Every business needs a business model, no matter what industry they operate in. Taking the time to assess what type of business model will help you achieve your goals as well as understanding how to design one is key to helping you succeed. Here’s what you need to know.
What is a business model?
In a nutshell, a business model is a company’s plan for making money. It should outline:
- What product or service the company will sell
- How it plans to market it
- Who the target market is
- What expenses the company will face
- How the company expects to make a profit.
A business model can help new businesses attract investment as well as motivate team members. It should cover projected startup costs and include a marketing strategy and competitor review. It should help potential investors understand exactly how the business makes money.
But business models are also useful for established companies. These businesses should take the time to regularly review and adapt their business model to be able to anticipate trends and challenges that lie ahead.
Keep in mind that while a business model and a business plan are both key elements of your overall business strategy, they are not the same. A business model shows how your business will generate revenue and reach profitability, while a business plan digs a little deeper and looks at how you will implement your business model. This includes looking at operational practices and what goals you need to reach by when, as well as detailed financial projections.
Types of business models
Given there are many different business types, it’s no surprise that there’s a wide range of business model types too. Below, we’ve outlined some of the most common ones.
A retailer is the last link in a supply chain. Retailers buy finished goods in bulk from manufacturers and distributors and then sell them on to customers at a higher price to cover expenses and help turn a profit.
Examples include clothes retailers, florists and pharmacies.
Manufacturers source raw materials and produce finished products by using internal labour, equipment and machinery. They might make custom goods or mass-produced items which are then sold on to distributors, retailers or directly to customers.
Examples include car manufacturers and pharmaceutical companies.
With this type of business model, the company charges a set fee for a specific service, rather than selling products. Depending on the type of business, the fee charged might be an hourly rate, a monthly retainer or commission. It might even have a fee schedule, whereby different rates are charged for different services.
Often, these types of businesses offer specialist services, they are experts in their field and have valuable knowledge. These businesses can also increase earnings by taking on work for other clients or raising their rates.
Examples include accountants and hair stylists who might work independently or on behalf of an office or salon.
Subscription business models can apply to both e-commerce businesses and those with a physical store. They work by requiring customers to make a recurring payment for ongoing access to a service or product. This has advantages for both the business and the customer. For businesses, it improves buyer retention, while being able to automatically repurchase a product or service is also convenient for the customer.
With this type of business model, companies can also offer different products in their range under different plans and prices through tiered subscriptions. At the end of the contract, the business can either renew or cancel their subscription.
Examples include streaming services such as Spotify and Netflix, as well as food subscription services like HelloFresh.
With a bundling business model, a company chooses to bundle two or more products together, often offering a lower price than they would charge if the products were sold separately. Customers can be incentivised to buy more this way, enabling the business to generate more sales and even sell on products that have been difficult to shift. However, as the products are being sold for less, profit margins can shrink.
Examples include florists that encourage you to add a box of chocolates to your order, and gyms that offer discounts to customers who agree to sign up to a set number of classes a month – the more you agree to, the bigger the discount.
Businesses with a product-as-a-service model charge customers to use physical products. This might be done through a subscription fee, a per-use or per-mile fee or a combination of the two.
Examples include bike rental companies, where customers might be charged an annual membership fee, but are also required to pay a per-mile fee when they cycle. It also includes companies that rent tools and charge a membership fee, plus an additional fee for each use. In these examples, instead of being sold a product, customers are paying for the services or outcomes from using the product.
In a leasing business model, a company buys a product from a seller and then charges another company or customer to use that product for a recurring fee. This works particularly well with high-value items such as manufacturing equipment, but it’s possible to lease smaller items too. To profit from leasing, you want the revenue you earn from leasing the item before it loses value to be greater than the purchase price.
This type of business model works in a similar way to product-as-a-service, but terms are usually longer. They might be days, weeks or months, rather than a few hours. Leasing businesses are also less likely to charge a subscription or membership fee.
Examples include companies that rent machinery to customers carrying out home improvement projects.
Buying a franchise means you’ll be buying the rights to sell goods and services from a company that’s already established. The original owner (the franchiser) works alongside the buyer (the franchisee) to help them with business operations such as financing and marketing to ensure the business functions in the right way. The franchisee must pay a percentage of the profits to the franchiser.
Examples include fast-food restaurants such as McDonald’s and Domino’s Pizza, as well as children’s party entertainers and gyms. There’s a huge range of franchise businesses across the US.
A distribution business model focuses on the distribution of goods and services from the producers or manufacturers to the final customer. It ensures these products reach customers in the most direct and cost-efficient way. Distributors usually buy the product in bulk and sell it on at the highest price to make a profit. They also use various promotional strategies to ensure goods sell.
One example includes a car parts company that buys products from a manufacturer and sells them on to its customers or retailers.
With this type of business model, customers are able to use a product or service for free, but usually only for a limited time or with limited features. To access more advanced features of the service, customers must pay a fee. This is often used by companies in the software-as-a-service (SaaS) space, such as Spotify.
Other examples include online publishing companies that let customers access one or two articles per month, but the remaining content is behind a paywall.
How to design a business model
There’s no set way to design a business model. Many businesses will include elements from a number of models and there are different steps you can take. However, when designing your business model, it’s sensible to consider the points below:
- Who is your target customer? A good starting point is to identify your audience and target market. This can help you when it comes to crafting your product, your messaging and advertising.
- How will your product help those customers? You also need to think about what problem you’re trying to solve and how your product or service will do this. Your product or service should have a clear value proposition that is specialised enough so that it can’t be copied by competitors. If your product or service doesn’t solve a problem or need, you might struggle to find enough demand.
- What challenges might you face? Think about the challenges your company could come up against, including both product-related difficulties and operational ones. Consider how you might be able to overcome them.
- How will you make money? It’s important to consider one or more revenue streams to be sure your business will be able to generate earnings. Also think about what level of investment you might require.
- What are your key metrics? Think about how your company will measure success. It’s unlikely your company will be profitable immediately, so you need to consider other metrics such as how many repeat customers you have or how much it costs to acquire each one.
- Who could you partner with? It’s also sensible to think about potential business partners to help drive success. For example, if you’re a wedding planner, you’ll need good relationships with florists, caterers and venues.
- What expenses will you have? Make a list of all the expenses your business will have, such as gas and electricity bills, fuel costs, rent and staff wages. Then think about the price you will need to charge for your services to cover these costs and make a profit.
Writing a solid a business plan can help you when it comes to designing your business model, and this will also be required if you are looking for investment in your business.
On top this, it’s wise to carry out some market research. Take a look at what competitors are doing and see how they’ve structured their operations and who their customers are. Use online questionnaires or focus groups with your target audience to find out how interested they would be in the products or services you want to offer and how much they would be prepared to pay for them. Ask what could be done to potentially improve your products.
As your business grows, you can adapt and change your business model as you see fit.
How Swoop can help
If you’re setting up a business and need support finding the right type of funding or business loan for your business or help getting the right business insurance, the team at Swoop would be happy to help. We can talk you through the different options and help you find the most appropriate solutions for your business. Get in touch today.