What is a Business Model? – 23 Types of Business Models

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types of business models

Most popular types of business models for your startup

Different Types of Business Models for Different Needs


The business model is the engine of any business. It unlocks long-term value for an organization while delivering value to customers and capturing value for the organization through monetization routes & strategies. It drives business operations & growth.

Many people mistake the business model for a business plan though the two are entirely different. A business plan is more like a tool to communicate your business with investors, or potential partners. It helps you to write your business goals and strategies to achieve those goals. But the thing to be stressed upon here is that the business s plan is based on assumptions. It contains projections of your business for the next 4-5 years and these are hardly tested.

Business Model, on the other hand, is more significant in the sense that it is more like an experiment that startups usually conduct to test their assumptions about different aspects of the business. It rarely happens that the business model you choose is the first time right i.e. you plan your model and it turns out to be successful. It is because to make it work in the real world, you need a lot of strategic thinking and more importantly experimentation.

Developing a product prototype is one thing while building a sustainable business around it is another. Enabling this prototype to create value for its customers and capture value for the company is the goal of any business model.

There are many types of business models that companies use for their businesses. Following are the most popular ones:

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Manufacturer

This is one of the simplest types of business models. A manufacturer uses raw material and creates a finished product from it. They can sell to the customers directly or reaches customers through distributors or dealers who sell the product finally to consumers. Examples are automotive manufacturing companies like general motors, farm equipment makers like John Deere, etc.


Distributors

They buy products from the manufactures and sell them to retailers or directly to customers. Automobiles are sold to consumers through dealers. The electrical equipments of big brands are also sold through this route.


Retailers

A retailer purchases the product from a distributor or wholesaler and sells it to the customers. An example of an online retailer brand is Amazon.  Garments are also sold through retail outlets.


Franchise

The franchise uses the existing business model of a product that has been successfully developed. It does not create the new products but instead purchases the right to use an existing business’s trademarks, and other proprietary knowledge to market and sell that business’s brand while paying royalties to it. An example is McDonald’s.


Bricks & Clicks

A company in this business model has a presence online as well as offline.  Business operating on this model has an advantage over the traditional brick & mortar or e-commerce based business models as it allows customers to pick up products from the physical stores where they can feel the product before buying while enabling them to place the order online.

Thus it gives flexibility to the business since its online presence allows customers to buy products even when they do not have brick-and-mortar stores at their locations. Also, it allows the business to reach out to more consumers and a bigger market through the offline route. Examples – Few grocery & many apparel companies.


Brick & Mortar

Here the manufacturers, retailers or wholesalers, deal face to face with the customers at shop, office, or outlet.


E-Commerce

In this business model, companies create online sales stores where customers can order the product of choice.


Nickel-and-Dime

In this model, the most-sensitive & the primary product or service is provided at the lowest possible price while all other services that come with this product/service, are charged. Examples – Low-cost airline service where the flight tickets are tagged with low price with separate charges for baggage, food, etc.


Freemium

This is one of the most common types of business models on the internet. It provides basic services to the customers for free and charges on premium services such as add-ons or few advanced services to the paying customers. Usually, there are certain limitations on basic services like advertisements in the apps, in the online software, or on the platform or restrictions to make download.

For example, Youtube provides free video content to its users but with advertisements while its premium service is ad-free along with other benefits. This model is advantageous for startup companies due to its ability to act as a marketing tool for their offerings and helping such companies attract users without expensive ad campaigns.


Aggregator

Using the aggregator business model, the company aggregates various service providers under a particular niche and sells their products or services under its brand. The aggregator becomes the middleman and eliminates all the other middlemen from the market. Aggregator earns money from the service providers in the form of commission.

Examples – Airbnb, Uber, etc.


Subscription

This type of business model is successful when customer acquisition costs are high. It helps to retain customers over a long-term contract and get recurring revenues from them through repeat purchases.

You may think of a scenario where you make a series of online tutorials and sell it to 50 students in one month for $100. This way you’d make $5000 in a single month. To generate the same revenue in the following months, you will have to find new customers or create new tutorials. But if you make your tutorials available for a monthly subscription at $50 and you manage to attract 80 customers, you’ll generate monthly revenue of $4000 without having to find new customers.

Netflix, LinkedIn, Amazon, and many other companies use this model to generate a part of their revenue.

But to sustain a subscription-based business model, it is necessary to create new content frequently and that motivates subscribers to keep paying.


