What is a business model?
Simply put, the business model refers to an outline of how a company plans to profit and grow, keeping its product and customer base in mind.
It is important for the company’s success because no matter how unique your idea is or how upcoming your product plans to be, a company must have a feasible plan of making money that is enough for future investments and sustaining itself.
At its core, a business model explains the ‘what’s and ‘how’s of a business:
What product or service the company sells.
How it intends to market that product or service.
What kind of revenues it will enjoy and what expenses it will face.
How it expects to turn a profit.
The first two points come under the value proposition. It’s a description of the goods/services the company has to offer, and why they are desirable to clients, in a way that differentiates the product/service from its competitors, while the next two points pertain to the viability of its operations.
There are many different types of models, extending the list to pages. However, it’s important to choose one that is best suited to your business. Designing and executing business models as it fits your business, requires a lot of experimentation.
It can’t be executed just by making it on a piece of paper. That implies that often an entrepreneur has to design multiple variations of a business model and test those in the marketplace. Depending on the results, they have to go forward with the variation that fits best and gives maximum return on investment.
Amongst the many, there are a bunch of new-age proven business models you can choose from. Some of them are listed below:
1. Freemium Model:
Freemium is a culmination of two words: free and premium. It’s one of the most widely used approaches by start-ups these days.
You present your offerings for free but withhold a certain toolkit, most advanced and premium features. Those are offered to only paying members.
The plan is to give a superior customer experience even for free and at the same time, market the premium features in such a way that it lures in customers to buy the paid membership.
Another technique in the freemium model that tends to be successful is the free trials – such as 15-day/ 30-day free trials. Customers are much more comfortable with accessing a product/service for free, testing it out, and experiencing the feeling that comes with it before deciding to make a purchase.
Companies that use this model include :
2. Peer-to-peer model:
In this model, a company acts as a middleman between two individual parties and creates value for both the demand and supply side by bringing them together.
Like linking the client to the seller, and earning money out of it. This model has huge advantages, the biggest one of them being having lower overhead cost, and no/less inventory. It removes the stress of building a product and the cost that goes into it.
While giants are operating under this model, this business type can also be operated from a one-room apartment, or just even virtually. It’s simply creating a link. Instead of worrying about manufacturing costs, you are bringing the sellers to the buyers, and facilitating a transaction. The benefit is that you get to take a small slice of the pie from each transaction. You give sellers a place to make a profit and reach consumers, while customers are happy to find exactly what they want, usually at a discounted price.
The major example of this model are:
3. Razor blades model:
The razor and blades business model is a business model in which the main item is sold at a low price to increase sales of a complementary good, for example, razor blades.
The replacement razor blades cost more than the original model of razor blades. This is a beneficial model if you know there would be recurring sales for sub-products associated with your main sale.
In addition to the traditional razor blades model, companies also use the reverse razor blades model — in which they offer customers a high-margin product and then promote the sales of products that accompany that initial product. For example Apple iPhones or Macs. They sell high-priced tech models, and then push the required accessory with it, which you can buy additionally.
Companies that use this model are:
HP/other company Printers
Xbox or PlayStation
4. Subscription Model
This model allows the customer to get services/products/combinations by paying a fixed amount every month or year. This works in many situations. Like a magazine subscription, or a product you need monthly or daily, being shipped to you once you pay your monthly or yearly dues. Or, an app subscription, where you buy a monthly or yearly plan and then enjoy its services.
This is beneficial for both the customer as they know the monthly cost, it takes out the thinking when buying the product. Once you give your details, every month the money automatically gets taken out of your linked bank/card account. The customer knows what to expect and there won’t be a high or low with the budget, it’s a constant price. On the company’s end, the profit depends on the recurring sales and its prediction, which is incredibly advantageous to a company’s value and revenue.
Companies that use this model:
How to choose the right business model?
There is a vast pool of options to choose from. At the end of the day, there’s no absolute answer to how to choose the right one. You have to understand, the business model that’s best suited for you will depend entirely on your company’s growth strategy and plans for operations and profits.
Before starting you have to ask yourself some key questions:
What are your customer’s real needs?
How will my product/service benefit the needs of the customer?
What is the market potential and where do my competitors stand?
What set-up costs am I looking at?
Which expenses will be fixed and variable costs?
What do I value more – scale or customization or both?
As you answer these questions you will be able to evaluate business models a little better and be a step closer to finding what suits you best. As previously mentioned, you can’t find your business model on a piece of paper, you would have to experiment with the market.
But keep in mind, the time and effort gone into the plan before implementing it in your business are the time saved from errors and more time for growth and success.
Our growth and transformation experts at Shoonyas will be pleased to consult with you and help you find your sweet-spot, business model that aligns with your growth strategy and plans for profits.