Your startup’s business model is essentially the way your business will generate income. This is often confused with business strategy, but both are subtly different from each other.
In this article, I’m going to outline exactly what a business model is, along with examples of successful business models, and why a business model should be treated as separate from your business strategy.
Your Business Model: A Simple Definition
Believe it or not, defining exactly what constitutes a business model is more difficult than you think. As Harvard Business Review puts it: Business models are subjective. “It’s one of those things many people feel they can recognize when they see it, but can’t quite define.”
This is especially true of badly constructed business models. Like a painting, it’s easy to point out a mistake, but not so easy to understand the techniques that go into creating the painting in the first place. This difficulty is often caused by confusing a business model with a business strategy.
Let’s simplify this then and create a definition that has some consensus behind it. Think of a business model as an overview of your business, flowing from product concept to profit. It sets the overall goal of your business, focusing on how you generate money.
A business model contains:
- The product/service your business believes has value for the customer.
- The market niche and main target demographic
- How you will deliver your product to this demographic
- The expense of bringing your product/service to your target market
Let’s look at an example of what a business model is. Calm is a startup that offers meditation and mindfulness training to the general public. Quadrupling its revenue from 2018 onward and raising $115million in investment, it has been valued as a $1billion company and has over 40 million users.
Calm has achieved this through its business model. By targeting the iOS market and a growing interest in mindfulness applications, it has produced the most downloaded meditation app in the world. That’s no mean feat considering the competition and a sheer number of similar products.
Calm’s product concept (in this case software as service) is simply to teach meditation in a clear way through an easy to use the app. This is the product value that the company offers consumers. The market niche is an overlap between phone users and those seeking mental well being. This is delivered through a freemium “try before you buy” model. The expense covers the cost of developing the app and advertising. Below is their pricing page.
There you have it, four simple parts of a business model: Product, market, delivery, and expense.
You may find interesting the video below where I cover in detail what is a business model.
Examples of Business Models
Now that we understand that a business model delivers four important pieces of information to potential investors, let’s look at the types of business models you can expect to encounter. There are many more, but we’ll try here to give a well-rounded summary of some popular business models with a proven track record.
1) The Aggregator Model
The aggregator business model has been especially popular since the early 2000s and has risen up hand in hand with tech infrastructure.
In essence, this model works on a network basis. A business provides a service where it collects (aggregates) product information from different sources. This information is then accessed more easily by customers, as it is all found in one place.
An example of this would be a website that aggregates hotel bookings on its website, allowing customers to see many hotel rooms and compare the rates and features easily. A company like Trivago has this exact model and posted profits of $500million in 2015 alone.
Characteristics of the aggregator business model include:
- Having two customer types. One category includes the companies that allow their products to be aggregated into one place. The second customer category includes those who browse those aggregated lists to make a purchase – someone looking to book a room, etc.
- The companies listed all offer products in the same industry. This gives the aggregated website focus, attracting paying customers looking for that exact product.
- Aggregators generate revenue by either taking commission each time a customer pays for a third party product/service through its website, or by charging a service fee for companies to be listed in their database.
2) Manufacturer Business Model
Manufacturers create products from raw materials or components. They usually buy these materials from producers, create a new product, and then sell those products either directly to customers or via a third-party wholesale or retail relationship.
The manufacturing chain can be a long one. An example of a manufacturer would be the major aircraft manufacturers like Boeing or Airbus.
They build their planes from raw materials but also components such as engines from companies like General Electric. General Electric itself also operates with a manufacturing business model, creating these parts to move further down the supply chain.
Characteristics of the manufacturer business model include:
- Creating products from materials for customers or other businesses.
- Re-configuring production and retooling factories each time a new product is launched.
- Building customer loyalty to a brand based on the quality and usefulness of manufactured goods.
3) High Touch Business Model
This model relies upon maximum contact between a company’s sales staff and the customer. Not just concerned with selling a product to a customer, a high touch business model involves taking each customer through an elaborate pre and post-sales process.
High touch business models require that company staff help customers with their product in terms of setting it up, operating it, and even maintaining it. Below is a good image showing the difference from high touch to low touch.
As business author and management professor Michael Leboeuf puts it: “A satisfied customer is the best business strategy of all”. The high touch business model has this business ethos at its heart.
The high touch model creates a connection between the customer and a company’s sales team, often only one sales member. This person-centric approach creates a sense of trust and loyalty in the customer.
An example of the high touch method would be an advisory firm like FTI Consulting, which interacts with business clients, advising them on all of their needs. In just the first quarter of 2019, FTI generated $551.3million in revenue from offering this high touch model.
Characteristics of the high touch business model include:
- The strongest sense of customer loyalty.
- Bespoke solutions and services offered on an individual basis. A high touch business model adapts to each customer’s needs.
- Pristine customer interactions with no bad word of mouth and very rare poor reviews.
- Often working on a low volume basis due to the high contact approach. However, some large companies will have the resources to provide high touch models to a large number of clients simultaneously.
There is also the low touch business model which relies on quick, short customer interactions. The low touch business model is more about high volume and fast sales and is best suited to products that do not need extensive pre and post aftercare. An example of low touch would be a fast-food chain where customers are served with speed.
4) The Franchise Business Model
Speaking of fast food businesses, some of them also operate under the franchise business model. A franchise is essentially a license. This license is bought from the owner or parent company in order for another business to use its branding and products and even to gain access to their infrastructure and knowledge.
In this sense, the entity selling the franchise is called the “franchiser” and a person or company paying for access to the franchise is called a “franchisee”.
This type of business model is very popular in the restaurant and food sectors, generating 48% of franchise income across the US annually. McDonald’s restaurants consist mainly of franchised premises, with 35,000 restaurants across the globe. This shows how successful such a model can be.
Characteristics of the franchise model include:
- The franchisee not having to establish a brand and infrastructure.
- The franchisee pays an initial license fee to use the brand as its own, along with royalty or commission. They must also run their business to the parameters of the parent brand.
- If a franchisee does not adhere to the standards of the parent brand, they will have the license revoked. This is to protect the brand of the franchiser. In other words, there are terms and conditions attached to the use of a franchise license.
- Franchise licenses can be bought with a one-off payment but usually have a duration specific to each license. This needs to be renewed at those intervals.
5) Subscription Business Model
The subscription business model is certainly lucrative. This model involves having customers pay monthly, quarterly or yearly to use a product. Businesses are increasingly switching to a subscription model because it generates continued revenue rather than a single purchase.
The subscription business model has been around for a long time. Newspaper and magazine subscriptions used to be very popular. Even now, large scale publications such as Forbes and Times Magazine now offer digital subscriptions which are the successor to older physical subscription models.
Netflix, Amazon prime, and Apple all offer video subscription services, with video streaming on-demand (SvoD) expected to generate over $25billion in 2020 across the US alone.
Subscription services also exist for the home delivery of physical products such as shaving kits, with Dollar Shave Club offering such products and being sold in 2016 for a staggering $1billion.
Characteristics of a subscription business model include:
- Customers not having to continually reorder the same item. Instead, they sign up for a subscription once and receive the item on time each month.
- Subscription models have to keep a close eye on Lifetime Value (LTV). This tells the company how much they will make from each subscriber during their subscription.