Affiliate business model

An affiliate business model allows you to sell products or services that do not belong to you. You as an affiliate direct your efforts towards featuring other products or services and convincing users to buy them. In return, you get a commission. An example is the Amazon affiliate program that allows the content creators, publishers, and website owners to monetize their traffic. They direct their readers to products available at Amazon and earn a commission from qualifying purchases made by the readers. 


Multi-sided platform business model

In a multi-sided business model, companies offer their services to both sides i.e. to the different but related customer segments. For instance, LinkedIn provides paid subscription services to HR managers who look for candidates for filling various positions in their companies. At the same time, LinkedIn provides another subscription service to people seeking job opportunities.


Agency-based business Model

An agency handles the non-core business activities like advertising, digital marketing, etc. of companies that outsource such tasks. An example is neilpatel.com which is one of the most successful sites in digital marketing and helps companies grow their traffic exponentially.

In an agency-based business model, you generate enough qualified leads and grow the agency based on these projects.


‘Driven by Data’ Business Models

With the increasing number of users on the internet, there is also an increase in the amount of data generated. The consequence is a business model using which companies like twitter sell or license the data of its users to third parties which are then used for advertising, analysis, etc.


Crowdsourcing

In the crowdsourcing business model, users contribute to the value that is delivered to them through product or service. This business model is combined with other revenue models and businesses to create a solution for the user that they need and ultimately earn money. An example is Wikipedia that is a multilingual online encyclopedia. It is based on open collaboration through a wiki-based content editing system.


Dropshipping

Dropshipping is one of the types of business models prevalent in the e-commerce space. In this model, the drop shipper does not own any product but just an online store. The product is actually sold by partner sellers who receive the order through the dropshipping store when the customer places an order at the store. The partner sellers then deliver the products directly to the customer.


‘As a Service’ Business Model

Many companies use this business model to offer their solution, which can be a platform, software, equipment, or even infrastructure, in the form of service. These are popularly known as PaaS (Platform as a service), SaaS (Software as a service), and EaaS (equipment as a service). A company using these types of business models does not sell the product but charge for the usage of the product which can be ‘pay-per-use’ or a monthly fee. Often the customers are charged for the features they use and not for the features they haven’t. Xerox and Rolls Royce are examples of companies using such types of business models.


Auction-Based

In this business model, sellers offer products often through an online route and buyer who places the highest bid gets to buy the product. Such a model is used often for unique items that are not frequently traded such as antiques, real estate, etc. Here buyers are fully aware of bids by other buyers.

Auction sites that act as auction brokers in an online system make money by taking a percentage of the selling price.

An example is eBay.


Reverse-Auction-Based

In a reverse auction-based system, sellers bid prices instead of buyers and there are many potential sellers with a single buyer. The sellers compete with each other to get business from the buyer and therefore lower their prices to outcompete each other. The bidder with the lowest bid wins the auction. There are instances where the bidder with a price higher than the lowest bid wins the auction. It happens when the buyer likes his offer more than the other bidders.

An example of reverse-auction is the procurement process in the public sector which lets sellers bid for government contracts.


On-Demand

The objective of companies that use this business model is to deliver products to consumers in the least possible time (immediately). The idea is to make the services and products easily accessible to users including those they cannot own. This model works through the usage of internet and mobile apps.

Example – Uber.


Razor and blade model

If you’ve ever bought the razor, you must have noticed that the razor itself is practically free or priced very low, but the replacement blades are expensive. It is a business model in which a dependent product (razor) is sold at a lower margin and the profit is generated by selling a paired product (blades) through high volume sales. By using this model, businesses create a stream of recurring income by locking a consumer onto a platform or a product for a long period.

Examples are industries making mosquito repellents, razors, etc. The gaming industry also uses this business model by giving away the gaming consoles for free or at a manufacturing cost and make profits by selling games.


Reverse Razor and Blades

This is exactly opposite to the razor and blade model in the sense that it encourages the sale of high margin products by offering the related low margin product at a very low price.  An example is an iPhone. iTunes or the digital products that Apple makes are priced very low. This is done to increase the sale of the iPhone which is a high margin product.


To Wrap Up

While experimenting with different types of business models, you may find that one model fits much better than the other for your business. Though established companies use a combination of many types of business models rather than operating on just one, startups usually begin with one business model and later devise new models once their primary one is established. The business model you choose depends on the value that you would like to create for your stakeholders and your business needs.


Do you feel there is something more to be included? Kindly write to us. We will be more than happy to consider your valuable suggestions.