What is a Business Model?
A business model is the company’s overall plan of operation within your market. If you’re unsure where to start, tools such as theBusiness Model Canvas walk you through decisions by segmenting the model into key parts of the operations—where the company conducts business, revenue sources and cost structure, partners or third-party vendors, customer base(s), how the product or service reaches the end user, how much interaction your company has with the customer, and more.
Types of Business Models
Because there are several business model types, it is common for companies to have a combination of different models in order to acclimate to changing consumer patterns. Here are the most commonly-used business model strategies:
Examples: Hilti, Coca-Cola, General Motors
Simply put, manufacturing companies create products with raw materials or pre-made parts and components. Manufacturing companies focus solely on finished goods that are then sold to either consumers or other companies who utilize the finished goods. This model is common with large-scale production companies.
Examples: Airgas, Anheuser-Busch, Morris & Dickson
Products are created and sold by retail outlets—but what happens in between? Distribution companies often work as intermediaries to connect the manufactured product to retailers, or even directly to consumers. Supply chain and logistics are heavily used in distribution companies, as there are copious channels that products are entered into. The end goal for distributors is that the products are sent to the correct end user.
Examples: Massage Envy, Subway, Hyatt Place
Franchise ownership is the licensed privilege of a franchisee to conduct business with an already established and trademarked company. Franchises provide franchisees benefits such as trademark usage, marketing material, training, and other management resources. However,majority of franchises require anywhere from $50,000-$200,000 to start, as well as ongoing royalties to the franchisor, 4%-8% of gross revenue.
4. Brick-and-Mortar/Traditional Retail
Examples: PetSmart, Barnes & Noble, Mattress Firm
Retail is the sale of products to consumers, and goods are used primarily for consumption, not resale. Brick and mortar, or a physical building where a person can purchase goods, is the traditional and most conventional retail strategy. The future of brick-and-mortar businesses is highly debated due to the rise of E-Commerce.
5. E-Commerce/Online Retail
Examples: Amazon, eBay, Chewy
E-commerce, also known as internet commerce or electronic commerce, is the commercial transaction of money for goods and services through the internet. In 2017, consumers spent a total of $453.46 billion for retail purchases made on the web. Some purchases cannot be made on the web, like alcohol, gas, certain animals, and certain types of food—however, U.S.e-commerce grew by 16% in 2017, and numerous business owners either started an online business or modified their already existing businesses as a result of this growing trend.
Examples: Wal-Mart, Target, Best Buy
Also known as “click-and-brick” and “click-and-mortar,” the brick-and-click model was created to fill the holes in the e-commerce (click) and retail (brick) models. This model is more accessible for consumers because they have the option to instantly purchase a product online; if they need to make a return, customers can travel to the nearest physical store at their convenience. With the brick-and-click model, the long-standing and larger-brand businesses have access to wider financial resources, which also assists in acquiring new customers.
Note: Although this model is meant to transform shopping into a more convenient experience, businesses face the challenges of both a brick-and-mortar retailer and an e-commerce business. Competitive pricing against manufacturers, logistics to distribute goods and manage inventory, and combining overhead expenses of both types of businesses are just a few conflicts that brick-and-click owners face.
Examples: Spotify, MailChimp, Hootsuite
Have you ever used a free media streaming service with commercials, and the music or video stopped to offer you a commercial-free experience for a monthly fee? This is a “freemium” business— a combination of “free” and “premium”—a strategy that offers free versions of a product or service, but more advanced features at premium prices.
Examples: Netflix, Birchbox, Dollar Shave Club
In a subscription business, the company relies on recurring revenue on a consistent schedule (weekly, monthly, annually). Subscription businesses require close attention to churn (the rate of unsubscribes), acquisition of new customers, and increasing the value of existing customers.
Examples: Supercuts, Law Firms, PR Firms
This model is where the idea of “having regulars” comes from—a high-touch business relies on the relationship and trust between a customer and the business. In a high-touch company, customers are more likely to interact with the same salesperson or consultant in the company. These types of businesses also charge a higher amount for specialized services due to the quality determined by the customer.
Examples: IKEA, Swirll Yogurt
Also known as the “touchless conversion sales model,” the low-touch model requires little-to-no customer interaction with employees. Consumers are able to enter the business, receive the goods they need, and check out. In contrast to the high-touch model, prices tend to be lower as a result of smaller staff, less personalization of service, strong self-branding, and higher demand caused by social media. Logistics and product placement are also commonly designed for easy, grab-and-go access.
Having multiple business models is common, especially for companies who realize the need to engage in a more profitable revenue stream. Amazon, originally an e-commerce platform for books, now practices e-commerce, subscription, and freemium due to its marketplace expansion to media streaming and various items. Wal-Mart also adapted, offering brick-and-click services with the curbside pickup/return. Some items from Wal-Mart are solely e-commerce, not even allowing for in-store pick-up.
In today's constantly-changing environment, adaptability is crucial to keep up with emerging trends. Having a vision, purpose, and business plan, however, will help ensure that today's fad does not cause you to lose course of your true business goals, and more importantly, your business’s success.