- No matter how good the product or service, subscription services will lose some subscribers each month. These must be replaced in order to keep the business afloat.
6) Advertisement Business Model
The advertisement business model is simple at its core. A business builds an audience and then sells advertising space to advertisers on its product. The larger the audience, the more money the business generates as an advertising platform.
Websites have been doing this for decades, and advertising services like Google Ads generating billions of revenue in doing so. YouTube partly runs on this model and provides free video hosting, building a huge user-base that advertisers can access at a premium. Recent forecasts suggest that it will generate over $5billion in advertising in 2020.
Advertising business models often require large amounts of investment to get up and running. That investment tends to be front-loaded as the company needs to create its user base before being able to approach companies willing to pay for advertising.
There’s little point in a company paying for advertising that will never be seen by anyone!
Characteristics of the advertising business model include:
- High burn rate until an audience is secured.
- Increasing advertising prices for premium spots on the product. Taking YouTube as an example, advertisers pay more for an advert appearing on a channel with 10 million subscribers than they do on a channel with 10 subscribers.
- As a business expands and diversifies its product range, it may use its own advertising spots to promote its own products at times. This saves on advertising budget.
7) Crowdsourcing Business Model
Crowdsourcing is a more recent business model. It involves customers contributing in order to launch a product or service. In essence, they pay money upfront for the promise (which sometimes isn’t fulfilled) that a product/service will be provided if enough revenue is raised.
Crowdsourcing can be used to replace angel funding or to supplement it. In some cases, a company will have an existing prototype, in others, the crowdfunding will be used to fund product research.
Companies like Kickstarter and Indiegogo allow individuals and companies to crowdfund their products. Which, incidentally, is a great example of the Market Business Model, where a company creates the marketplace for others to trade. With a 5% commission, Kickstarter makes millions each year.
And crowdsourcing doesn’t just stop at finances. Businesses can crowdsource labor, open innovation, crowd creativity, and other critical resources. Companies save money by doing so and those taking part are made to feel that they had a hand in building something.
Characteristics of the crowdsourcing business model include:
- Avoiding handing equity out to investors. Those crowdfunding a business usually receive the product or the satisfaction of supporting something in return. This means that a company’s founders can hold onto larger amounts for later funding rounds (some crowdsourcing websites, however, do give each person a small amount of equity).
- It can be used to create free promotional materials. For example, when Airbnb asked customers to submit videos to promote their favorite hidden destinations. This footage then created more business for the company without having to spend any money.
- It works to create a foundation but is often best used as a springboard to create self-sustainable revenue.
8) Brick and Mortar Business Model
The brick and mortar business model are one of the oldest models in existence. Although this model has been forced to adapt in the wake of increasing online-only business models, it is still effective for many businesses.
Brick and mortar businesses interact face to face with customers via a physical store or shop. These premises allow customers to buy products from sales staff directly and to ask questions.
It’s a mistake to think that eCommerce has killed the brick and mortar model.
In the words of Jim West, CEO of a successful furniture chain, West Elm, which generates $1.3billion annually in revenue: “I was reading all these reports that were down on retail brick-and-mortar, saying it’s all about online…I think brick-and-mortar is an amazing opportunity to use our stores and our store staff as a vehicle to truly engage with the community in a way no other retailers are doing.“
The brick and mortar business model have several characteristics, including:
- Physical locations to showcase products to the world, allowing customers to see and even test products first hand before buying.
- Acting as a touchpoint between retailers and customers, building relationships that foster brand loyalty.
- Creating a sense of community where customers communicate with each other about their physical shopping experiences.
- Funneling customers to specific locations where in house or third party advertising can be placed on the premises to fuel revenue.
9) Distributor Business Model
It’s a common mistake to believe that a business must create its own products to be successful. The distributor model is a fantastic way to create extensive, stable revenue streams without having to make a single product. A distributor sells third party products directly to consumers, but can also distribute products to retailers.
In order for the distributor or distribution model to be successful, a business must have a clearly defined and established chain of supply. Most successful distribution businesses maintain more than one of these “distribution channels” to maximize revenue and have redundancy should one distribution channel collapse.
I should state at this point that every business is, in some way, a distribution business. All businesses are trying to get their product into the hands of customers. However, there are companies that work completely on the premise of distribution alone. If your business is distribution heavy, I would lean towards using the distributor model.
Some companies both brand their own products and sell third party products via a brick and mortar store. Walmart uses this combined brick and mortar/distributor model to generate one of the world’s most recognizable outlets. In 2019 alone, Walmart had over 2 million employees with 11,361 stores and generated revenue of 514,405million dollars.
The distributor model has a number of characteristics, including:
- Investing substantial resources in setting up distribution channels.
- Not focusing on manufacturing (although some businesses will have a hybrid model which does both).
- Ensuring that distribution channels can scale both upward and downward based on demand.
- Continually appraising the chain of supply so as to maximize profits in each distribution channel. The fewer third parties involved along the way, the larger the profit margin for the distributor.
10) Retailer Business Model
Most of us are familiar with the retail business model. Whether it’s when shopping online or walking through a shopping mall, we know what a retail business looks like. This model involves buying products from a distributor and then selling those products directly to consumers, sometimes with your own branding.
A key aspect of the retail business model is in the way that it relies on manipulating value propositions. If, for example, a clothing brand is not selling well, then a retailer can alter the discount price in order to shape the value proposition of the product.
The most successful retailers continually manipulate the sales point of their products, in tandem with solid advertising, which then goes on to affect the general market value of a brand or item. Successful retail as a model is all about anticipating the value customers see in specific products.
We often associate retailers with the clothing industry, but they can sell any type of product. It’s perceived wisdom that the retail model has had its day, but with a recent year-on-year rise of 5.8% in sales for December 2019, across the US, there is plenty of profit to be made for retailers who are tactical about their target demographics.
An example of the retail business model would be Burlington Stores, Inc. This brand is a fortune 500 company and sells directly to customers via its retail stores. In the third quarter of 2019, it posted revenue of $1.7billion and sales increases of 8.6%. While many focus on an online presence, retailers can still make significant inroads by anticipating customer needs.
Characteristics of the retail model include:
- Being the point of contact for a sale, whether online or in a store.
- Placed at the end of the supply chain, receiving goods.
- Using price changes, discounts, and marketing to change the value proposition of products.
- Using strategies that maximize sales boosts such as at Christmas or during the transition from one season into another (especially important for clothes retailers). Trend analysis is key.
11) Ecommerce Business Model
Business models come in all shapes and sizes, but they also differ in terms of their complexity or clarity. The eCommerce business model is a simple concept that elegantly explains how a business will generate revenue. It involves selling products online to customers through a website.
That’s it. However, as technology progresses, eCommerce has also entered the world of social media platforms and apps. There are many apps now where even small brands can sell directly to customers.
Take small media entrepreneurs like James Rolfe. He made big waves as a video creator and continues to produce content. He has sold tens of thousands of DVD editions and collections of his videos through his website store. This is a route many content creators are exploring as merchandise sales for Youtubers has exploded, generating $6.8million for Youtube creator Pewdiepie alone.
Ecommerce works just as well for a small single-person business selling their small number of products to a niche audience as it does for gigantic corporations like Apple. Ecommerce can be considered the grandfather to many of the other communications based business models we see today. And it’s still going strong.
