uses to turn a profit is referred to as its business model. It lists any estimated costs as well as the goods or services the company intends to sell, as well as its chosen target clientele. Both new and established businesses need strong business models. They aid young, developing businesses in luring capital, hiring talent, and inspiring management and personnel.
Related: Importance of a business model
Established companies must continuously alter their business models if they are to stay abreast of emerging trends and problems. Business models also assist employees in understanding the future of an organization they might want to work for and investors in evaluating companies that interest them.
Types of business models
1. Franchise model
Franchising enables the franchisor to license its resources and brand name, which is best for the company’s expansion. a franchise’s intellectual property and rights to offer its goods and services in exchange for a fee. The best illustration is McDonald’s, which has 93% of its stores franchised globally.
The leading restaurant chain in the world is McDonald’s. Out of a total of 38,695 restaurants worldwide, it runs 36,059 franchised locations. The last 13 years have seen year-over-year growth in its franchise restaurants.
Examples: Subway, McDonald’s, Gold’s Gym
2. A platform with multiple sides
A multi-sided business model is used by any organization that provides services to both consumers and businesses. The ideal example is LinkedIn, which offers subscription-based services to both individuals looking for employment prospects and human resources professionals looking for candidates to fill open positions. For instance: LinkedIn and Freelancer.com
3. A business strategy for cash machines
is referred to as the cash conversion cycle as well It refers to how rapidly a business changes money into goods and services and back again. Companies that have poor profit margins but maintain a disruptive position in the market tend to employ this approach. For instance, Amazon makes a sizable sum of money from its online store before paying its suppliers. Another way to look at it is that vendor credit is how Amazon manages its supply chain.
The cycle of Cash Conversion: Cash ==> Goods and Services ==> Cash
Examples: Apple, Alibaba, and Amazon
Pro tip: Businesses that deal in inventories are best suited for this type of business model.
4. The Freemium economic model
The freemium business model, which combines free and paid services, is mostly employed by tech businesses in their Software as a Service (SaaS) or applications business models. Companies provide free (lite) versions to customers, but only for a brief period or with a few features, to expand their business and attract new clients. The customer must choose to pay for services to access the improved features.
Zoom, Dropbox, MailChimp, Evernote, etc. are some examples.
Advice: It’s a great technique to entice clients to explore the program or application.
5. The subscription business model
With this business model, customers can obtain services by making a set monthly or annual payment. In this scenario, the business must offer enough value to its customers to encourage frequent visits to the website.
It enables businesses to target specific market segments and provide a set amount of items in their content under various plans and pricing known as tier offerings.
For $8.99/month for the Basic plan, $12.99/month for the Standard plan, and $15.99/month for the Premium plan, Netflix provides monthly subscriptions.
Examples: Netflix, LinkedIn, Amazon Prime, and Dollar Shave Club.
Pro tip: Websites with content or services can benefit from using this paradigm.
6.Peer-to-peer business model
According to this concept, a corporation serves as a middleman between two different parties, adding value to both the supply and demand sides. It differs from the conventional situation where a company sells its services to customers. It receives revenue via commissions. The ideal illustration of a platform that permits transactions between hosts and guests is Airbnb.
Examples: Freelancer.com, Uber, eBay, Offerup
How to create a business model
Draw a diagram that develops a structure so your staff may produce goods or services for clients in a lucrative way to create an effective business model for your organization. A business model often comprises information about your target market, how they utilize your product, how you distribute it, and specifics on how you advertise your enterprise.
Along with important operational activities, staffing needs, and other resource requirements, the model also provides information on how business is carried out in detail. In contrast to a business plan, which is a longer document, a business model often uses visual representations to define your company.
- Gather and evaluate data about your organization so that you can develop a visual representation of it. Don’t complicate your business model.
- Identify your target audience. Describe your strategy for luring clients who will allow you to set a fair price for the goods or services provided by your business. By focusing on the right demographic, effective company models typically require little in the way of marketing expenditures. These clients could also be distributors or resellers of your goods.
- Develop your value statement. The value of the features and benefits that go along with your product or service must be clearly defined for your business model to be successful. Explain how your business plans to gain or sustain a competitive advantage, for example, through improved distribution, more inventive ways to solve client issues, reduced prices, or a quicker delivery.
- Explain how you plan to manage your company more effectively and provide products of a higher caliber than your rivals. For instance, look for chances to use better technology or procedures or to manufacture goods abroad. Streamline your sales and customer service processes. As part of your business strategy, incorporate quality management techniques like Six Sigma to lower errors, boost quality, and cut expenses.
- Gather information about industry standards that could affect your company’s operations by using the resources offered by websites like Business.gov, the Small Business Administration Small Business Planner, and the Business Valuation Resources website.
- Describe the steps you will take to guarantee customer satisfaction. While maintaining high levels of customer satisfaction, retention, and loyalty, operations with substantial technical support and customer care sometimes face hefty warranty costs. Forming alliances with other service providers may be a more cost-effective business strategy, depending on your strategic goals.
- Specify how you want to strengthen your position in the market. Give some examples of how you could get more clients, introduce new products, or otherwise grow your company. Typically, prospective investors are interested in learning more about the predicted expansion of your business model and related plan. Calculate your investment’s return.
Components of a business model
There are other strategies you can use, however, the following is our strategy and what we consider to be the 10 key elements of a business model:
- High-level vision: A succinct summary of your business strategy in two or three sentences that represent your compass direction.
- Key objectives: Your major aims and your proposed metrics.
- Customer challenges and targets: The kinds of clients who will buy your solution and their precise problems.
- Solution: Your main approach to resolving client issues.
- Value: The essential components of your solution that set it apart and add differentiation.
- Pricing: How much your solution will cost and how it will be packaged?
- Messaging: A strong argument for why your product is worthwhile to purchase that is both obvious and persuasive.
- Go-to-Market: The channels you’ll employ to advertise to and sell to your clients.
- Investment needed: The expenses involved in making the solution work.
- Growth opportunity: The strategies you’ll use to expand your company, including any important collaborations you could require.
Importance of a business model
A business model is unquestionably necessary to develop a company. No, we are not discussing the rough blueprints within. We’re talking about a real-world representation of the company you wish to create. You must make a thorough plan on paper. Make sure to include all the foundational information that may be relevant to your business.
You will undoubtedly be able to succeed as an entrepreneur with the aid of a business model. Here, the main objective is to develop a specific, realistic assessment of the viability of your business idea.
When you have a business model in place, it will be easier for you to determine all the crucial components, including the idea behind your enterprise, the issues you hope to address with the model, and the best way to provide value for your customers.
You will be able to identify the company’s advantages and discover any weaknesses it may have.