Business models: Definitions, types and key components
Starting a business is a lot of work. There are dozens of moving parts to manage, and it’s easy to get off track. One of the best ways to counter this is to clearly define your business model — or how your company will operate and make money.
What is a business model?
A business model is a company’s overarching plan for profitability. It helps define the roadmap used to identify your target market, plan necessary expenses, promote your products and more.
The phrase “business model” is somewhat new. It was originally coined in 1994 by Peter Drucker. However, the concept is as old as business itself — every business has a model, whether they realise it or not.
Common types of business models
There are a lot of business models to choose from, but most of the time they fall into one of a dozen or so categories. Let’s explore some of the most common business model examples.
eCommerce model
This is a retail business model where sales are conducted primarily (or entirely) online. There are no physical storefronts where customers can go and shop. The advantage of doing things this way is reduced overhead — physical locations are expensive to maintain and require extra staff.
Example(s): The classic eCommerce example is Amazon, but there are plenty of others: watch brand MVMT, razor brand Dollar Shave Club and pet supply store Chewy, to name just a few.
Brick and mortar model
On the other side of the retail coin is the brick and mortar model, where the physical storefront is the main method of reaching customers. The main advantage of brick and mortar is the ability to control the customer shopping experience. It’s relatively rare these days to have a purely brick and mortar business — even small businesses often have some online presence.
Example(s): Coles, Woolworths, most grocery stores, and most banks are examples of brick and mortar businesses. Apple is an interesting example — although it may make a lot of sales online, it’s famous for its stellar in-store experience.
Hybrid model
The hybrid model combines two or more models into a single, functional business. These are usually complementary — for example, a computer hardware company might also sell software on a subscription basis. This helps companies leverage existing markets to maximise profits.
Example(s): Google is an excellent example of a hybrid model: primarily an advertising business, but also sells software subscriptions and other services. Similarly, Apple is primarily a hardware company, but it also sells subscription software services.
Direct sales model
The direct sales business model cuts out the brick and mortar and/or online storefront entirely and instead sells directly to customers through a network of salespeople. This can help further reduce overhead for the business.
Example(s): Avon and Herbalife are prominent examples of a direct sales business model.
Franchise model
The idea behind the franchise model is that the franchiser creates a blueprint of an already-successful business, and then offers that blueprint to franchisees, who can build their copy of the business.
The advantage for the franchisee is that they get a proven business concept, and often name recognition and additional help from the franchiser. The franchiser makes money by claiming a portion of the profits from each franchise.
Example(s): 7-Eleven, Just Cuts, and Battery World are among the largest franchises in Australia.
Advertising based
With an advertising-based business model, most or all of your revenue comes from selling advertising slots to other companies. This is a common business model for blogs, media publishers and news organisations. They provide the content for free and sell advertising space. As traffic to the site increases, they can charge more for the advertising space and increase revenue.
Example(s): Again, Google is the classic example. Google doesn’t just make money from selling ads — it also provides the framework for publishing ads on other websites. Facebook and other major social networks are also examples, as are most industry blogs.
Subscription model
This business model involves ongoing payments from customers for a product or service. Sometimes known as the recurring revenue model, the goal here is to get customers to purchase a product or service on an ongoing, subscription basis, rather than as a one-time purchase.
Example(s): Examples of subscription business models include most print newspapers and magazines, media streaming services like Netflix, and many modern software companies, such as Microsoft.
Freemium model
The freemium model is similar to the subscription model. The company offers a basic version of its product or service with limited features, and then a premium tier that users can subscribe to unlock the rest of the feature set. Another variation might have the free tier be ad-supported, with the premium subscription removing the ads (which typically makes for a better user experience).
This model has become extremely popular among modern software companies and mobile apps.
Example(s): Trello, LinkedIn, and Spotify are some very popular examples of the freemium model.
Manufacturer model
The manufacturer model has been a standard for businesses for a long time. With this model, the business earns money by manufacturing products from raw materials and either selling them directly to consumers or to other businesses (who might then sell them to consumers).
Example(s): Apple also falls into this category. Other examples of manufacturer models include Intel, Samsung, and LG Electronics.
Distribution model
The distribution model is one in which the business, or distributor, takes a manufactured product to market, often selling it wholesale to retail businesses, which then sell to consumers. Manufacturers and distributors are two sides of the same coin.
Example(s): Examples of distributors in Australia include Pro Prep and Fulfillment Australia, eStore Logistics, and ACFS Port Logistics.