Characteristics of the eCommerce business model, include:
- Direct sales through a website.
- Often handling shipping in house.
- Growing by funneling customers to their website on a repeat basis.
12) Bricks and Clicks Business Model
We’ve already touched on the idea that more than one business model can be implemented at a time, but let’s look at the end result of this approach – hybrid business models. This is when a business combines two distinct business models together.
It’s not unusual, in fact, most companies run more than one business model in parallel, especially once established and looking for new revenue streams.
The bricks and clicks business model is an example of this and is now one of the most successful business models in existence. It’s a hybrid of the eCommerce and bricks-and-mortar models we discussed above. You’ll also see some refer to it as the “clicks and mortar” model.
In this model, a business sells its products both in a physical store and online via delivery. A third part of the model is sometimes also integrated called the “flips” segment – bricks, clicks, and flips. The “flips” part of the model is when a business also sells products via a catalog or other print publication.
There are two approaches to bricks and clicks. One is where people can buy directly online as well as at a store, while the other allows customers to order an item online and then pick it up at a local outlet if stocked or delivered there.
What makes the bricks and clicks model so powerful is that it offers options to customers. They can choose how they want to buy their products. However, this also means that a business has to invest in both physical and online storage and marketing. In some cases, this will result in excelling at neither because the capital needed for each distribution channel has been halved.
A great example of bricks and clicks is the US-based chain TJX, which Business Insider reports generating $35.9billion in annual sales. Their TK Maxx store brand offers products to customers via their physical stores, but also through online delivery and “click & collect”.
Characteristics of the bricks and clicks model include:
- Investing in both physical and online infrastructure.
- Often including loyalty points or card systems that can be used both online and in-store.
- Understanding that bricks and mortar systems operate differently to eCommerce models, and therefore, while some integration is required, they remain different aspects of the one business.
13) Nickel and Dime Business Model
The nickel and dime business model is about driving the cost of a product down to its lowest point while still making a profit. By doing so, customers are tempted to buy such products because the psychological weight placed on the purchase is low.
This is the exact opposite of a hero or premium business model where products are deliberately expensive.
The nickel and dime model evokes images of family-run stores offering low-quality goods for as little as a dollar each. However, this model is used in nearly every industry imaginable. For example, JetBlue Airways is a discount airline. They offer low budget flights and peaked in 2016 with a staggering $1.2billion of pre-tax income.
A key part of many nickel and dime business models is that they generate significant income through associated costs. By pricing goods at the most cost-effective threshold possible, customers then spend more money on connected products or services.
For example, in a nickel and dime store, a customer is more likely to pick up several other items or make an impulse buy because the products cost so little, even when they initially only intended to buy one thing.
Another strategy is to increase associated costs such as higher food or luggage prices on a budget airline or charge for annual car servicing at a budget car dealer.
Characteristics of the nickel and dime model include:
- Selling a high volume in order to have a sustainable profit.
- Creating an understanding with customers that such products are low budget, and hence they will not be premium or industry-leading. Customer expectation is key. If they expect too much and receive too little, the brand will not succeed.
- Paying particular attention to competition and market pricing in order to undercut.
14) Freemium Business Model
The freemium business model is particularly popular for app and software developers. However, it is also seen in other areas as a “try before you buy” model. Businesses deliver a product with reduced features for free, selling access to more advanced features later.
This results in parallel plans where the more a customer pays, the more features and services they will unlock. In some cases, the “premium” version of a product simply involves removing advertisements so that the product is easier to use.
Examples of restrictions commonly placed on the “free” version of an app or piece of the software include limited storage and time restrictions. Physical products tend to be offered in trial amounts so that customers only get to try it out and no more before buying the full item.
Online companies are consistently turning to freemium models in order to generate significant revenue. Evernote, an app that assists phone and tablet users with creating lists and notes, is an example of this. It allows customers to use a completely free version of the app, which by 2018 had been used 8 billion times and was valued at $1billion during funding rounds in 2012.
Characteristics of the freemium business model, include:
- Creating loyal customers first before asking them to pay for a service or product.
- Providing true value through the free version of said product/service, not a useless counterpart. Customers are now used to the freemium model, especially when using apps. They expect a free version to still have practical value.
- For apps, monetizing through in-app purchases creating more revenue.
15) Data Licensing/Selling Business Model
One of the most controversial business models in existence, the data licensing or data selling model continues to gain ground for large companies. The concept behind this model is that a business gathers data on its customers/users and then sells this data to a third party.
This is how we end up with targeted ads when we browse online. One company gathers information about what you like and then shares this with a company that has you in its sights, as part of its targeted demographic.
Twitter is one of the most famous companies that use this model. It earns 86% of its revenue from advertising. The best way it can improve its profits is to be able to cater to adverts to specific people. In other words, those people who are most likely to buy an advertised product.
Instead of “technically” selling data to advertisers, Twitter records the things its users post about and like. It then pairs a product with users who have similar interests. The other 14% of its income does come from direct licensing. In 2018 Twitter generated $425million by allowing third-party companies to access and analyze its user’s likes and dislikes.
Characteristics of data licensing or selling, include:
- Rigorous data collection of each user action.
- Safe storage of this data to avoid privacy concerns.
- Being able to sell this data either directly to companies or indirectly through targeted advertising.
16) Agency Business Model
The agency business model works is a commission-based model. Such a business generates income by having a large network of companies to which it can hire out talent. The business enters into a temporary partnership with these companies, offering its services on a project by project basis.
There are two types of agency business model. One includes advertising agencies, for example. They are paid by a company to create advertising material for that company’s products or services. The resulting advertising material is then owned by the company and not the advertising agency.
The second type of agency business model involves a company that signs up agency workers to its workforce so that they can be placed with third party business. For example, a recruitment agency will be contacted by a business looking to take on new staff.
It is the recruitment agency’s aim to bring the employer and the staff member together and take a fee for doing so. In this way, the recruitment agency has two customer bases – workers and businesses looking for workers.
Alternatively, this second form of agency work can keep the workers on its payroll and hire them out on temporary contracts to other businesses. This means a company doesn’t need to commit to a full-time employment contract.
Agency based business models offer a lot of flexibility. An example of such an agency is SummitCPA, which has made waves in the world of accounting by disrupting the standard way agencies deliver accountants to their clients.
Characteristics of the agency business model include:
- Being a firm for hire, working on tasks as a temporary part of a third party’s team.
- Providing a pool of talent to problem solve a client’s challenged.
- Claiming no ownership of the resulting work.
17) Affiliate Marketing Business Model
Affiliate marketing works by democratizing revenue. It allows larger distributors and producers to share their profits with those who help them make a sale. The model works purely on a commission basis and, therefore, those using affiliate marketing are motivated to notch up a high volume of sales as opposed to spending a long time on customer support.
Where affiliate marketing differs from other commission-based business models, is that the affiliate marketer isn’t handling the sale itself. Instead, they act as an influencer, funneling potential customers towards a product or website where they can make a purchase.
Since the late 90s, affiliate marketing has slowly become commonplace online. Bloggers, webmasters, and content creators have used affiliate marketing to generate revenue. This can be through a paid advert where a creator talks about the product or just through an attached link that leads to the product.
