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What’s a business model? Definition & Guide

Understanding your customer’s needs is the biggest challenge when starting a business. Your product must solve a real problem and be wanted.

Starting a successful business requires more than ensuring your product meets market needs. Making money is another crucial step. Your business model matters.

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What is Business model?

Your business model is its revenue strategy. It describes how you provide value at a fair price. This includes your products or services, target market, and expenses.

The business model lets entrepreneurs test and model cost and revenue structures. Exploring potential business models can help start-ups determine if their business idea is viable, attract investors, and guide their management strategy. Established businesses use it for financial forecasts, milestones, and business plan reviews.

What constitutes a business model?

A business model has three components:

Design, raw materials, production, labor, etc.
Marketing, distribution, service, and sale.
Pricing, payment methods, timing, etc.
A business model examines your costs and charges. It summarizes your business plan’s opportunity and strategy. Target market, value proposition, sales, marketing, etc.

What determines your business model’s success?

Customers must pay more than the product costs to make a business model successful. Profit is simple.

New business models can enhance any of the three components. Design and manufacturing may be cheaper. You might find better marketing and sales methods. You could also create a new payment method.

However, an effective strategy does not require a new business model. Instead, offer an existing business model to different customers. Restaurants use a standard business model but target different customers.

There are 17 business models

Start a business without inventing a new model. Most companies refine their business models to gain an edge. Start a business with these business model examples.

    1. Advertising

The advertising business model has matured as the world has moved from print to online. The model involves creating content people want to read or watch and then showing ads.

Readers and advertisers must be satisfied with an advertising business model. Readers may not pay you, but advertisers do.

Instead of paying content creators, an advertising business model can use crowdsourcing to get content for free from users.

Advertising models
CBS, NYT, YouTube

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    1. Associate

Affiliate marketing differs from advertising in some ways. The affiliate model, found mostly online, uses links embedded in content instead of visible ads.

If you run a book review website, you could embed Amazon affiliate links in your reviews so readers can buy the book. Amazon pays a small commission for every sale you refer.

Affiliate marketing examples
TopTenReviews.com, TheWireCutter.com

    1. Broker

Brokers match buyers and sellers. Each transaction costs the buyer, seller, or both.

Freight brokers and brokers who help construction companies sell dirt from new foundations are other types of brokerages. Real estate agencies are the most common.

Brokerage models
RoadRunner, ReMax

    1. Customization/concierge

Some companies customize their products and services to make each sale unique for the customer.

Custom travel agents arrange trips for wealthy clients. Nike’s custom sneakers show mass customization.

Customization business model examples

NikeiD, Journal

    1. Crowdsourcing

Crowdsourcing is when many people contribute content to your site. Crowdsourcing business models usually generate revenue through advertising, but there are many others. Threadless lets designers submit t-shirt designs and pays a percentage of sales.

Companies with difficult problems often publish them for anyone to solve. Rewarded solutions help the company grow. Successful crowdsourcing businesses offer the right rewards to attract the “crowd” and build a sustainable business.

Crowdsourcing examples
Kickstarter, Patreon

    1. Disintermediation

You usually go through a series of intermediaries to sell something in stores.

Disintermediation allows you to sell directly to consumers and lower prices.

Disintermediation examples
Dell, Apple

    1. Fractionation

Fractionalization allows you to sell only a portion of a product.

Timeshares are a great example where a group owns a portion of a vacation home and uses it for a set number of weeks each year.

Fractionalization examples
NetJets, DVC

    1. Franchise

Restaurants, cleaning companies, and staffing agencies all franchise.

Franchises sell the formula for starting and running a successful business. You sell a national brand and support services to new franchisees. You’re selling your successful business model.

Franchise models
McDonald’s, Allstate, Ace Hardware

    1. Freemium

A freemium business model involves offering free features and charging for premium ones.

Freemium is not a free trial. Freemium models let customers use basic features for free and charge for advanced features. This article discusses SaaS pricing models, including the freemium model.

Freemium examples
MailChimp, Evernote, LinkedIn

    1. Leasing

Leasing is not fractionalization. Fractionalization sells perpetual access to a portion. Leasing is like renting. A customer must return your product after a lease agreement.

Leasing is most often used for high-priced products that customers cannot afford but can rent.

Rental business models
Cars, DirectCapital

    1. Low-touch

By offering fewer services, low-touch businesses lower prices. Budget Airlines and IKEA are good examples of this model. The low-touch business model requires customers to buy additional services or do some things themselves to keep costs down.

Low-touch business models
IKEA, RyanAir

    1. Market

Sellers can list items on marketplaces, and customers can easily connect with sellers.

The marketplace business model can generate revenue from buyer and seller fees, advertising services, and buy insurance. Products and services use the marketplace model.

Market-based business models
Airbnb, eBay

    1. Pay-as-you-go

Customers pay for actual usage at the end of a billing period rather than pre-purchasing electricity or cell phone minutes. Home utilities use the pay-as-you-go model, but printer ink does too.

Pay-as-you-go models
HP Instant Ink, water firms

    1. Razor

The razor blade business model—selling a durable product below cost to boost sales of a high-margin, disposable component—is named after the product that created it.

Razor blade companies practically give away the razor handle because they expect you to keep buying a lot of blades. To ensure repeat purchases, customers must be tied into a system.

Razorblade business model examples
Gillette, Inkjet printers, Xbox, Kindle

    1. Reverse razor

Reverse auctions have sellers offer their lowest prices to buyers. Buyers then pick the lowest price. Flipping the razor blade model, you can sell a high-margin product and promote a low-margin one.

Customers join product ecosystems like razor blades. The initial purchase is a big sale, unlike the razor blade model. The add-ons only keep customers using the expensive product.

Reverse razorblade business models: iPhone & iTunes, Peloton.

    1. Reverse auction

Contractors bidding on construction projects use reverse auctions. Reverse auctions appear when you shop for a mortgage or other loan.

Priceline.com, LendingTree, and reverse auctions

    1. Signup

Subscription models are growing. In this model, consumers pay a subscription fee for a service.

Magazine and newspaper subscriptions have existed for a long time, but now software, online services, and service industries use the model.

Business models for subscriptions
Netflix, Salesforce, Comcast

Use established business models to innovate

This is not an exhaustive list of business models, but it may inspire you to structure your business.

Start-ups don’t need to invent new business models. Using proven models can help you succeed. You’ll innovate incrementally within your business model to grow.

New business models are risky but lucrative. Customers may reject the model.