A business model is an action plan for the successful operation of a business, identifying sources of revenue, the target customer base, products or services to be offered, pricing and costs, and any other necessary operational details.
Types of Business Models
The following are considered the most popular types of business models:
The manufacturing business model refers to the way a company produces and sells goods.
In a manufacturing business, raw materials are transformed into finished products through a series of production processes, such as assembly, machining, and packaging.
There are several different manufacturing business models, including:
- Make-to-stock: This model involves producing goods in advance of customer orders, with the goal of maintaining a certain level of inventory. This model is typically used for products that have a stable demand and a short lead time.
- Make-to-order: This model involves producing goods only after a customer places an order. This model allows for customization and may be used for products with a longer lead time or more complex production process.
- Assemble-to-order: This model involves producing goods in advance, but only assembling them after a customer places an order. This allows for customization while still maintaining some level of efficiency.
- Engineer-to-order: This model involves designing and producing a product to the specific requirements of a customer. This model is typically used for products with a long lead time and a high level of customization.
Overall, the manufacturing business model a company chooses will depend on factors such as the nature of the product, the level of customization required, and the level of demand for the product.
The retail business model involves purchasing goods from manufacturers or wholesalers and then selling those goods to consumers.
Retailers may operate physical stores, online stores, or a combination of both.
There are several different types of retail business models, including:
- Brick-and-mortar: This model involves operating physical stores where customers can browse and purchase products in person.
- E-commerce: This involves operating an online store where customers can purchase products through the internet.
- Omnichannel: This entails operating both physical stores and an online store, allowing customers to shop through a variety of channels.
- Specialty store: This involves focusing on a specific product category or niche, such as electronics or clothing.
- Department store: Department stores offer a wide range of products across multiple categories, such as clothing, home goods, and electronics.
Retailers may also use different pricing strategies, such as offering discounts, running sales, or setting prices at a premium, depending on their target market and business goals.
In short, the retail business model involves purchasing goods from manufacturers or wholesalers and then reselling those goods to consumers through various channels.
The fee-for-service business model involves charging customers a fee for a specific service or product.
This model is often used in the professional services industry, such as consulting, legal services, and accounting.
Under the fee-for-service model, a business typically charges a fixed price or an hourly rate for its services.
The customer pays for the service as it is provided, rather than paying in advance or in installments.
One advantage of the fee-for-service model is that it allows businesses to align their revenue with the value they provide to their customers.
It also allows businesses to offer customized services and pricing to meet the specific needs of their clients.
However, the fee-for-service model can also be challenging for businesses, as it requires them to continually generate new business and ensure that their services are in high demand.
It can also be difficult for some businesses to predict their revenue and manage their cash flow under this model.
Moreover, it can be a business model that’s difficult to scale because the service provided (and revenue generated) is often a function of the time put into it (a “time for money” exchange).
For example, a lawyer or doctor’s salary is typically dependent on how many clients or patients they serve.
Even if they raise their rates, they have only so much time and energy they can physically dedicate to their jobs – they can charge only a certain number of billable hours or see a certain number of patients – which is why their incomes tend to cap out at a certain level.
Overall, the fee-for-service business model is a common approach for businesses that provide professional services and charge customers for the value they provide.
The freemium business model involves offering a basic product or service for free, while charging customers for premium features or additional services.
This model is often used in the software and digital media industries, as it allows businesses to attract a large user base and generate revenue from a portion of their users.
Under the freemium model, businesses typically offer a basic version of their product or service for free, while offering premium features or services for a fee.
For example, a software company may offer a free version of its software with limited features, while charging customers for a premium version with additional features or support.
One advantage of the freemium model is that it allows businesses to attract a large user base and build brand awareness by offering a free product.
It also allows businesses to generate revenue from a portion of their users, rather than relying on a single upfront payment.
Nonetheless, the freemium model can also be challenging for businesses, as they must balance the need to monetize their premium features with the need to retain their free users.
It can also be difficult to convert free users into paying customers, and businesses may need to invest in marketing and customer acquisition to drive revenue.
But the freemium business model is a common approach for businesses that offer software or digital media products and aim to generate revenue from a portion of their user base.
The subscription business model involves charging customers a recurring fee, typically on a monthly or annual basis, in exchange for access to a product or service.
The subscription model is often used in the software, media, and e-commerce industries because it enables businesses to generate a steady stream of recurring revenue.
Under the subscription model, businesses typically offer a product or service for a fixed fee, and customers pay for access on a recurring basis.
For example, a software company may offer a subscription to its software for a monthly fee, while a media company may offer a subscription to its online content for an annual fee.