There are four components to the affiliate marketing model. The first is the affiliate. This is the individual or company that decides to promote a third party product for a commission. The second is the merchant. This is the individual or company actually selling the product.
The third component is the network. This is usually a sort of middleman who bridges the connection between the affiliate and the merchant via their own network, payment option, or delivery infrastructure, as well as any other online marketplace, etc.
Affiliates primarily interact with the network and then the network interacts with the merchant on their behalf.
The fourth and last component is the customer who interacts with the affiliate. An entire industry has risen up around the affiliate marketing business model, generating an expected $6.8billion in revenue in 2020.
Characteristics of the affiliate marketing business model include:
- Affiliates suggesting products but not directly selling them.
- Affiliates using customer or audience trust as a way to generate third party revenue as an influencer.
- Third-party networks handling delivery and transactions.
18) E-commerce Marketplace Business Model
Differing from the standard eCommerce model, instead of a business selling items online to customers, the eCommerce marketplace model involves creating a digital marketplace where third party individuals and companies can sell their goods.
Revenue is generated by sharing commission or through third parties paying a fee to access the digital marketplace. This fee is also known as a” list price”.
In essence, the marketplace can be thought of like an online shopping mall where individuals or companies can sell their goods. Companies make their own profits through sales but have to pay to rent the space. Examples of this include eBay, Etsy, and Amazon.
In the Chinese market, Alibaba rules supreme. Alibaba is similar to Amazon in that it hosts both first party and third party goods.
Market capitalization is important here. It is a measurement of how much a company’s shares are collectively worth, and in 2019, Alibaba posted that its market capitalization was a staggering $397.8billion.
While eCommerce itself is now inexpensive, large companies have squeezed the eCommerce marketplace sector, and so it’s difficult to get traction there, though not impossible.
If an eCommerce marketplace company has a unique spin, such as seen with used items marketplace Schpock (recently posting annual revenue over $5million), then it can still be lucrative.
For others, using the already launched eCommerce marketplaces like Amazon and Alibaba is much more cost-effective, by simply listing products for sale through their services instead of having to build a marketplace and attract users.
Characteristics of the eCommerce marketplace business model include:
- Investing in a digital platform to host third party product or service listings.
- Providing a simple checkout and transaction system for the speed of purchase.
- Automating the transaction delivery so that vendors are instantly informed that a product needs to be shipped.
- In some cases, offering warehouse storage and direct delivery of goods.
- Taking complaints about businesses selling in your marketplace and reacting accordingly.
19) Dropshipping Business Model
Dropshipping is another type of business model that goes through trends of popularity, depending on how the model is performing in general. At its heart, dropshipping is very similar to the distributor model. Where it differs, however, is that a dropshipping business doesn’t deliver or distribute the products directly.
Instead, like affiliate marketing, once the order is made, a third party handles distribution for you.
In this model, the dropshipping company is the merchant. The merchant sells items to customers, taking the orders and processing the transactions. The merchant also handles all advertising of the products. The big difference here is that the merchant doesn’t own the products.
Unlike affiliate marketing where the affiliate has no part to play in the sale, the dropshipping business markets products under its own brand takes the orders from the customers and then buys the desired products from a third party company.
The third-party company then ships directly to the customer, which is one of the huge benefits of the dropshipping model. They are simple to set up, require no manufacturing, and even shipping is taken care of.
Not only that, but the sector is still growing, with the dropshipping market estimated to be worth $557.9billion by 2025.
Characteristics of the dropshipping business model include:
- Having an online store with own branding.
- Having agreements in place to sell 3rd party items.
- Processing transactions.
- Ensuring that 3rd party companies can handle the supply of items as purchased.
20) Network Marketing Business Model
The network marketing model is sometimes referred to as “multi-level marketing”. When discussing network marketing, it’s easy to think at first that it’s a pyramid scheme. Of course, pyramid schemes should be avoided at all costs, but network marketing isn’t the same thing. It’s a legitimate business model.
Why does it get mistaken for a pyramid scheme? Because it’s often described as having a “pyramid structure”. But these are two different things. Let me explain.
The pyramid structure of the network marketing business model involves commission sales. It is a form of direct marketing, where one person or company at the top of the pyramid sells directly to the customer and receives a cut of the profits.
They also recruit people underneath them to sell the same product. They, in turn, recruit their own salespeople. Every time one of their recruits makes a sale, the recruit, and the recruiter receive a commission.
This is why it’s often mistaken for a pyramid scheme because the revenue flows upwards and is shared by those at the top of the pyramid. The critical distinction is that recruits are not asked to pay anything into the business model in order to get started.
In a pyramid model, recruits pay money into the scheme by buying products they can later sell. In network marketing, recruits often don’t even handle the products, but just sell them directly to customers over the phone. The parent company or producer of the product then handles shipping. It’s commissioned sales pay with no salary.
A great example of network marketing is Usborne Publishing. This successful book publisher uses its own in-house team of writers, artists, and editors to produce primarily non-fiction books for children. It then uses what Usborne Publishing refers to as “consultants” to sell these books directly to schools, libraries, book stores, and other educators.
In essence, the “consultants” are independent salespeople who make a commission on each sale and can recruit further consultants to expand the size of their profit. The company is worth over $65million.
Characteristics of the network marketing business model include:
- Having a hierarchy of salespeople, with each new salesperson providing a commission for those above him/her.
- Salespeople being, in effect, independent. They are often referred to in network marketing circles as Independent Business Owners (IBO).
- Relies less on advertising and more on directly contacting potential customers.
- Each salesperson is accountable only to themselves.
- Although it has a pyramidal structure or hierarchy, it is not a pyramid scheme. Participants are not asked to “buy-in” in order to become salespeople. Money only changes hands when a sale is made.
21) Peer 2 Peer Business Model
Referred to as peer to peer or P2P catalyst, this business model creates a digital economy. Unlike eCommerce marketplace models, P2P creates a decentralized economy where the transactions are not handled by a central website, but instead are processed directly between users of the economy.
This allows users to trade with each other without necessarily having to pay commission for each sale, although some services do charge a percentage of each resulting purchase.
While the transactions are decentralized and users are free to handle them any way they choose, the listings for offered products or services are centralized on a website customers can browse.
Craigslist is probably the most famous example of this model. Users post their listings onto the site and carry out any transaction off-site once a customer contacts them. After including in-demand ads as part of its business model alongside the revenue from P2P, Craigslist posted annual profits over $1billion in 2019.
A point of interest is that such business models have been put under pressure as social media giants like Facebook have launched their own marketplace. However, Craigslist’s results show that peer to peer business is still very much alive and kicking.
Characteristics of the peer to peer business model include:
- A centralized location, usually a website where users can post their personal ads.
- The transaction takes place outside of the website.
- The marketplace makes money from charging listings fees and the user makes money from finding customers through the marketplace’s large install base.
22) Blockchain Business Model
Like P2P, this is a decentralized business model. However, in place of offering listing space, instead, a blockchain business creates a digital ledger that processes the use of digital currencies like Bitcoin or Ethereum.
