Types of Business Models and How To Choose The Best For an Idea
Types of business models and how to choose what best suits your idea – follow me.
Business Model is the way a company creates value, captures value, delivers value and make profit from the value created.
It is the basic foundation upon which any business structure is built. Any entrepreneur with a view of building anything sustainable must take time to develop a business model.
However, there are different types of business models in the business world today. In fact, dozens of them exists. But the one you adopt depends on the industry. Of course there are certain types of business models that are applicable across different industries.
Today, I will share some of the most popular types of business models with examples of companies that have become very successful applying those models. It also depends on the value proposition you are fronting. The goal of this post is to help you make a decision on which type of business model is best for the idea you are incubating.
Please note that the 30 types of business models listed here is a non-exhaustive list. However, it touches on the most popular models you can think of. Most importantly, each of these has proven to be a huge success and the examples are there for you to see.
Types of Business Models
1. Aggregator Business Model
Aggregator business model as the name implies is a type of business model where a company aggregates multiple service providers of a particular niche and sell their services under its own brand. It is recently developed model but has become very popular and tremendously popular thanks in no small measure to the success of Uber. In fact, some people refer to the model as ‘the Uber model’. The way the company makes money from this model is by charging commissions.
Good examples of this model are:
Uber for taxi (the most obvious one of course)
Yodlee for financial services
Airbnb and bookings.com for on-demand accommodation
Zillow and Oyo for hotels
Expert Tip: This is one of the most effective and scalable business models where as a startup you don’t have so much overheads to worry about.
2. Online Marketplace Business Model
Online marketplace as a type of business model aggregates different sellers or service providers into one platform but let them compete with each other to provide the same product/service at competitive prices.
The marketplace has a responsibility to build a brand that is reputable by all metrics. Usually, the key metrics with which the reputation of such a brand is judged are trust, on-time home delivery, quality products and sometimes free delivery service.
The way the market place makes money from this type of business model is by earning commission on every sale made on its platform.
As you can see a marketplace functions in a similar way as an aggregator. But there is a difference. First, in online marketplace the different sellers are meant to compete against one another and doesn’t necessarily do business under the same marketplace brand. Each vendor on-board the platform with own name and has the liberty to set their prices.
Another difference here is that in a marketplace there are wide range of products in different industries that can be on-boarded. But an Aggregator aggregates service providers of a particular niche.
Good examples of companies using this model are: – Amazon, Alibaba and Jumia.
Expert Tip: Marketplace is easily scalable but require much more investment in terms of infrastructure. You need to have a good plan for funding before venturing.
3. Franchise Business Model
The franchise business model is a means of expanding a business into different territories or locations using the funds of other people who wish to set up similar businesses.
A franchise business usually involve the franchisor and the franchisee. The franchisor is the already established brand which now sells the brand right to a new business to operate.
A franchise is a win-win for both parties. But for the sake of this post we look at the revenue model for the franchisor. A franchisor makes money through the following means:
1. Initial franchise registration fee
2. Ongoing royalties charged every year – either as a percentage of gross sales or a fixed rate.
3. Initial and ongoing training fee (this is sometimes embedded in the initial registration fee).
4. Revenue from supplies and equipment to franchisee
The fast food industry is the most common example of brands that use the Franchise business model. So when you think of the franchise business model you can think of companies like McDonald, KFC, Tantalizers, Sweet Sensation.
McDonald in particular seen astronomical growth utilizing this business model.
But apart from the fast food industries we are also seeing some retail outlets like SLOT expanding rapidly using the model.
Examples: McDonald, Domino Pizza, KFC
Expert Tip: Franchise is a good business model for expansion into new territories when you have built a reputable brand that can be trusted. And as a budding entrepreneur, it is also a good model to leveraging on an existing brand to gain experience and learn the business secret in a particular industry before launching your own brand. So it is a win-win situation for both parties.
4. Subscription Based Business Model
In most industries the cost of customer acquisition is very high. And retaining those customers equally takes a great deal of investment. So when we discuss types of business model, the smartest way of retaining customers over a long period of time is through the subscription-based business model. The subscription business model lets you keep customers over a long-term contract and get recurring revenues from them through repeat purchases.
So the basic design of the product or service that uses this model does not allow for one-off payment. The service offering requires ongoing payment, usually in return for a fixed duration of benefit.
This model is very common with businesses that offer software as a service (SaaS) and other digital companies. But it is also becoming popular with some physical products.
Examples of companies that utilize subscription business model are – Netflix, DSTV, Dollar Shave Club, Spotify and Hello Fresh.
Expert Tip: It is cheaper and easier to retain 100 customers than to get one new one, so I strongly recommend this model if your business can fit into it.
5. Freemium Business Model
Freemium is another type of business model that is very common among SaaS businesses. The model attracts customers by introducing them to the basic and often limited-scope of their service/products. Then, with the client using their service, the company attempts to convert them to a more premium and advance version that requires payment.