A popular advantage of the subscription model is that it allows businesses to generate a predictable stream of recurring revenue, which can help with cash flow management and long-term planning.
It also allows businesses to build a loyal customer base and potentially increase customer lifetime value over time.
On the other hand, subscription businesses must continually provide value to their customers in order to retain their subscriptions.
It can also be difficult to acquire new subscribers, and businesses may need to invest in marketing and customer acquisition to drive growth.
But the subscription business model is a common approach for businesses that offer products or services on a recurring basis and aim to generate a steady stream of recurring revenue.
In the bundling business model, a company offers a package or bundle of products or services for a single price.
The bundle may include a combination of products that the company produces itself, as well as products or services from other companies.
Bundling can be an effective strategy for companies to increase sales and customer loyalty, as it allows customers to purchase multiple products or services at a discounted price.
It can also help companies differentiate themselves from competitors by offering unique or customized bundles that meet the specific needs of their customers.
There are several types of bundling strategies that companies can use, including pure bundling, mixed bundling, and complementary bundling.
Pure bundling involves offering a bundle of products or services that can only be purchased as a package, while mixed bundling allows customers to purchase individual products or services as well as a bundle.
Complementary bundling involves offering a bundle of products or services that complement each other and are typically used together.
Some examples of the bundling business model include subscription services that offer a package of products or services for a monthly fee, cable or internet packages that bundle television and internet services, and travel packages that include flights, hotel accommodations, and activities.
The brokerage business model involves a company or individual acting as an intermediary between buyers and sellers in order to facilitate the sale of a product or service.
In this model, the brokerage earns a commission or fee for connecting the buyer and seller and facilitating the transaction.
Brokerages may specialize in a particular type of product or service, such as real estate, insurance, or financial products, or they may offer a wide range of products and services to their clients.
They may work with individuals or businesses, and may serve as a representative for either the buyer or the seller, or both.
Brokerages may also provide additional services to their clients, such as research, analysis, or advice, in order to help clients make informed decisions about their purchases.
Examples of brokerages include real estate agencies, insurance brokers, stockbrokers, and travel agencies.
These businesses typically operate by matching buyers and sellers, negotiating prices and terms, and helping to facilitate the transaction.
The marketplace business model involves creating an online platform that connects buyers and sellers of a particular product or service.
The company operating the marketplace typically takes a fee or commission for facilitating the transaction between the buyer and seller.
Marketplace businesses may offer a wide range of products and services (e.g., eBay or Craigslist), or they may specialize in a particular category, such as clothing, electronics, or home goods.
They may also offer additional services to buyers and sellers, such as payment processing, customer support, or marketing (e.g., Etsy).
In the marketplace model, the company operating the platform does not typically produce or sell products itself, but rather acts as a facilitator for transactions between buyers and sellers.
This allows the company to focus on creating and managing the platform, rather than managing inventory or fulfillment.
Examples of marketplace businesses include online retailers such as Amazon, eBay, and Etsy, as well as peer-to-peer platforms such as Airbnb and Uber.
These businesses provide a platform for buyers and sellers to connect and transact, while also providing a range of services to support the transaction.
A franchise is a business model in which a company (the franchisor) grants the right to use its brand, business system, and proprietary knowledge to a third party (the franchisee) in exchange for an initial fee and ongoing royalties.
The franchisee is responsible for operating the business according to the franchisor’s guidelines and standards, and is typically required to pay royalties based on a percentage of sales or a fixed fee.
The franchise model offers a number of benefits for both the franchisor and the franchisee. For the franchisor, the franchise model allows the company to expand its business quickly and efficiently, by leveraging the resources and expertise of the franchisees.
The franchisee, on the other hand, gets access to the franchisor’s established brand and business system, which can help reduce the risk and uncertainty associated with starting a new business.
There are many different types of franchises, including those in the retail, food, and service sectors.
Some common examples of franchise businesses include fast food restaurants, hotels, and cleaning services.
In order to become a franchisee, an individual or company typically needs to undergo training and meet certain requirements set by the franchisor.
These may include financial qualifications, business experience, and a commitment to operating the business according to the franchisor’s standards and guidelines.
The pay-as-you-go business model, also known as the pay-per-use or subscription-based model, is a pricing strategy in which customers pay for the goods or services they use on an ongoing basis, rather than upfront or in a lump sum.
This business model is often used for products or services that are consumed over a period of time, such as software, cloud storage, or access to a service or platform.
In the pay-as-you-go model, the customer typically pays a fee based on the level of usage or consumption. This fee may be charged on a regular basis, such as monthly or annually, or it may be based on the actual usage of the product or service.
The pay-as-you-go model has a number of advantages for both the business and the customer. For the business, it can help to generate a steady stream of revenue and allows the company to scale its operations more easily.