The business model works by the product being publicly available in the form of a digital ledger that tracks transactions. Each time a transaction is made, a new block is added to the digital blockchain recording the transaction. However, advanced cryptography is used so that this data cannot be hacked or stolen.
This means that a transaction can be processed securely and privately between seller and buyer, verified that it has taken place by its existence on the blockchain code, while the details of the transaction remain completely private through encryption.
Currencies that use blockchain technology to register transactions and keep them private is called cryptocurrencies. More and more businesses are turning to cryptocurrencies and blockchain to carry out transactions for a number of reasons.
First, there is no transaction fee. Many businesses have to pay bank charges on their transactions. This is not the case with blockchain technology. Another reason to use blockchain is that it is a more secure way of carrying out transactions. The user data is far less likely to be hacked and used for fraud.
Finally, many companies are using cryptocurrencies and blockchain technology simply because customers want to use them. Millions of consumers are concerned with privacy and how companies store and use their financial data. Blockchain business models take this concern out of the equation.
When companies receive the cryptocurrency for a product, they can hang onto it until its market value increases, then sell it for an even bigger profit. Cryptocurrency is notoriously volatile but can reach incredible valuations. In January of 2020, for example, Bitcoin surged in value by 29%.
The blockchain business model can include a delayed cash conversion cycle in order to sell earned cryptocurrency for the highest profit margin down the line.
Characteristics of the blockchain business model include:
- Decentralization of financial transactions.
- The blockchain technology is not owned by anyone company and is instead a shared resource for anyone who wants to use it.
- The blockchain isn’t monetized by one single business. Each transaction is recorded via peer to peer interactions as they alter and add to the blockchain.
- Blockchain business models usually require that the cryptocurrency used is converted into a real-world currency at some point, preferably when the cryptocurrency is experiencing a surge in value.
23) Software as a Service Business Model
Software as a service is often abbreviated to “SaaS”. Alternatively, you might see it discussed as IAAS (Information as a Service) or PaaS (Platform as a Service). They essentially mean the same thing with some subtle differences and refer to one of the current most profitable business models in the world.
This model can also be described as a “pay as you go” model. Customers use a piece of software, gaining access to its features. However, when the customer decides to stop using that software, they cease paying for it and can no longer access it unless they start paying again.
The PaaS model (Platform as a Service) differs slightly from SaaS in that it offers an entire operating system and other utilities so that customers can develop software of their own. An example of this is Google’s App Engine.
The IaaS model (infrastructure as a service) differs from SaaS in that the business provides more than simple software features, but instead access to storage, server, firewall, and network infrastructure. The features of the infrastructure are unlocked on payment.
You’ll often hear these terms used interchangeably, and although they share the same business model in that they are subscription-based, it’s important to understand these subtle distinctions.
The opposite of the SaaS model is “software as a product”. This is the older model where software is simply sold for use with the one-time purchase of a license. In recent years, more and more software developers have discovered that the SaaS model is far more profitable, that’s why Adobe reached a new high in annual income for 2019: $11billion.
It’s no coincidence that a company like Adobe has surpassed previous revenue as it switched to a SaaS business model. It’s an entire line of software that is now available through a subscription model under the Creative Cloud banner.
Adobe’s change in business model is a great case study of how to switch business models correctly, migrating revenue-generating products in a way that has been almost seamless.
Switching business models doesn’t always work, and there’s always a risk of alienating your existing customers, but if the correct switch is made with the perfect timing, as a gap opens up in the market, Adobe’s numbers illustrate just how profitable such a change can be.
Characteristics of the SaaS business model include:
- Usually incorporates cloud storage or “always online” component in order to verify the subscription.
- Pay tiers exist from standard to premium or enterprise level so that the more accessible features are included, the higher the monthly or annual subscription.
- Requires lightning fast, reliable, and secure hosting so that software can be downloaded and continually monitored for active license use.
- Creates continual, subscription-based income similar to media consumption models like Netflix and Amazon Video. While there was initial resistance to this way of delivering software, it has been successful for many companies.
24) One-For-One Business Model
The one-for-one business model is classified as a form of “social entrepreneurship”. It is a way to both generate revenue and have a lasting positive impact on others. A simple way to look at it is that if you buy a pizza, the restaurant promises to provide another pizza for someone less fortunate who cannot afford it.
You might wonder how such a business model can survive, but there are two ways to generate a profit with the one-for-one approach. The first is to ensure that your margins are large, so large in fact that you can afford to create two products for the price of one and still make a profit.
The second is to use a one-for-one promotion where the initial loss will be made up for by good brand reputation and later sales as a result.
The one-for-one model is also known as “buy-one-give-one” and was first pioneered by TOMS Shoes, where one item was given away for every purchase. TOMS Shoes began donating a pair of shoes to a child in a developing country for every pair purchased.
This was soon followed up by brands like Warby Parker, who donated eyeglasses to those who couldn’t afford them every time someone else bought a pair.
By the end of 2019, TOMS had donated over 60million pairs of shoes, though this has resulted in a small profit margin with revenue of $91million for Q4 of 2019, but a profit of just $8million for the same period.
Characteristics of the one-for-one model include:
- Large enough profit margins to produce two products for every one sold.
- Linking this “free” product to a good or social cause. This both helps people and builds a good brand reputation.
- Potentially limiting this offer to products with high margins only.
- Factoring delivery of items to needy causes and any resulting necessary infrastructure investment into cost structure.
25) Accessories (Razor and Blade) Business Model
The accessories business model is a great way to generate lasting, regular revenue. Instead of having customers pay just once for something, they pay over and over for something that is essential to them.
In the accessories business model, customers buy a product that requires specific parts to run. These parts are finite in their capacity and so run down eventually. Customers then have to buy those parts in order to keep the full product working.
This is why it is also referred to as the “razor and blade” business model because that perfectly outlines how it works. That and the fact that the founder of razor and blade manufacturer Gillette, once said: “Give ’em the razor; sell ’em the blades”.
You buy the main razor, but the blades blunt over time and need to be replaced. By offering the razor to the customer for a reasonable price (sometimes even at a loss), the company generates revenue long term, each time customers buy a pack of razors.’
The razor and blade model goes far beyond small purchases, though customers are often more willing to buy affordable accessories repeatedly. Believe it or not, something as expensive as nuclear power works using a razor and blade model.
Companies build and sell their reactors at a loss or for cost, knowing that their reactors require a specific type of fuel to work. When a business deliberately designs its products to only work with its ecosystem of accessories, this is called “vendor lock-in”, and we see this with companies like Apple who only want their accessories used with their main products.
Kodak used to rule the photography industry as a leading manufacturer of film and cameras. They generated millions of dollars by selling low price cameras, but high price film stock. They knew people would have to buy the film stock once they had a camera.
Another example is Comcast. The telecommunications giant gives free DVRs to customers. Then, a subscription is required to gain access to channels each month, eventually turning a profit after 18 months. This shows why it’s important to retain customers long enough to overturn the marketing and production cost of the original product.
A stunning example is when Standard Oil expanded into the Chinese market. The Rockefeller owned oil business sold kerosene lamps at a loss, knowing that they would generate substantially more revenue in the long term because the kerosene lamp owners had to buy oil continually to keep the lamps running.
This shows the central premise behind the razor and blade model – put the permanent product into the hands of consumers, knowing they need to buy accessories to make it work.