Although in theory a customer may stay on freemium forever, a company tries to show the benefits of upgrading to the higher version. And oftentimes majority get to upgrade.
Examples:
LinkedIn/LinkedIn Premium
Canva/Canva Pro
Zoom/Zoom Premium
MailChimp/Mailchimp Premium plans
Slack/Slack Pro
Expert Tip: If you want to sell software online I think you have little or no option than to start with freemium business model. The reason is because not many people will want to pay for a service they have not tasted.
6. Advertising Business Model
Call it ‘attention merchant’ business model and you won’t be wrong. The idea behind this model is the business wants to grab the attention of their target audience. They offer them the service for free but bombard them with endless advertisements.
And actually the advertisement business models are evolving even more with the rise of the demand for free services on the internet.
Users are happy that those companies don’t charge them for the services and value they get. But one thing they fail to understand is that in the words of Apple CEO, Tim Cook, “When an online service is free, you are not the customer. You are the product.”
This business model is popular with online media publishers where the information is provided for free but are accompanied by paid advertisements by partners.
Examples: Facebook, YouTube, Google
Expert Tip: This is a very powerful model but a startup may not want to try it until you can prove that you have enough funds to run till advertizers start coming.
7. Brick-and-Mortar
Brick-and-mortar is a traditional business model where the retailers, wholesalers, and manufacturers deal with the customers face-to-face in an office or a physical shop. The business either owns or pays rent on the space in use.
The Igbo Apprenticeship System is a well-known system that deploys this model.
Examples of brick-and-mortar businesses include auto repair shops, Best Buy, Dick’s Sporting Goods, Home Depot, Target, and Trader Joe’s.
8. Ecommerce Business Model
Ecommerce is a upgraded brick and mortal model You simply sell physical products but instead of having a physical shop you take the shop online.
It is a simple yet one of the most promising business models in modern times.
There are several types of e-commerce business models, including Business to Business (B2B), Business to Customer(B2C), Customer to Customer (C2C), and Customer to Business (C2B).
Example: Amazon, Alibaba, eBay, OLX, Walmart, etc.
9. Social Enterprise Business Model
This is also called social entrepreneurship business model. It’s a hybrid solution, a combination of both profit and not-for-profit services. Although there are some debates about its long-term sustainability, but it has actually proven to be quite sustainable. In fact, many companies are pivoting their business models to cater to socially conscious millennials today.
The best example of this is Bombas, that provides one socks to the homeless for every pair sold. With this social enterprise type of business model Bombas became the most successful startup to come out of American Entrepreneurship Reality Show, Shark Tank.
This model is based on the fundamental that companies should make profits without causing any harm to anyone. Moreover, a part of the profits should be spent in humanitarian works to improve human living conditions.
Example: Brunello Cucinelli. Bombas, TOMS. Warby Parker
Expert Tip: This is such a great model and it makes for the easy attraction of funding from humanitarian agencies across the world.
Related:
AirBnB Business Model and How to Apply it Across Other Sectors
Uber Business Model – An Exponential Business Model
Importance of Business Model and Why Your Business Needs One
How Kuda Bank Lost Over ₦6 billion in 2021 Alone
10. Affiliate Marketing Business Model
Affiliate Marketing us another very popular type of business model that has been around for a while. It is based on the marketing ability and extensive reach of a specific group or an individual’s platform.
Businesses pay such a group or individual to promote a particular good or service. And in return the individual or group receives compensation in exchange for their promotion. That compensation may be a fixed payment, a percentage of sales derived from their direct promotion, or both.
Usually an affiliate link is provided for easy tracking of sales coming from a particular Affiliate.
Amazon is undoubtedly the biggest Affiliate platform in the world today. And any intending Affiliate can find a wide range of products to promote there.
Example: Social media influencers and Bloggers.
Expert Tip: As a business owner I recommend this type of business model as it is an indirect way of recruiting marketers with having to commit to salary. And if what you sell is a digital product, don’t be scaled of setting the commission as high as possible as an incentive to get more Affiliates to sign up.
11. Dropshipping Business Model
Dropshipping as a type of business model is very similar to Affiliate Marketing. It is a type of e-commerce business model where the business owns no product or inventory but just an online store.
The actual product is sold by partner sellers (manufacturers, wholesalers, another retailer or fulfilment house). It is the partner sellers who processes and delivers the product as soon as the store receives an order from the customer.
Examples: Inspire UpLift, BlueCrate, Gadgets etc
Expert Tip: Unlike in Affiliate Marketing, the Dropshipper sets their own price and makes a profit which is the difference between the item’s price as set by the partner and what the Dropshipper sells. It is a good way of starting a business without capital.
12. Network Marketing Business Model
Network marketing or multi-level marketing (MLM) is a type of business model that involves a pyramid structured network of people who sell a company’s products. The model runs on a commission basis where the participants are remunerated at multiple levels. The renumeration also comes from multiple sources:
- When a networker makes a sale of the company’s product.
