Working business models live and thrive all around us in the marketplace. In the world of business—manufacturers, wholesalers, distributors, retailers, and services—there are many tried and true business models. With the mass adoption of technology and the internet, old business models are morphing and new business models are emerging.
A business model is a brief explanation of how a business concept makes money. It describes who buys the products or services, how much they pay, and how often they purchase. It is the logic of a business.
Unfortunately, not all businesses are logical. A poorly conceived business model quickly becomes a liability and unless it’s fixed, can bring a business down.
The same products and services can be marketed through several different business models. For example, the transportation of people can be achieved through different means. You can buy and own a vehicle, you can lease a vehicle for a specific term, or you can rent a vehicle for short-term use. Car dealerships, leasing companies, and rental agencies are three different proven business models that connect cars with customers and enable people to get where they’re going.
Another business model, the razor and blade model, gives away razor handles and earns its revenue by selling the user blades or refills. A different model sells electric razors to customers at a much higher initial cost, but without the ongoing costs for refills. These two business models serve the same market through different strategies.
The artisan business model describes how artists, musicians, and writers market their wares. Many artisans simply create their works and sell them to local shops. Some set up as vendors on busy streets or at space rented at a farmer’s market, while others become part of a marketing cooperative. These are all variations on the artisan business model.
Franchising is the practice of using another firm’s successful business model. For the franchisor, the franchise is an alternative to building chain stores to distribute goods and avoid the investment and liability that comes with owning a chain. The franchisees benefit from the franchisor’s success and pay royalties for that benefit. Franchisees are thought to have a greater incentive than direct employees because they are invested in the business.
The freemium business model works by offering basic web services, or a basic downloadable digital product, for free, while charging a premium for advanced or special services or features. This model is made possible in part by the fact that there is little or no cost of costs for the products, once created.
The online auction is a prime example of a business model that didn’t exist a few short years ago. Customers bid online for products and services. Buying and selling in the auction format is made possible through auction software which handles the various processes involved.
A number of new business models are emerging in the e-business realm. E-businesses earn revenue through strategies such as subscriptions, sale of advertising, and transaction commissions. Search engines, for example, provide their services to the end user for free—rumour has it that they manage to make ends meet through the sale of advertising.
The business model of choice must serve the owner’s needs, enable the business to stay competitive, and meet the needs of customers.