Many of the costs in the pay-as-you-go model are variable. The more the customer consumes, the more they pay to help cover the cost the company has to bear to provide the goods or services.
For the customer, the pay-as-you-go model allows them to pay for only what they use, which can be more cost-effective than paying for a product or service upfront.
There are many different variations of the pay-as-you-go model, and businesses may use different pricing structures and payment terms to suit their specific needs and business goals.
Some examples of pay-as-you-go models include subscription-based services, metered billing, and usage-based pricing.
The razor blade business model is a pricing strategy in which a company sells a product at a low price or at a loss, with the intention of making profits through the sale of consumables or accessories that are used in conjunction with the product.
The consumables or accessories are typically sold at a high markup, allowing the company to recoup its initial investment and make a profit.
The term “razor blade” comes from the common practice of selling razors at a low price and then making money through the sale of replacement blades.
However, the razor blade model can be applied to a wide variety of products and industries.
Some examples of products that use the razor blade model include:
- printers (which are sold at a low price and make money through the sale of ink or toner cartridges)
- video game consoles (sold at a low price and generate revenue via the sale of games and other accessories), and
- smartphones (some of which are sold at a low price and make money through the sale of apps, subscriptions, and other services)
The Razor blade business model is often used by companies as a way to establish a customer base and build brand loyalty.
By selling the initial product at a low price, the company can encourage customers to try the product and become loyal users.
The company can then make profits through the ongoing sale of consumables or accessories, which can create a long-term revenue stream.
Reverse Razor Blade
The reverse razor blade business model is a pricing strategy in which a company sells a product or service at a high initial price, with the intention of making profits through the sale of consumables or accessories at a lower markup.
This model is the opposite of the traditional razor blade model, in which the initial product is sold at a low price and the consumables or accessories are sold at a high markup.
The reverse razor blade model is often used by companies that sell products or services with a high upfront cost, such as commercial equipment, industrial machinery, or professional services.
By charging a high initial price for the product or service, the company can recoup its investment and make a profit.
The company can then make additional profits through the ongoing sale of consumables or accessories at a lower markup, which can help to create a long-term revenue stream.
The reverse Razor blade model is a way for companies to balance the upfront cost of a product or service with the ongoing costs of maintaining or using it.
It can also be used as a way to encourage customers to continue using the product or service over time, by providing them with a lower-cost option for consumables or accessories.
The Explainer: What is a Business Model?
How to Form a Business Model
Forming a business model is an important step in the process of starting and operating a business.
A business model is a plan for how a company will generate revenue, create value for its customers, and achieve its business goals.
There are many different business models that companies can use, and the appropriate model will depend on a number of factors, including the company’s industry, target market, and unique value proposition.
Here are some steps to follow when forming a business model:
Identify your target market
Understanding the needs and preferences of your target market is essential for developing a successful business model.
Conduct market research to learn more about your potential customers, and use this information to inform your product or service offerings and pricing strategy.
Develop your unique value proposition
Your unique value proposition is what sets your business apart from competitors.
Determine what value you can offer to your customers that they cannot get elsewhere.
Choose a business model
There are many different business models to choose from, including the traditional business model, the franchise model, the pay-as-you-go model, and others.
Consider the strengths and weaknesses of each model, and choose the one that best fits your business goals and resources.
Create a financial plan
A financial plan is a detailed projection of your company’s revenues, expenses, and profits over a certain period of time.
Use your business model to develop a financial plan that outlines how you will generate revenue and control costs.
Test and refine your business model
Once you have developed a business model, it is important to test and refine it to ensure that it is viable and sustainable.
Use market research, customer feedback, and financial data to continually assess and adjust your business model as needed.
How to Understand a Business Model (as a Trader or Investor)
As a trader or investor, it is important to understand the business model of a company in order to make informed decisions about buying or selling its stock.
Here are some steps you can take to understand a company’s business model:
Review the company’s financial statements
Financial statements provide detailed information about a company’s revenues, expenses, and profits.
By reviewing the company’s financial statements, you can gain insight into how the business generates revenue and controls costs.
Research the company’s industry and competitors
Understanding the competitive landscape of the company’s industry can help you to better understand the company’s business model.
Research the company’s competitors to learn more about their business models and how they compare to the company you are interested in.
Read the company’s annual report and other financial documents
Many companies publish annual reports and other financial documents that provide detailed information about their business model and operations.
These documents can be a valuable source of information for traders and investors.
Analyze the company’s customer base
Understanding the company’s customer base can help you to better understand its business model.
Look for information about the demographics and preferences of the company’s customers, as well as the company’s sales and marketing strategies.