- When their recruits otherwise known as downline makes a sale also.
- Level bonuses
The network marketing business model works on direct marketing and direct selling philosophy where there are no retail shops but the offerings are marketed to the target market directly by the participants.
The market is tapped by making more and more people part of the pyramid structure where they make money by selling more goods and getting more people on board.
Traditionally, businesses that deploy the network marketing model has no budget for advertisement. Rather the networkers promote the business by word of mouth marketing and leveraging existing relationship.
Examples: Oriflame, GNLD, Longrich etc.
Expert Tip: Network Marketing is a great model if the company has a great product, but care must be taken in the design for it not to slip into a ponzi scheme.
13. Crowdsourcing Business Model
Crowdsourcing is another interesting type of business model. The model relies on users and consumers to contribute ideas, solve problems, and generate contents, goods, or services.
This model allows companies to utilize a larger audience to create ideas or prove concepts instead of relying only on paid employees
The revenue model here is a bit diverse. Usually the business model combines with other business and revenue models to create a monetization strategy.
Examples: Wikipedia, Quora, Waze, Kickstarter, Patreon, and Threadless
Expert Tip: To make a great success of this you need to have a very strong value proposition for users. One of such should be a clear financial reward they gain.
14. Razor and Blade Business Model
This is aptly named after the product that invented the model. The business model aims to sell a durable product at a heavily discounted rate or sometimes below the cost price so as to then generate high-margin sales of a disposable component of that product. For example, razor blade companies may give away expensive blade handles with the premise that consumers need to continually buy razor blades in the long run.
Razor and blade model is used by companies that deal in complementary or companion products just like razors and blades.
By using this model, businesses create a stream of recurring income over the life of the root product.
Companies dealing in refillable products employ this business model. The game industry also makes use of this model by providing the gaming console at a very economical price and making good profits with the sale of games
Examples:
- HP (Printers and inks)
- Gillette (Razor and Blade)
Expert Tip: It is important to design the durable product in a customizable manner that the customer must keep coming back for the disposable component.
15. Reverse Razor and Blade Business Model
Flipping the razor blade model around, you can offer a high-margin product and promote sales of a low-margin companion product.
Similar to the razor blade model, the 2 products are complementary. But, unlike the razor blade model, the initial purchase is the big sale where a company makes most of its money. The add-ons are just there to keep customers using the initially expensive product.
Amazon employs this business model to sell its Kindle e-reader. It provides Kindle ebooks at a price lower than their actual cost so to make people consider Kindle as a one-time investment to enjoy low-cost books throughout its life.
Examples:
- Amazon Kindle and eBooks
- iPhone & iTunes
- Peloton & monthly subscription
Other Types of Business Models
16. Retail Business Model
17. Distribution Business Model
18. Manufacturers Business Model
19. Data Licencing / Data Selling
20. Peer-2-Peer Business Model
21. Leasing
22. Pay as Go (Utility) Business Model
24. Family-owned business model
25. Pyramid Scheme Business model
26. Auction-Based Business Models
27. Reverse Auction Business Model
28. Brokerage Business Model
29. Bundling Business Model
30. High Touch and Low Touch Business Models
Which is the Best Type of Business Model?
Many people are asking this question today. And I know as you read from the first paragraph to this point, the same question must have popped up within you once or twice.
But the truth is that all the types of business models discussed here are ‘the best’ in their own respect. The one you choose depends more on the industry than any other thing. Of course, the problem you are trying to solve for your customers also comes handy here.
Some types of business models are more popular and work better for certain industries than others.
For example, Software as a Service (SaaS) companies often use subscription and freemium business models. This makes software more accessible to customers while providing valuable recurring revenue for the business.
On the other hand, many social media platforms use hidden revenue business models to make money through advertising model. By providing full access to the platform for free, these companies attract more users. In turn, this creates a more valuable audience for advertisers.
Finally, what brings the best out of any type of business model is your execution ability. Take time to plan and time your execution to perfection.
Conclusion on Types of Business Models
We have discussed 30 different types of business models here, and there are more. We also looked at how to choose the best type of business model for your idea.
Let me however add, that the differential here maybe your ability to study your competitor’s model and improve on it.
I give you an example on this. Let’s assume your competitor uses a subscription business model with no free options. If you offer a freemium model, you may be able to attract new customers. In fact your competitor’s customerswillmost likely switch allegiance. This is because many online users prefer to try a product for free before purchasing.
Please I will not fail to mention that there are some businesses that can easily be classified under multiple business models.
I trust you are better equipped to make a decision on your business model now. All the best.
Also Read:
Why You Need a Blog – 20 Benefits of Blogging
THE ADVANTAGES OF STARTING BUSINESS AS A TEENAGER
HOW TO BOOTSTRAP YOUR STARTUP TO UNICORN STATUS
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