Why should you have a business model, and what one should you use? A business model is the design and framework of your enterprise. It factors your target customer or customer base, revenue streams, financing, and whether you are focused on products or services.
When creating a product, you want to consider the existing market and plan to be different and innovative. You need to determine how are you plan to market the product and deliver it to the customer. Additionally, you need to determine how to set up and manage your finances. A service business will have the same considerations, with the addition of determining if the service is provided in person or online. Another consideration for all businesses is the level of freedom you desire when managing it.
These variables are essential when deciding on the right business model for your company. There are a variety of business models to choose from, and you will need to consider which model best suits your needs.
What Business Model Should Your Business Use?
Here are 5 things you should consider when choosing the right business model for your business.
1. What are your customer needs.
2. What is the most reliable for your type of business?
3. Which is easier for you to manage?
4. What is the market potential?
5. What are the revenue streams?
Common Business Models
Direct Sales Business Model
This model is widespread and is focused on selling directly to the customer. There is no middleman or wholesaler. There may not even be a retail environment where you interact directly with the customer. Products created or manufactured are sold straight from the factory to the customer, usually via a website. Direct sales work best with a dedicated sales staff who can form a solid connection with the customer base. A variant of this is a direct sales business model if you sell business to business.
The Traditional Brick & Mortar
This business model focuses on the face-to-face interaction with a customer within a retail space. Examples of this would be banks, grocery stores, and clothing stores. With this in mind, there are considerations. As the company owner, you must purchase or lease a building. You are responsible for the upkeep of the building, including maintenance and utilities. Since it would be impossible for you to be at the business 100% of the time, you must employ trustworthy employees. Over the past several years, online sales have led to a reduction in brick-and-mortar stores.
A hybrid model combines the traditional brick and mortar with an online sales or direct sales business model. To remain profitable, many existing brick-and-mortar businesses have converted to this model.
One great example is a small coffee shop my husband and I found in Cannon Beach, Oregon. The shop was filled with happy customers and employees, incredible tastes and smells, locals and visitors, and just steps away from the ocean. It had a neighborhood feel of the Pacific Northwest with old leather chairs and a local golden retriever relaxing at the feet of a patron enjoying hot chocolate. We enjoyed the place so much that we decided to find them online when we returned home and found out that they also ship directly to the customer. This coffee shop serves the local community and lets its customers experience its products in their homes by having a hybrid business model.
The advertising-based model is truly about figuring out how your business generates revenue. Are you selling a service, product, or possibly a mix of both? Many media companies and social media businesses use this business model for much of their revenue. Because consumer tastes and opinions are easily swayed, selling ads as a revenue stream can be precarious. The in-product today may be the pariah of tomorrow. If a product you advertise suddenly becomes undesirable, your bottom line will be impacted.
Many business owners look at the franchise model when first starting their business. There is an upside to choosing to franchise. The framework is put together, the marketing and branding are complete, typically the customer knows the product already, and the company already has a track record. However, there are some things that you must keep in mind when it comes to franchising.
You are offering a service or a product that is not your own. You may find yourself paying a large down payment to become part of the franchise and have to pay a portion of your sales every single month. Depending on the franchise, sometimes licensing fees are also billed to you, and you may find yourself still in the mindset that you are working for a company that is not your own.
Choosing the franchise model is truly a personal choice. You may want the quick setup and be willing to pay a hefty payment upfront to get started quickly. But you want to make sure that your personality jives with this business model. If you are looking for a large amount of freedom of creativity, franchising may not be the best choice for you. Franchising could be the right option if you are okay with a foundation being set up and a portion of your sales being taken every month in exchange for an established brand. You can check out the best franchises under 25k here.
The freemium model is a newer type of business model. It’s relatively simplistic. Let’s say you go online and find a service that seems interesting. You may sign up for a newsletter or go right into a free subscription that can last for a few days to a few months. In fact, there may even be a service that will give you a free lifetime subscription to use their base model. These basic services will continue to be free, and it gives the company the chance to really engage with you.
Over time, if you choose the freemium model, which is great for software companies and startups in education technology, your customers may come to enjoy your product so much that they want to upgrade. Growing businesses may need additional accounts, and they may be willing to pay for these. This model is unique because it puts a product or service out for free in the hopes that it will turn into something more through customer relationships.
This model has become very popular. The subscription model is focused on long-term contracts, and you may have seen them online. Perhaps, you want a box of curated items sent to you each month. That’s a subscription model. This business model started out very small over a decade ago. In the past few years, we are seeing many businesses use it. Some have been successful, but there has been a bit of a flood on this model. Because there is a contract in place, it can be difficult for subscribers to cancel, or they forget to cancel, causing unexpected repeat purchases. This model also works on automatic payment and does not always have to be a product; it can also be an online service.
We have a full list of the different types of business models with examples. Check out the article for more business models you may want to think about.
The Bottom Line
There are several business model types to choose from. The factors to consider are the amount of control you want over your business, a physical location vs. online, and your target customer. Whether it be a traditional brick and mortar, the fun enchantment of the hybrid model, or the subscription model, there is a chance for success and growth within these business models. Take your time and choose wisely to make the best decision possible for the future of your start-up.