Your ability to Understanding the problem you are solving for your customers is the biggest challenge you will face when you starting a new business. Customers need to know exactly what you are offering to determine if your products will solve their problems.
But, ensuring that your product fits the needs of the market is only one part of starting a successful business. The other key ingredient is figuring out how you’re going to make money. This is where your business model comes into play.
What is the business model?
Your business model is a description of how your business makes money. It’s an explanation of how you deliver value to your customers at an appropriate cost.
According to Joan Magretta in “Why Business Models Matter,” the term business model came into wide use with the advent of the personal computer and the spreadsheet.
These tools let entrepreneurs experiment, test, and, well, model different ways that they could structure their costs and revenue streams.
Spreadsheets let entrepreneurs make quick, hypothetical changes to their business model and immediately see how the change might impact their business now and in the future.
In their simplest forms, business models can be broken into three parts:
1. Everything it takes to make something: design, raw materials, manufacturing, labor, and so on.
2. Everything it takes to sell that thing: marketing, distribution, delivering a service, and processing the sale.
3. How and what the customer pays: pricing strategy, payment methods, payment timing, and so on.
As you can see, a business model is simply an exploration of what costs and expenses you have and how much you can charge for your product or service.
A successful business model just needs to collect more money from customers than it costs to make the product. This is your profit – as simple as that.
New business models can refine and improve any of these three components. Maybe you can lower costs during design and manufacturing.
Perhaps you can find more effective methods of marketing and sales. Or, maybe you can figure out an innovative way for customers to pay. Keep in mind, though, that you don’t have to come up with a new business model to have an effective strategy.
Instead, you could take an existing business model and offer it to different customers. For example, restaurants mostly operate on a standard business model but focus their strategy by targeting different kinds of customers.
The different kinds of business models
You don’t have to invent an entirely new business model to start a business. In fact, the vast majority of businesses use existing business models and refine them to find a competitive edge. Here’s a list of business models you can use to start your own business.
The advertising business model has been around a long time and has become more sophisticated as the world has transitioned from print to online. The fundamentals of the model revolve around creating content that people want to read or watch and then displaying advertising to your readers or viewers.
In an advertising business model, you have to satisfy two customer groups: your readers or viewers, and your advertisers. Your readers may or may not be paying you, but your advertisers certainly are.
An advertising business model is sometimes combined with a crowdsourcing model where you get your content for free from users instead of paying content creators to develop content.
The AM News, The New York Times, YouTube, etc., are typical examples.
Brokerage businesses connect buyers and sellers and help facilitate a transaction. They charge a fee for each transaction to either the buyer or the seller and sometimes both.
One of the most common brokerage businesses is a real estate agency, but there are many other types of brokerages such as freight brokers and brokers who help construction companies find buyers for dirt that they excavate from new foundations. Agents or third parties are usually a perfect example.
If you can bring together a large number of people to contribute content to your site, then you’re crowdsourcing. Crowdsourcing business models are most frequently paired with advertising models to generate revenue, but there are many other iterations of the model.
Threadless, for example, lets designers submit t-shirt designs and gives the designers a percentage of sales.
Companies that are trying to solve difficult problems often publish their problems openly for anyone to try and solve. Successful solutions get rewards and the company can then grow their business.
The key to a successful crowdsourcing business is providing the right rewards to entice the “crowd” while also enabling you to build a viable business.
Franchising is common in the restaurant industry, but you’ll also find it in all sorts of service industries from cleaning businesses to staffing agencies.
In a franchise business model, you are selling the recipe for starting and running a successful business to someone else.
You’re often also selling access to a national brand and support services that help the new franchise owner get up and running. In effect, you’re selling access to a successful business model that you’ve developed.
Restaurants like Mr. BIGS, McDonald’s, Domino’s Pizza are examples
Leasing might seem similar to fractionalization, but they are actually very different. In fractionalization, you are selling perpetual access to part of something. Leasing, on the other hand, is like renting.
At the end of a lease agreement, a customer needs to return the product that they were renting from you. Leasing is most commonly used for high-priced products where customers may not be able to afford a full purchase but could instead afford to rent the product for a while. Car leasing, Computers Houses and warehouses are a few examples of leasing models.
Marketplaces allow sellers to list items for sale and provide customers with easy tools for connecting to sellers. The marketplace business model can generate revenue from a variety of sources including fees to the buyer or the seller for a successful transaction, additional services for helping advertise seller’s products, and insurance so buyers have peace of mind.
The marketplace model has been used for both products and services. Examples include Jumia, Konga, eBay, etc.
Subscription business models are becoming more and more common. In this business model, consumers get charged a subscription fee to get access to a service.
While magazine and newspaper subscriptions have been around for a long time, the model has now spread to software and online services and is even showing up in service industries. Examples are Netflix, Salesforce, Comcast
This is by no means an exhaustive list of all business models that exist but, hopefully, it gets you thinking about how you might structure your business.
The key thing to remember is that you don’t need to invent a new business model when you’re starting your business. Using existing models can help lead you to success because the model has been proven to work. You’ll be innovating in smaller ways within that existing business model to grow your business.
A new business model could be extremely lucrative and very expensive. Make your research and succeed!