Characteristics of the razor and blade business model include:
- Selling products at a loss to generate profit through the sale of accessories.
- Undertaking significant market research to minimize the likelihood of people buying a product and then giving up on it before purchasing enough accessories to turn a profit.
- In some cases, building a subscription model into the repeat purchase of accessories.
26) Privacy as an Asset Business Model
Most commerce is now carried out almost exclusively on a computer or mobile device. Even when we aren’t buying anything, our internet browsing habits are being tracked by big business. They want to know what we like so that they can then advertise more of the same to us and take a cut when we buy the displayed product or service.
We also see tech panics around any leaks involving consumer credit cards and bank details. There is a real desire for privacy to be at the heart of what we do online, with 47% of internet users in the US more concerned about their privacy in 2019 than they were in 2018.
It’s not surprising then that privacy as an asset is now a popular business model. In this model, individuals want ways to stop big businesses and hackers from getting their hands on private data. At the same time, companies that store private information are terrified of having a data leak as it would hurt their sales and reputation.
This business model then involves selling software to individuals and companies to protect their private information. Alternatively, companies can directly use privacy as a selling point. Take DuckDuckGo, for example. This search engine provides adverts based purely on a person’s current search words.
It does not track user info and store what they like and where they visit. This “privacy as an asset” approach has allowed DuckDuckGo to generate $25million annually.
Other companies like Ghostery are creating entire browsers designed to not track personal data. With 73 employees and $19.4million of annual income, it’s easy to see why Ghostery and others have found a fantastic niche – the privacy as an asset business model!
Characteristics of privacy as an asset business model include:
- Attracting customers by showing why privacy matters and how a product protects it.
- Monetizing “free” products through advertisements that are not based on continual tracking of internet usage.
- Destroying any personal information from each user of the product.
27) Enterprise Business Model
The enterprise business model is an upmarket model usually implemented by large businesses with access to Fortune 500 customers. In essence, it’s a model specifically designed to secure commerce with those possessing millions of dollars in disposable income.
Businesses using the enterprise model focus solely on closing financially substantial deals and do not focus on high volume sales. Most of the time, this means having only a handful of clients at any time.
In many ways, we can look at the enterprise business model as being the antithesis of the nickel and dime model. Both are trying to create a desirable value proposition for their chosen target demographics. However, the nickel and dime model is focused on high volume at a low price point while the enterprise model is focused on a high price point at low volume.
The enterprise business model relies on expert market research, marketing, and sales. Market research is necessary to identify a list of “perfect” clients. The marketing is designed with pinpoint focus to attract such clients, and the sales team has to have the experience and talent to close these high profile deals.
The cost of losing out on one deal can be catastrophic for the enterprise business model, simply because such businesses rely on so few, high paying clients.
The beauty of the enterprise business model, however, is that it can apply to almost any sector. Lawyers, accountants, agents, publishers – as long as the business is focusing on a small number of high paying clients, then it’s an enterprise business model.
Examples of these types of business include PR companies like Weber Shandwick, that focused in 2019 on promoting its 25 most valued entertainment clients at Cannes, rather than scaling the business to handle larger client numbers.
Characteristics of the enterprise business model include:
- Focusing on a small number of high-end clients.
- A stronger division of labor between marketing and sales.
- Building long term relationships with this small, but exclusive clientele.
28) Consulting Business Model
We’ve already come close to the consulting business model when discussing agency work among others. In this case, however, a consulting business works purely in an advisory capacity. This is about leveraging a pool of knowledge and expertise and hiring it out by the hour.
In some respects, a business lawyer could be seen to be running a consulting business model. On the other end of the spectrum, a building surveyor could also be approaching his or her business in the same manner.
If your business is concerned with giving advice as to its main mode of generating revenue, then you are operating via a consulting business model.
The primary asset of a consulting business is, therefore, the expertise of the staff giving advice. Relevant qualifications, experience, and the ability to advise diplomatically are essential.
Take the Big Three as an example. This refers to the world’s three largest strategy consulting firms. They are Mckinsey, Boston Consulting Group, and Bain & Company. Their annual income respectively is $10billion, $7.5billion, and $5billion.
This huge revenue is generated purely through giving advice, and advice is always worth money if it’s correct of course!
Characteristics of the consulting business model include:
- Headhunting the best advisors in your field at your price point.
- Ensuring that advice is continually appraised so that advisors maintain standards.
- The results of any consultation should be measured by a reliable metric to gauge its efficacy.
29) Cash Conversion Cycle Business Model
One aspect of business that seems mysterious to outsiders, is how businesses can continue to operate successfully when having such slim margins. Even more mind-boggling is how companies like Amazon can do this every year and still be considered one of the biggest companies in the world.
The reason they survive, and even prosper, is because they have incorporated the cash conversion cycle business model into their operations.
This business model has been a revelation over the last 10 – 15 years. In Amazon’s case, they pull off the seemingly impossible by “paying it forward”.
Most businesses, especially in retail, have a cash conversion cycle. This is predicated on how long it takes a business to buy inventory and then convert those products into cash. Often, companies require a positive cash conversion cycle, which means that they pay for the items before they sell them, such as buying in clothes for a clothes store to sell.
When a business like Amazon makes a sale, however, it has a trick up its sleeve. It’s able to have a negative conversion cycle. This means that they are able to receive money for goods before having to pay suppliers, instead of buying stock upfront.
This is because Amazon works as a marketplace and is able to set the rules itself, allowing third parties to sell products in that marketplace, but with Amazon handling the transaction first.
In effect, Amazon “borrows” from its suppliers when a sale is made. They have between 25 and 30 days before they need to pay the supplier their money for a sale. At that time, Amazon pays it forward. They use this money to fund the rest of the business. When it comes to paying, other payments will have come in that can then be used.
This perpetual cash conversion cycle allows Amazon to always be one step ahead because the website sees continual growth. That means there is always more new money coming in to pay merchants when the cash conversion cycle is over.
Amazon isn’t the only company that plays around with its cash conversion cycle to keep expanding its business. Manufacturers do the same when there is a demand for their products. They reinvest money back into the business knowing there is more revenue on the way to pay what they need.
Characteristics of the cash conversion cycle include:
- Having a continual stream of revenue.
- Using income as it comes in to strengthen or expand the business.
- Having to alter the cash conversion cycle quickly if revenue takes a downturn.
30) Business to Business (B2B) Business Model
A business to business model relies on commerce between companies, rather than the general public. In hybrid approaches, some companies will sell to both businesses and consumers. A quick example of a business to business transaction is when a manufacturer sells goods to a wholesaler or retailer.
The manufacturer isn’t selling directly to the public. Instead, the manufacturer generates revenue by selling to another company that will later sell those goods to the public.
It’s important to realize that B2B isn’t limited to the manufacturer/wholesaler/retailer supply line. Often, business to business transactions involves providing products or services to help another business run properly.
Examples include selling cleaning products, office supplies, and equipment to a business so that they can work efficiently. Alternatively, it could be providing a service – anything from security to software as a service (another great example of how some businesses combine models!).
The beauty of the B2B model is that it is completely scalable. Whether it is a one-person business selling custom made office chairs to other businesses, or a multi-national corporation selling tax advice to businesses, the process is generally the same.