Bundling model
The bundling business model is simply one in which the business sells two or more products or services together, often for a discount. This can encourage additional revenue by offering discounts on bundled products, often with the hope that sheer volume will make up for the lower profit margins.
Example(s): Examples of the bundling business model include Adobe Creative Suite and many fast-food restaurants, like McDonald’s.
Leasing model
The leasing model is exactly what it sounds like. Rather than selling products to consumers or other companies, a business would rent these products out, with the expectation that they would be returned. This is most common with expensive items, such as vehicles and medical equipment, but it can also apply to lower-cost items.
Example(s): Examples of the leasing model include car rental companies, trailer and truck rentals and some suppliers of at-home medical equipment like oxygen concentrators.
Key components of any business model
Regardless of the business model you choose, there are a few things you should consider. Here we’ll walk through some of the most important.
High-level vision
Your business model should start with the overall vision for your business. Give a basic description of your strategy — two to three sentences about what you want to achieve and how you intend to achieve it. This can eventually serve as part of your company’s mission statement.
Key objectives
After establishing your high-level vision, your next step is to determine and elaborate on your key objectives. These are the primary, quantifiable goals of your business. You should lay these out clearly and elaborate on how you plan to reach them. Examples can include sales or revenue targets, growth objectives or marketing strategies.
Target market
To build a successful business, it’s important to know not just what you’re selling, but who you’re selling it to, as well as the problems they’re trying to solve with your product. This helps you tailor your products, services and marketing to provide the most benefit.
Value proposition
Your value proposition is the unique element of your product, service or solution that makes it worth choosing over competitors. Determining why someone would choose your product lets you focus on its strengths in the market. For example, you might be able to offer a better price than competitors, or your product might be the first with a new feature.
Pricing model
Your next goal is to lay out your pricing model. This is an essential part of your business model that establishes what you’ll charge for your product or service. This is important because it ultimately determines how much profit you’ll be making.
Market positioning
Market positioning refers to the strategy and messaging you use to attract customers and get them to buy. It’s how you portray your products and services to convey your value proposition and convince the market to buy from you and not your competition.
Go-to-market strategy
Your go-to-market strategy describes the channels you intend to use to promote and sell your product. These will be based on your target market, value proposition and market positioning. Some examples include social media, mobile apps, paid search and radio ads.
Long-term growth strategy
Finally, your business model should include ideas for long-term growth strategies. Considering all the above components, how can you continue to grow your company in the future? This could include expanding into new markets, introducing new products or services, strategic acquisitions or partnerships with other brands. Think big!
The business model canvas
The business model canvas is a sort of graphical layout for showcasing and reviewing your business model. It lays out various components in a grid so that you can easily get an overview of your business. Here’s what it should include:
If you’re ready to get started, we have a business model canvas template available — check it out!
Customer segments
Divide your target customers into segments based on industries, groups, location, needs or other criteria that you find helpful. This enables you to better target your efforts.
Value propositions
As stated above, your value proposition defines what makes your product unique and worth purchasing by your target audience. You should state this clearly on your business model canvas.
Channels
This area describes how your business will reach and engage with your defined customer segments. What media will you use to reach your audience? This could be a website, social media, TV ads, or any other channel you might use.
Customer relationships
You should define what an ideal customer relationship looks like. Do you want to build long-term, ongoing relationships with a personal touch, or is automated better for your business? Decide now, as this can inform your sales strategy.
Revenue streams
Here, you’ll describe the sources of revenue you anticipate generating from your customers. In other words, how will your business make money? Examples might include subscriptions, product sales, and any upsell opportunities you intend to offer.
Key resources
In this area, you’ll elaborate on the key resources your business needs to function daily. These resources can include capital, property, supplies, online assets and even staff members.
Key activities
These are the actions you’ll need to take, using the key resources you outlined, to make the business work. Some activities you might want to include are product development, employee training, fundraising or pitching potential clients.
Key partnerships
Your key partnerships are the suppliers, strategic partners, outside vendors, advertisers, investors and financial institutions that your business will work with to achieve success. Make a note of these on your business model canvas.
Cost structure
This is a review of the expenses and other costs involved in maintaining your business model. Advertising, labour, research and development, and distribution are all examples of what should be included in the cost structure section of your canvas.
Automate core business operations with MYOB
WIth your business model created and laid out on a canvas, you’re ready to jump in. Of course, operating a business is a lot tougher than building a model.
MYOB can help. Our powerful online accounting software helps automate key functions like payroll, invoicing and payments. Try it out today.
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