Saturday, March 25, 2023

Business Models: Types, Examples and How to Design One

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The business models are the plan for generating revenue. Types include retail, manufacturing, subscriptions, and more.

A business model spells out how a business will generate revenue. If you want to start a business, take the time to determine what type of model will support your goals, and incorporate its design into your business plan and market research.

Here are details about different business models, examples of each, and how to identify the right one for you.

What is a business model?

A business model is an outline for how your company plans to make money. In general, a business model explains four things:

  • What product or service a company will sell.
  • How it intends to market that product or service.
  • What kind of expenses the company will face.
  • How the company expects to turn a profit.

Types of business models and examples

Because there are many different businesses, the list of business model types is constantly changing. Here are 12 common business model options, all of which can be customized for a specific company or industry.

A “disruptive business model” innovates on these basic structures. And lots of businesses earn money from multiple revenue streams, meaning their business models include several of these types.

1. Retailer model

A retailer is the last link in the supply chain. These businesses purchase goods from manufacturers or distributors and then sell them to customers for a price that will both cover expenses and turn a profit. Retailers may specialize in a particular niche or carry a range of products.

Examples: Many of the businesses you patronize day to day are probably retailers, from grocery stores to pharmacies to florists.

2. Manufacturer model

A manufacturer converts raw materials into products. Then, they sell those products to distributors, retailers or directly to consumers.

Example: Manufacturing businesses build everything from furniture to pharmaceuticals. They can be companies of any size and in almost any industry.

3. Fee-for-service model

A fee-for-service is just what it sounds like: A business charges a set fee for a specific service. A business set up on this model can increase its earnings by doing work for additional clients or by raising its rates.

Depending on what type of work the business does, it might charge an hourly rate, monthly retainer or commission. It may also create a fee schedule with a set rate for different types of services.

Example: Hairstylists, accountants and real estate agents all charge fees for their specialized services. They may work independently or be affiliated with a salon, office or brokerage that provides resources in exchange for a percentage of their earnings.

4. Subscription model

A subscription business model can be applied to both traditional brick-and-mortar stores and e-commerce businesses alike. Essentially, the customer makes a recurring payment for ongoing access to a service or product. A company may directly ship its product in the mail, or you may pay a fee to use its services.

Example: Many local farms offer farm shares or community-supported agriculture subscriptions, where clients get access to fresh produce on an ongoing basis while crops are in season.

5. Bundling model

The bundling business model involves companies selling two or more products together as a single unit, often for a lower price than they would charge selling the products separately.

This type of business model allows companies to generate a greater volume of sales and perhaps market products or services that are more difficult to sell. However, profit margins often shrink since businesses sell the products for less.

Example: Many class-based fitness centers and gyms use a type of bundling model, where clients pay fees for a certain number of classes per month. The more classes a client buys, the cheaper each individual class becomes, even though their total spend increases.

6. Product-as-a-service model

Product-as-a-service businesses charge customers to use physical products. They may charge a subscription fee, a per-use or per-mile fee, or a combination of both.

Example: Bike rental companies offer products as a service. Customers might pay an annual membership fee plus a per-mile fee each time they ride, or they might have the option to rent a bike for the day.

7. Leasing model

Under a leasing business model, a company buys a product from a seller. That company then allows another company to use the product they purchased for a recurring fee.

Example: A business that rents machinery like backhoes, augers and dozers to individuals for their home construction projects is using a leasing business model.

8. Franchise model

A franchise is an established business blueprint that a franchisee purchases and reproduces. The franchiser, or original owner, works with the franchisee to help them with financing, marketing and other business operations to ensure the business functions as it should. In return, the franchisee pays the franchiser a percentage of the profits.

Example: Domino’s, Anytime Fitness and Ace Hardware are all examples of the franchise model.

9. Distribution model

A company operating as a distributor is responsible for taking manufactured goods to the market. To make a profit, distributors buy the product in bulk and sell it to retailers at a higher price.

Example: A chain of beauty salons that buys supplies in bulk and sells some of them to other salons is using a distribution business model, though they may have other revenue streams too.

10. Freemium model

In a freemium model, customers can use parts of a product or service for free but must pay for access to more advanced features. This model is common in the software-as-a-service space — Spotify, for instance, has a free ad-supported tier, but subscribers get to listen ad-free.

Example: Some news and internet publishing companies use a freemium model, where some or all content is free but premium content or special features are paywalled. These are some Business Models for generating revenue.

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