Let’s look at a real-world example. Skype is a popular video conferencing platform. Microsoft owns the technology and uses it to allow businesses to easily perform remote presentations or hold meetings from all over the world.
While Microsoft keeps its Skype profit figures secret, it has been estimated that by 2024, Skype will have over 2 billion users worldwide, with most of its revenue coming from selling the software to other businesses.
This is a great approach as once businesses install Skype, bespoke adverts for newer features can be sent directly to those businesses most likely to respond positively to them.
Characteristics of the business to the business model include:
- Focusing on selling directly to other businesses rather than private individuals.
- Networking heavily within a chosen niche. For example, offering services and freebies to potential clients in one sector.
- Two-pronged strategy with specific business types being targeted through advertising, but also through having a strong cold calling approach to drum up sales, especially in the early stages.
31) Multi-Sided Business Model
A multi-sided business model simply means that a business is offering products an0d/or services to both sides of a supply chain. For example, the website Upwork offers a place for companies to list job openings. However, Upwork also does business with freelancers looking to fill those very same positions, charging them to apply.
By being able to target both sides of the supply chain and offer a valuable service, Upwork increased its revenue in 2019 by 25% to $253.4million dollars.
Another great example is LinkedIn. The social media giant offers a place for individuals to showcase their professional achievements, including via premium accounts, while at the same time selling subscription services to the HR departments of thousands of companies. When these departments need to fill a vacancy, LinkedIn finds them the ideal candidate.
Multi-sided businesses don’t need to work purely online, either. Think of a bar, for example, that hosts evenings where spirit and beer producers can showcase their products to distributors and other clients. In the course of one evening, the bar is being paid to host the products by producers while also selling drinks to the distributors in attendance.
The multi-sided business model is about bringing both sides of the supply chain together, and charging them both for the privilege!
Characteristics of the multi-sided business model include:
- Having at least two distinct customer bases.
- Bringing those customers together in a way that allows you to charge both sides.
- Incorporating two different strategies to cater to each side’s needs.
32) Vertical Integration Business Model
Most products and their parent companies occupy at least one link in the supply chain. At its most basic, this is the manufacturer selling directly to the customer.
If the manufacturer sells to a retailer first and then sells to the public, the supply chain has two links. Some businesses, such as those found in the agricultural commodities sector, include many steps between producer and consumer.
If any of these links break, then the supply chain grinds to a halt and a product cannot be delivered to a paying customer. Taking the example of agricultural trading, if inadequate storage of grain during transport results in it spoiling, then it will never be sold to customers.
For this reason, some companies operate a vertical integration business model. This is when a business secures more than one link in the chain; it effectively buys other steps of the supply chain so that it can have more control over how a product gets to the consumer.
For example, Netflix works with a vertical integration model. At first, the company bought the streaming rights to third party content. The company had to rely on this to give value to subscription customers. Now, however, Netflix has taken over the supply chain and makes many of its own shows and films, cutting out the need for a supplier.
A huge advantage of this is that there are fewer fees to be paid to third parties and that a business can later scale up to offer its supply chain infrastructure to other businesses for a fee. An example of this would be Amazon Video, who, like Netflix, has created its own streaming service. However, it makes this video hosting infrastructure available to production companies who want to stream their content for a small subscription fee, giving Amazon commission.
Characteristics of the vertical integration business model include:
- Taking over more than one link in the supply chain.
- Potentially hiring out this infrastructure to third parties.
- Investing heavily in expanding the day to day running of the business as it adapts to new parts of the supply chain.
33) User-Generated Business Model
The user-generated business model involves monetizing the content users of product produce. This can be fraught with ethical difficulties, and a rigorous legally binding terms of service is a must so that users cannot claim infringement of their copyright.
Modern platforms use the user-generated model regularly. For example, Quora is a “questions and answers” website. Users log in and ask questions about any topic. Other users with the experience or qualifications to answer the topic, then respond. The best answer is then upvoted to the top of the page underneath the relevant question.
Other platforms, such as Youtube, monetize user-generated content using adverts, but that money is shared with content creators. Youtube incidentally just posted a whopping $15billion worth of ad revenue for 2019. We can see here then that the user-generated model is closely related to other advertising business models.
Some believe that the user-generated model is new, but it’s been around for hundreds of years. Publications would sometimes use user-submitted letters as a focal point for an article, and the entire letters section of magazines and newspapers rely on user-generated content.
Characteristics of the user-generated business model, include:
- Creating a central location or platform for users to post content.
- Monetizing that content through various means such as advertisements or subscriptions.
- Editing user-generated content to be more appealing to advertisers and other users. Again, something that should be in the terms of service.
34) Data Processing Business Model
I’ve already explored how data licensing or selling can be a lucrative business model, but what about simple data processing? Technically, this involves not just processing data but for storing it. A company using this model charges a fee for access to its computational infrastructure.
A data processing or storage business invests heavily in computer server technology. These servers have the processing power to carry out complicated analyses. This could include scientific data, social media analytics, or marketing trends.
Most businesses don’t have the computer infrastructure to carry out large amounts of analysis, hence why the gap in the market has been filled by data processing businesses.
Whether processing or simply storing information, such businesses require top-level cybersecurity and data protection procedures. If a leak happens, that can all but destroy the faith customers have in a data processing business’s brand.
IBM has had a leading hand in computer technology for decades and offers a range of data processing servers to clients. At the end of 2019, the company announced an annual revenue of $77billion.
Characteristics of the data processing business model, include:
- High investment for data processing equipment and maintenance.
- It can be business to business or open to individual customers.
- It usually provides tiers of features, with enterprise clients gaining access to premium storage and processing, much like SaaS.
- It needs to provide a reliable, secure, and fast way for clients to access their own information.
35) Information Business Model (news, Wikipedia, etc.)
Have you ever heard of scientia potentia est? I’m just flexing my Latin, but it means: “Knowledge is power”. This was first attributed to one of the founding fathers of science, Sir Francis Bacon, but it’s as true now as it was in the 1500s.
As an entrepreneur, you’ll know how important that power is. The knowledge of your market, of your customers, of your competitors, of the technologies you need to succeed, etc. But the information business model actually monetizes knowledge. Well, information.
It’s a certainty that if knowledge is power, people will pay for it. The information business model simply involves the selling of information. This is an overlap with a data licensing and selling model.
Where it differs, however, is that the information is usually open to the general public. News stations, newspapers, blogs, newsletters, documentaries, books, and even magazines and comics are part of this information business model.
These examples all sell information to the consumer either directly or through advertising. Subscription or one-off payment models can be used in tandem with this.
An example of this would be Times Magazine. This publication monetizes information, selling it to the public. It also charges companies for advertising space within each issue’s pages. Although print magazines are currently having difficulty making larger profits, Times Magazine was still sold in 2018 to Marc Benioff for $190million.
Alternatively, companies can gather data and sell that information to the highest bidder, such as complex market trend analysis or polling data.
Characteristics of the information business model, include:
- Strong market research to determine what type of information is valuable to your chosen demographic.
- Creating or using an effective delivery method
- Build customer trust and loyalty based on the relevance and reliability of the information being presented.
