Choosing the best business model for your business
When you start a new venture or seek to grow an existing company, one of the most important questions to answer is: “What is my business model going to be?” You’ll build out the answer to that question by answering two other questions first:
- What is my market?
- What problems will customers in this market pay me to solve?
Let explore how you can find a business model that aligns with your market and brings in revenue.
Guide to business models
Here is what we’ll be covering:
What is a business model?
9 common business models.
- Advertising business model.
- Affiliate marketing business model.
- Franchising business model.
- Freemium business model.
- Razor blade business model.
- Reverse razor blade business model.
- Subscription business model.
- Agency business model.
- Ecommerce business model.
How to choose the best business model for you.
- Consider your customer needs.
- Consider how your customers buy.
- Consider the market potential and competition.
- Consider your value proposition.
- Consider multiple revenue streams.
Conclusions and next steps.
What is a business model?
A business model is an approach that you’re taking to make money. It’s how you deliver value to your customers, via products or services, in exchange for a set cost. A business model is an essential element of any business, as it’ll help you define your value proposition over the long term.
Think of Facebook. The company started by making the platform free, and once the audience was large enough, it began monetising via advertising. And that’s just one model Facebook could have taken. Others would have included charging a monthly subscription fee or selling products and services.
Often, the business model you adopt will depend upon your market and what they’re willing to pay for. Your business model isn’t set in stone. There’s a good chance that you might not end with the same business model you started with.
A business model is not a business plan. Your business model is the revenue-generating approach you’re taking, while a business plan is an in-depth document that outlines your future and how you’ll go about achieving that future. You can help to streamline the process of choosing and evaluating a business model via business model templates and canvases.
9 common business models
There are dozens of different business models out there. The route you choose will depend upon your industry, but even more so, by what your customers are willing to pay for. Here are some of those business models?
- Advertising business model.
- Affiliate marketing business model.
- Franchising business model.
- Freemium business model.
- Razor blade business model.
- Reverse razor blade business model.
- Subscription business model.
- Agency business model.
- Ecommerce business model.
Here’s a look at nine of the most common business models available to you today.
- Advertising business model
The advertising business model has been around for a long time. Although print used to be the leading advertising medium, this has drastically switched to online and mixed-media formats.
The approach is simple: You create content that people want to consume and use display ads to monetise your business. You’re not charging your readers or visitors, but instead, are monetising their attention by selling advertising space.
If you’re running a website, there are all kinds of advertising networks you can partner with to run ads. In this scenario, you usually get paid by clicks or views.
- Affiliate marketing business model
The affiliate model is another common business model, especially online. With affiliate marketing, you’re recommending products or services in exchange for a commission.
One popular affiliate program is the Amazon Associates program. Once you join this affiliate network, you can promote any Amazon product in the world in exchange for a commission. Beyond Amazon, there are thousands of additional products and services you can recommend depending on your niche and audience.
- Franchising business model
Most of the examples here apply to the online space, although they can still be translated to the offline world as well. However, the franchising business model is primarily an offline model.
Nearly every single Spar, McDonald’s, and other fast-food restaurant chain is a franchise. In the case of McDonald’s, over 90% of its locations are franchised.
This model works incredibly well if you’re focused on expansion. The franchisor will license most aspects of its business to a franchisee, which then sells those products or services for a royalty.
- Freemium business model
The freemium business model is where you give away an aspect of your product or service for free, then you charge for the premium version or for add-on features. The critical distinction with freemium is that it’s free forever. You could essentially have a large group of users who never upgrade to the premium version.
There are a ton of different examples of this, especially in the software space. For example, Evernote has a freemium version that will suit most users’ needs, while the Premium and Business plans are equipped with higher-level features.
- Razor blade business model
The razor blade business model is named after the product that basically invented the model. The business model is selling an aspect of your product at below cost — basically giving it away — to sell high volumes of another component of that product.
The famous example of this is, of course, disposable razors. They give away the razor handle for free and make their money back on the blades you buy over the lifetime of the product. Another example is a printer. You buy the printer once, and you buy replacement ink cartridges time and time again.
- Reverse razor blade business model
This business model flips the above approach on its head. Instead of selling a low-margin product at the outset, you sell a high-margin product upfront and offer sales of low-margin products down the line. With both products, you’re joining a product ecosystem.
For example, let’s look at the Apple ecosystem of products. If you buy a new MacBook, there’s a good chance you’ll end up buying apps from the App Store, songs from Apple Music, and maybe even an iPhone. This model ensures single (or multiple) high-end purchases, followed by a series of smaller purchases over the long-term.
- Subscription business model
The subscription model goes back to the day of magazines, newspapers and even milk bottle home delivery. No doubt, you already have a handful of subscription products you pay for every month. Netflix, anyone?
The process is simple. Your customers pay a monthly fee to continue using your product or service. This is incredibly common for SaaS and content-driven businesses.
- Agency business model
The agency model involves generating quality leads and selling them on services and marketing campaigns. This model has been alive and well for more than 200 years. The first advertising agency was founded back in 1786 by William Taylor.
The modern agency is obviously quite different from the first agencies, and the “Mad Men” days, but the process and work are similar. You manage marketing-related projects for several different clients.
- Ecommerce business model
Ecommerce is the fastest-growing retail sector. When most people think ecommerce, Amazon or Takealot typically come to mind. But, with beginner-friendly tools like GoDaddy’s Websites + Marketing Ecommerce and WooCommerce, starting your own ecommerce store is only a couple of clicks away.
How to choose the best business model for you
As you can see, when you’re launching your new startup , you’re going to have a lot of different choices regarding your business model. Here’s a process you can follow to help you determine the best business model for your new venture:
- Consider your customer needs
The model you choose should align with your customer’s needs and expectations.
For example, if you’re taking the subscription model approach, then you’ll be doing your customers a disservice if you also include advertising.
You can most definitely combine multiple models, but they need to place customer experience, and not profit, above all.
- Consider how your customers buy
Some markets will be challenging to monetise. If you have a content-driven website that gets a high volume of traffic but doesn’t convert well to product sales, then the advertising model is probably your best bet.
Do your customers often make high-end purchases? Or, will they be more receptive to a recurring subscription or a low-end product?
- Consider the market potential and competition
Spend some time analysing your market to see how other companies are generating revenue. If they’ve been in business for a while, then they’ve probably found a model that can be replicated.
However, there’s always space to innovate and disrupt in a given market. So, don’t feel like you’re stuck doing only what’s been done before.
- Consider your value proposition
What makes you stand out in the marketplace? If you’re running a boutique fashion ecommerce business, do you only use local labels and designers? Or, do you offer a freemium version of an app in a marketplace dominated by paid app subscriptions?
- Consider multiple revenue streams
Most successful businesses will rely on multiple revenue streams. In the early days of your new business, it’s all about experimentation. Most of the business model examples above can be combined to enhance one another to bring in more revenue for your business.
Conclusions and next steps
As you can see, some business models have stood the test of time and are hundreds of years old. Others are much newer but scaling rapidly and taking over the marketplace.
Overall, there is no best business model, but instead, the best business model for your business. Let your market and customers dictate how you’ll generate revenue.
Finally, remember that your choice of business model isn’t set in stone, most businesses rely on multiple models and refine their approach with time.
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