Consider the company’s growth prospects
A company’s business model should be able to generate sustainable revenue and profits over the long term.
Consider the company’s growth prospects and evaluate whether its business model is likely to be viable and successful in the future.
FAQs – Business Model Examples
What is a business model?
A business model is a plan for how a company will generate revenue, create value for its customers, and achieve its business goals.
It outlines the products or services that the company will offer, the target market it will serve, and the strategies it will use to generate revenue and achieve profitability.
A business model also includes a financial plan that outlines the company’s expected revenues, expenses, and profits.
There are many different business models that companies can use, depending on their industry, target market, and unique value proposition.
Some common examples of business models include the retailer business model, the franchise model, the pay-as-you-go model, and the subscription-based model.
A company may choose a specific business model based on its resources, goals, and competitive environment.
Business models are important for entrepreneurs and business owners, as they provide a roadmap for how to create value and achieve profitability.
They are also important for traders and investors, as they provide insight into how a company generates revenue and profits and how they are valued.
Understanding a company’s business model is an essential part of evaluating its financial performance and potential for growth.
How do I make a business model?
A business model is a plan that outlines how a company will generate revenue and make a profit.
It defines what the business will sell, to whom it will sell, and how it will sell its products or services.
Here are some steps you can follow to create a business model:
- Identify your target market: Determine who your potential customers are and what they need or want.
- Define your value proposition: Explain what makes your products or services unique and how they benefit your customers.
- Choose a revenue model: Decide how you will generate revenue, such as through sales, subscriptions, or advertising.
- Determine your costs: Calculate the costs associated with producing and selling your products or services.
- Develop a financial plan: Use your revenue and cost estimates to create a plan for generating profits.
- Test and iterate: Try out your business model and gather feedback from customers. Use this feedback to refine and improve your model as needed.
Keep in mind that a business model is not a one-time exercise.
It is a fluid document that should be regularly reviewed and updated as your business grows and evolves.
What are some popular business models or ways of driving revenue?
Here are some examples of popular business models:
1. Subscription: A subscription model is when customers pay a regular fee in exchange for access to goods or services. Popular examples include streaming media services, membership clubs, and software as a service (SaaS).
2. Advertising-based: This type of model involves monetizing content by displaying advertisements alongside it. Examples include free newspapers, television channels, some websites, and search engines like Google.
3. Ecommerce: An ecommerce business operates over the internet and sells tangible goods such as clothing items or electronics. The business model focuses on driving online sales through digital marketing and optimization techniques.
4. Franchising: In a franchising model, businesses license their products or services to other companies who then operate under the franchisor’s brand and parameters. Examples include fast-food restaurants and cleaning franchises.
5. Marketplace: A marketplace is an online platform that connects buyers and sellers of goods or services, such as Uber, Airbnb, Etsy, eBay, etc.
6. Software as a Service (SaaS): SaaS is when software applications are hosted offsite by the company and accessed on demand via the internet by users for a subscription fee. Popular examples include Salesforce and Microsoft Office 365.
7. Pay-Per-Use: A pay-per-use model is when customers pay for a product or service based on how much they use it, rather than paying a flat fee upfront. Common examples include utility companies, entertainment streaming services, and cloud storage providers.
8. Hybrid Models: Hybrid models combine multiple business models to create a unique value proposition. It can also make a business model more diversified and resilient.
Microsoft, for example, is involved in several business models.
These include: subscriptions (e.g., Office, LinkedIn, cloud), hardware (e.g., Surface, PC components, Xbox), along with services, royalties, and advertising.
9. Online Market Network: An online market network is when businesses partner together to provide customers with access to products and services from different sources with one single transaction. Examples include Amazon’s Marketplace, providing customers with shopping options from third-party sellers.
Why is it called the “razor blade” business model? How is it different from the “reverse razor blade” business model?
The razor blade model sells the low-margin product cheaply (sometimes below-cost or even free) so customers buy the high-margin product over time.
Razor blades are expensive, but consumers will need to keep buying razor blades.
A similar business is printers. Printers can be relatively cheap, but the ink is not.
The reverse razor blade model sells the high-margin product upfront, then develops a stream of revenue off that.
The Apple iPhone is an example. The iPhone is expensive and then sells services and apps off that.
Conclusion – Business Model Examples
Business models are essential for any company looking to generate revenue, create value for its customers, and achieve its business goals.
While there are many different types of business models available, it is important to choose the one that best fits your company’s unique needs.
Once you have chosen a model, be sure to conduct market research and financial analysis in order to test and refine your business model as needed.
Understanding how various business models work can also help traders and investors better analyze businesses’ performance.