36) Other Business Models
This is by no means an exhaustive list. There are many other business models out there, but this should give you a comprehensive understanding of the most common ones.
At this point, I want to now briefly explore one issue I see arising often around understanding business models, which is the confusion over why business models and strategies are actually distinct aspects of a healthy business.
People confuse both of these often, and so let’s conclude by ensuring that you know the difference between a business model and a business strategy.
Business Model Vs Strategy
It’s a common mistake to assume that your business model and strategy are the same things. They are not. While your business model outlines the main goals of your business and its market, your strategy encompasses so much more than that. It is a guide to where you are going.
As a legendary management consultant and founding father of modern business philosophy Peter Drucker wrote, “objectives can be compared to a compass bearing by which a ship navigates. A compass bearing is firm, but in actual navigations, a ship may veer off its course for many miles. Without a compass bearing, a ship would neither find its port nor be able to estimate the time required to get there.”
This wonderfully poetic quote highlights the distinction: A business model is the compass bearing that never wavers, but the strategy is the navigation of the ship which gets you there.
Your strategy then is what facilitates your business model goals. It defines the path ahead, clearly outlining the steps needed in order to make your business model viable. Your strategy steers the ship to the port.
It’s understandable why both terms are often confused. There is a significant overlap. Often a business model contains parts of a strategy such as a distribution channel, but the strategy itself is needed to fill in the blanks and get your product into the hands of customers.
Bringing Your Business Model and Strategy Together
One of the key differences between a business model and strategy is that a business model tends to stay rigid, just like the compass bearing. The main thrust behind your product and how you will sell it rarely changes unless something drastic happens. However, it is your strategy that has the power to alter even that.
Your business strategy should evolve over time. Your strategy has to adapt to the following:
- Demographic changes
- Supply and demand
- New trends
- Financial health
- New Investment
- Technological innovation
A business strategy should meet current industry or niche demands, but also contain a contingency plan for what might happen in the future in order to make your business model successful.
That being said, there should be synergy between your model and strategy. If there isn’t, your business will fail. Take Blockbuster as an example. In 2004, it employed nearly 85,000 people across the globe and had over 9,000 physical stores. Just six years later in 2010, it filed for bankruptcy.
Why did this happen? Because Blockbuster’s business model and strategy were out of step with each other. Blockbuster’s business model was to sell and rent movies to the general public. The strategy to do this was having physical stores and making physical DVD stock available to customers at each store.
That is a huge outlay.
All the while, a little known company called Netflix was trying to do the same. Its model was to deliver movies directly to customers by mailing DVDs to them. While this was successful, the company pounced on innovations made in terms of video encoding and online storage.
The result? Netflix created the most successful streaming platform in the world, accounting for 19.1% of all internet traffic in the US in 2019. Blockbuster? It went bust (no pun intended).
Blockbuster failed to alter its strategy and transform its business model. This cost it its very existence.
Business models and strategies then are there to support each other. They are separate entities, however, and should be understood on their own merits before being combined.
Every business and its business model requires capital. Remember that storytelling plays a key role in fundraising and you will need capital to scale things up. This is being able to capture the essence of the business in 15 to 20 slides. For a winning deck, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
You can download the full pitch deck template where these slides above were taken from by unlocking the pitch deck template that is being used by founders around the world to raise millions below.
ACCESS THE PITCH DECK TEMPLATE
Learn More about Business Models
If you want to learn more about building the right business model or strategy for your startup, check out my podcast DealMakers. Each episode, I interview world-class entrepreneurs who share their advice for creating profitable startups that last.
FULL TRANSCRIPTION OF THE VIDEO:
Hello, everyone. This is Alejandro Cremades, and today we’re going to be talking about what is a business model?
Essentially, a business model is the way in which your business is generating income. You’re essentially realizing or creating value, and you’re extracting or taking away with you the compensation that you’re receiving from your customers in exchange for whatever you’re putting out in the market.
It is very important to separate the business model from the business strategy. The business model is all about how you are creating value and getting compensated for it. The business strategy is all about how you’re planning on bringing your business to the market and how you’re executing on it. So, with that being said, let’s get into it.
The first part of the business model is the product. Essentially, you’ve seen a problem in the market. You’ve been able to come up with a solution, and that solution that you’re bringing to market, whether it’s in the form of a service or if it’s in the form of a product, that’s essentially what the product is all about and, obviously, that product is going to have a price. You need to price it right. You’re going to have to do some price testing, some elasticity on the pricing. Whatever it needs so that you’re getting the amount of money that people are going to be paying for it right.
The next part of the business model is the market. You need to understand who you’re targeting. What’s the geographic location? Who are the people that you’re going to be going after, and essentially, this is a critical component of the business model because ultimately, your market and understanding who you’re going after is going to help you in extracting that value as soon as possible and having a business model that is repeatable and scalable, which is, at the end of the day, what investors, especially, you want investors for your business, are really wanting to go and look after. If they’re able to pull, let’s say, one dollar in, how many dollars can they take out, and you are only able to do that if you really understand very well the product that you’re bringing to market, who you’re servicing it to, and then how you’re getting out there and getting in front of your right customers.
The next part of the business model is the delivery. Essentially, the delivery is how are you planning on bringing that product to market? How are you going to do that? Is it going to be via organic distribution channels, via partnerships that you’re creating? Is it going to be via Facebook ads, Google Ads, LinkedIn ads? You really need to understand how you’re going to be delivering your business and put it in front of the right people. For this, first, you need to understand, as we were saying before, who is your market? Then understand where that market is so that you can get the right people in front of whatever you’re trying to bring to market.
The next part of the business model is the expense. What is the cost of this business model? What is the cost of that product or of that service? The cost that it’s taking in order to put it in front of the right people because, at the end of the day, what you don’t want to happen is that it’s costing you more than what people are willing to pay for it. You really need to make sure that you get your cost, very tightened up so that you understand how much money at the end of the day is going to be your take-home.
A few examples in terms of business models: you have, for example, the membership model. A membership model is where you’re putting out some knowledge that you may have, and you are making people pay for that coaching or for that service on a monthly basis a certain fee, and that could be on a recurring basis.
Another example could be a premium-to-premium. You’ve seen this on platforms like LinkedIn or platforms like that where you really get the idea of what the service is, you get to play with it for free, and then essentially if you want to do additional stuff with it, you need to pay a fee. That’s another way in terms of a business model.
Another way could be the franchise. You develop, let’s say, a restaurant. You maybe develop the food, and then you are giving that structure, those logistics to someone else who wants to replicate it, but not run with the burden of the logistics and coordinating everything. A good example of this could be McDonald’s, Burger King, you name it.
Then, lastly, you have the typical examples like retail. You have e-commerce platforms where you just go in, and these people are buying a certain amount at large scale. Then they sell it individually, and they make from the margins from those sales that they’re actually making.
Essentially, that’s what a business model is all about. If you like this video, make sure that you hit the Like button. That you leave a comment below, and also make sure, as well, that you subscribe, and that you check out the fundraising training, which is the training program where we help founders every step of the way from A to Z with everything related to fundraising.
There you’re going to find live Q&A sessions. You’re going to find every single template that you can think of, agreements, a community of other founders, and I think that you will very much like that. So, with that being said, thank you so much for watching.