April 20, 2016
8 popular business models – which one is right for you?
Starting a business is never easy and (as much as we may often wish there would be) there is no cookie-cutter approach for doing so. There are countless things that should be considered, such as what kind of product to offer, the finances required, the staffing needed to run the business, and so on.
One of the most crucial decisions that a new business owner needs to make is selecting the most appropriate and feasible business model for your product, and for the market environment, it will be operating in. There are several business models to choose from, many of which originate from the time commerce began. However, over time and with the development of new technologies, business models have evolved and there are have been many new options that have come on the scene to address the changing needs of the market.
When choosing which business model to go with, it’s important to know the options you have available and consider what each one has to offer. Below is a list of some of the most common business models, with a brief description of each one, the pros and cons and some well-known examples.
Manufacturing involves the creation of products to be sold directly to the consumer. This particular model has risen from the evolution of e-commerce, as the ability to sell directly from a website has resulted in many manufacturers skipping the ‘middle man’ and selling directly to their customers rather than going through retail outlets.
Advantages of adopting the manufacturer direct business model include lower distribution costs, which also means the ability to offer more competitive pricing, as well as the ability to build a unique relationship with customers and the ability to directly receive customer feedback and input. On the flip side, this model does require the manufacturer to create an online store and then market that store across appropriate channels, all of which require sufficient budget.
For a long time, the traditional retail business model has been the most common, however, it is now increasingly becoming threatened by rising trends such as subscription commerce, free delivery and returns, and direct sellers reducing product costs, all threatening the longevity of the traditional retail business. However, the traditional retail model translated into a digital environment can still be very profitable. The basic e-commerce retail model simply involves the selling of products to the consumer at a markup of the cost to purchase from the manufacturer.
The benefit of this model is that time and resources don’t need to be invested into the actual manufacture of the products, and by selling online, retailers can get away with very little overheads while being able to access a global market. However, the selling of physical products online does still present its own sets of challenges, such as inventory storage, shipping, breakage and insurance.
The subscription commerce model is shaking up the e-commerce space in big ways, offering convenience for customers by providing a regular supply of whatever product is being sold. This model offers many benefits to the retailer, such as a recurring revenue stream (only having to lead a customer through the checkout process once) and predictable cash flow, and the ability to easily predict the order volume that will need to be dispatched in a given time period. The reliance on long-term customers places high importance on customer retention, with retailers needing to provide excellent customer service and invest in customer retention to keep cancellations to a minimum.
The subscription commerce model is however susceptible to big issues, such as the high impact on the business should anything go wrong with stock or delivery, or should the product fail in any way. This model creates customer expectations of regularity and consistency, and living up to these expectations is important for success. There is also the risk that customers will become bored with the product after a while, cancelling their subscription.
The underlying principle in the on-demand model is providing goods and services to customers immediately and as needed. In order to achieve this, the supply of the good or service is driven by the implementation of efficient and intuitive systems and platforms. The key to success with this model is being able to satisfy the needs of customers in a cost-effective, scalable and efficient way then those that have come before.
Many of the successful on-demand businesses that we have seen so far take ownership of the marketplace, not the supply. This means that they have reduced operational expenses (e.g. Uber doesn’t have to own the cars, as the drivers bring their own). But most importantly, all the successful on-demand businesses are solving a real problem, such as inefficiencies in the current marketplace.
The franchise business model offers a lower risk to someone looking to start a business, by providing a way to use an existing and working business model, meaning a higher chance of success (but not guaranteed), shorter wait-time before opening and access to training and support. However, franchisees do have far less independence than someone who starts out on their own and many aspects of how they run their business are dictated by the franchisor.
For those considering turning their business into a franchise model and becoming franchisors, the key benefit is the ability to access someone else’s money to grow their business far more quickly than they could on their own (through the collection of initial franchise fees and ongoing royalty’s). However there are associated risks, for example, if a franchise is not operating their business in line with the guidelines set out by the franchisor (franchise agreement), the franchisor cannot ‘fire’ the franchise.
Brokerage may sound like it is referring to a financial institution, however, this business model actually applies to a broad range of services. Essentially, the brokerage model involves connecting buyers and sellers and facilitating transactions. With the rise of online commerce, we see this being done more and more on some form of online marketplace.
The key to success with this business model is connecting customers to sellers of a product or service that would otherwise be difficult for them to find, therefore solving a genuine problem. The broker earns revenue typically by charging a fee to access their marketplace, or by charging a commission for each transaction that they facilitate. Brokers, therefore, benefit from not needing to worry about supplying the product or service, however, there is a high dependency on ensuring value is evident for both sides. One of the biggest challenges that new brokerage businesses face is the age-old chicken and egg scenario, they need to be able to show customers that they have enough sellers on board to create a wide range of choice, however they also need to be able to show sellers that they have enough customers coming to their marketplace to be worthwhile.
In the landlord business model, the owner of the property or space makes money from renting his or her assets temporarily to generate revenue. This business model also applies to the financial industry where lenders act as landlords in the sense that they charge a fee or interest for lending money to clients. In the services industry, the expertise of service providers is rented out for a fee. In the digital space, we see this model presented through the leasing of online advertising space, which when the traffic to that space is very high, can be very valuable.
A key selling factor of this model is the convenience that it offers to the consumer, allowing them to access the good or service for the time they need, without needing to commit to ownership or pay the high cost to own it.
Of course, this model comes with its own sets of challenges, for example, strategies must be in place to address issues such as product damage or failure to return a product, etc.
Video rental stores such as Blockbuster are a great example of a physical landlord business model, however, we now see these types of businesses becoming threatened by hybrid models such as Netflix, who have combined the landlord and subscription models to provide greater convenience and more competitive pricing for consumers.
A combination of the words ‘free’ and ‘premium’. the freemium business model involves giving consumers a core product for free (in exchange for their details), then marketing to them in the attempt to ‘up-sell’ them to the premium products on offer. This model has gained increasing popularity over the past years in response to the changing market, starting in the IT world and now gradually making its way into numerous other industries such as music and publishing.
This model is well suited for a product or service that is new to the market to minimise barrier to entry and drive trials and word of mouth. The freemium model makes customer acquisition far easier and if they like the product or service, they can share with other consumers.
The freemium model, however, is not suited to every product or service. One of the key product/service requirements to make the freemium model work is that its value to the consumer increases over time (i.e. value increases as more people use it). This means that a lot of users are typically required in order for freemium to work and they have to be returning users. The freemium model can take a long time before becoming profitable due to a longer conversion process, however, if the product or service is the right fit, it can become a massive success.
Determining which is the perfect business model for you will be dependent on a number of factors, such as available funds, the competitive landscape and market characteristics, potential legal implications, etc. The pros and cons for each potential model should be carefully considered, the potential risks carefully evaluated and the market being entered assessed before making a final decision.
If you’re not sure which model to select or you need assistance with evaluating the market and assessing the options, or with the planning of your new business to ensure the best chance of success, then it may be worth considering seeking the expertise of an experienced business consultant to help with this.