A business model tells you what products or services you provide, who you provide the products and services to, and how the business would earn revenue. Read on to get an idea of which business model or a combination of, would suit you best.
Sometimes, a business model has a complete revenue model in it, but there are times when a separate revenue model has to be created, even possibly creating additional revenue streams. As we compare the models below, you will be able to see the difference between a business model and a revenue model, and will understand why you may need a combination.
BAIT & HOOK
This business model is probably one of the earliest ones. Just like how a bait is used to get fish to bite and get stuck on the hook, Gillette used this concept and is also known as the razor-and-blade model.
At that time, razors were made of metal and came with metal blades that lasted for a long while. To increase the sales cycle of the customers, Gillette introduced razors with disposable blades. They shortened the life span of the blades so that customers had to keep buying replacement blades for their razors.
With the introduction of plastic razors, consumers would need to purchase the disposable blades repeatedly. The razor would be sold at a cheap price, and the blades would provide recurring income from the continuous purchase.
A franchise is when a business owner licenses its business name and processes to another party.
The business owner, the franchisor, would have developed an established brand along with proprietary products or services and processes. The franchisor gives a license to the franchisee for a fee and provides information on running the business.
For the franchisor, this is a way to expand the business without using its own capital. Other than the license fee, a franchisor would also earn from training fees or advisory services, and royalties, which is a percentage of the franchisee’s sales.
For investors who have ready money but are not willing to go into market research, evaluating its attractiveness, figuring out the supply chain, operations and profitability or building a new brand, this is a viable option.
HIGH VOLUME, LOW MARGIN
This business model involves products or services with high turnover. This means products or services are sold with low prices and in high quantities over a short period of time.
These are typically grocery stores, hypermarkets, convenience stores and fast food restaurants. For services, they would be transportation (bus, train etc.), hair salons, nail salons, barbers, hairdressers etc.
LOW VOLUME, HIGH MARGIN
This business model is exactly the opposite of the above. Products or services are sold with high prices but do not get sold as frequently.
These are typically big-ticket items or high-end products such as cars, jewellery, furniture, some mobile phones. However, they are not limited to just these. You could provide a service that is highly specialised or if you are the only business providing the service in your area, that enables you to dictate a higher price while maintaining your costs, giving you higher margins.
Sometimes, buying is not a viable option as resources and opportunities could be limited.
Renting is a more attractive option than buying as the renter does not have to worry about the costs associated to owning the product or service such as maintenance, storage, instalments or being tied down to a contract. Sometimes, the renter only intends to use the product or service for a limited time.
Examples of this would be cars, bikes, lorries, equipment, heavy machinery, hotel stays and residences.
Conversely, rental businesses need to invest heavily in buying the property, equipment or machinery and further invest in tools or operational costs such as maintenance, insurance, registration or booking platform, tracking and delivering.
This business model is based on an advertising space that is created within a media owner or publisher’s space. For example, newspapers, magazines, radio stations, TV channels and websites.
The media owner or publisher invests in creating content that in turn brings in audiences that advertisers reach out to.
The subscription model is where a subscriber pays a recurring fee on a weekly, monthly, quarterly or annual basis. The offerings through a subscription service could be for a single service or item, or for access to various services or items. These include magazine subscriptions, membership fees, mobile network services, cable TV, streaming services and software usage.
The sellers of subscription services benefit by getting the payment in advance while the buyer gets a discounted price for something that they plan to buy or use regularly.
The pricing structure is very important in this business model so that it is seen as worthwhile to existing subscribers and attractive to potential subscribers.
The name freemium is a cross between a free service and a premium service. This means that users are able to access basic content or services for free up but will need to pay for an upgrade for additional access or use.
This model is usually used by businesses that offer softwares, games, news, research and information.
E-commerce literally means electronic commerce. This means the selling and buying of products and services through the internet.
This business model cuts down the cost of having a physical shop and requires an online payment system or payment gateway for the sales transaction to happen.
BRICK & MORTAR
Brick and mortar means having a physical location. Any business that has a shop, office or business location that offers its services or products to customers face-to-face is considered brick and mortar.
The downside is that retail space or office space add to the overhead cost with rent or mortgage, utilities bills, security and maintenance or renovation of the premise. However, the upside to this business models is that is gives consumers the ability to view and inspect the products they are planning to buy.
A clever example is IKEA. Their showrooms are made in such a way to not just sell furniture and furnishings, but to also inspire potential shoppers to create their own look.
CLICK & MORTAR or CLICK & BRICK
This term was created to refer to a combination of e-commerce and physical stores.
Some customers go online to research about a product and go to the physical store to see, touch and feel the product before making the purchase online or physically. The store works as showrooms for the online retailer.
Some retailers use the physical store as a pick up point for customers who do not want to wait for the products to be shipped or do not want to pay for shipping costs.
Start with your value proposition. You can do this by looking at your key resources, partners and activities and match them to the market segments and the channels you would use to reach them. Or if you need help with this….