UPDATE: This business models post was originally published on 28 October 2019 and updated on 14 January 2021.
Starting a new business is a very exciting time. You’re full of fresh ideas, optimism and energy and it’s all systems go. But it can also be a stressful time where you’re often putting your personal finances on the line to bring your business to life. One of the first steps in creating a successful startup is to choose a suitable business model that will allow you to thrive.
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What’s a business model?
A business model is essentially a roadmap you select at the very beginning of your startup journey. It suggests all the different tasks that need to be done in order to start making money. This includes defining your:
- Target market — in other words, who are you selling your products or services to?
- Distribution channels. Will you have a physical location, sell from a website or both?
- Promotion: For example, you would choose different promotional methods if your target customer is a consumer rather than a big business.
To help you establish which business model is best-suited to your business, here’s a quick overview of six common ones.
6 popular business revenue models
These are the tried-and-tested models that startups around the world have used to grow their businesses. Depending on the type of business you’re starting, there could be a few models that apply — or there might be one specific business model that stands out as the obvious choice.
1. Manufacturer model
The manufacturer model, also known as the business-to-consumer (B2C) model, is ideal for any business that turns raw materials into a manufactured product to sell directly to consumers.
Companies that manufacture parts for other businesses to assemble and sell are also considered manufacturers.
Examples: Apple, Samsung, Hyundai
2. Distribution model
A distribution business buys a large number of products from a manufacturer to sell on to consumers or retail businesses. Essentially, distributors act as a middle man between manufacturers and the general public, buying products in bulk and securing a profit by selling to consumers and retailers at a marked-up price.
Examples: Amazon Business, HD Supply, Bluechip Infotech, Dicker Data
3. Franchise model
The franchise business model is based on the principle of a ‘franchiser,’ who owns a successful business, creating a blueprint that a ‘franchisee’ can use to build their own copy of that business.
This is a lower-risk option for those looking to start their own businesses, because the franchisor has already been successful.
In this case, much of the startup work has already been done including:
- Branding such as logos, colours etc.
- Working out logistics and processes
- Finding and establishing relationships with suppliers
Often the franchiser will also assist the franchisee with venue design, marketing and various other operations.
In return, the franchisee is required to pay the franchiser a portion of their profits.
Examples: McDonald’s, 7-Eleven, Battery World
4. Freemium model
With the rising popularity of online services and apps, the freemium business model has become the go-to choice for many startups around the globe.
This business model offers consumers free access to a portion of the service, and ‘locks’ other key features that require a subscription to access.
The freemium model gives potential customers a little taste of the service, in the hopes that they will be enticed to pay for access to the whole service or suite.
Examples: Spotify, LinkedIn, Skype
5. Subscription model
Applicable to both online businesses and brick-and-mortar shops, the subscription model requires customers to pay a weekly, monthly or annual fee for access to a service or product.
While the principle of this model is straightforward, you need to be sure there’s enough demand for your product or service to generate revenue. This is why the freemium model mentioned previously is becoming more prevalent. Users and customers are more likely to commit to a subscription if they’ve been able to get a ‘taste’ of the product or service.
Examples: Hello Fresh, Netflix, eHarmony
6. Razor blades model
This business model is based on the principle of selling one item at a reduced price (or free of charge) in order to increase the sales of a complementary product — such as razors and razor blades. To purchase the razor itself is relatively cheap, however disposable razor blades generate a continuous revenue stream.
Examples: Gillette, Inkjet, Atari
Do your research and plan, plan, plan
Selecting the right business revenue model can make or break your startup, so it’s important to find the one that makes the most sense for your product or service.
Innovative and unique business models are popping up all the time in line with evolving consumer trends, so make sure you keep an eye on what’s trending. If none of the business models here apply to your startup, take the time to research other suitable options. As the saying goes, ‘the early bird gets the worm,’ and beating your competition to the punch will pay off in dividends.
Once you’ve chosen a business model, it’s time to commit it to writing in the form of a business plan (learn how here). Whether you’re a sole trader or working with a team, this document will outline your focus and direction, and assist in creating successful growth strategies.
A business plan is also useful in applying for loans or other types of funding.
While your business plan may evolve and change over time, it’s extremely important to take the time to create a thoughtful strategy early on. And it all begins with the right business model.