The business model is the first and most important thing you need to think about when you decide to start your business. If you’re looking for ideas to unlock the long-term value of your business, you need to think about what you’re going to sell, who your customers will be, and overall how your business is going to make money.

The business model is one of the ways to streamline your business process, a framework to define, understand and design your entire business in the industry.

In this article, we’ll look at what a business model is, how to choose the right one for your business, and what the most successful types of business models are.

What Is a Business Model?

A business model is an approach to operate a business in a specific market. According to management expert Peter Drucker, a business model answers the following questions:

Who is your customer, what does the customer value, and how do you deliver value at an appropriate cost?”[1]

A business model is similar to a business plan. It demonstrates the elements that enable an existing business to operate successfully to generate revenue.

While a business plan is a detailed document that describes your business concept by explaining the necessary elements you need to create value for your customers with your product or service, what problem you are solving for them, how your product or service will reach customers, how your business will remain competitive, and any revenues and costs you can anticipate.

A business model is an essential part of any business and depends on the market you choose and the customers who are willing to pay. It is the starting point that allows a company to stand out from the competition.

 You can even change your business model along the way. To choose the right business model you need a lot of thought, synthesis, and diagnosis.

There are many different business models.  You can choose a business model based on your industry and based on what your customers are willing to pay.

What is the Business Model Canvas (BMC)?

The Business Model Canvas is strategic management for developing new business models or documenting existing ones. It is a visual tool with elements describing a company’s value proposition, infrastructure, customers, and finances. It is a tool with elements that describe a company’s value proposition, infrastructure, customers, and finances.

It helps companies align their operations by illustrating the big picture of their overall business framework to examine all the different aspects of a single business model.

The nine “building blocks” of the business model design model that has been called the Business Model Canvas were originally proposed in 2005 by Alexander Osterwalder [2]  and can be applied to organizations of any size, type, or sector.

It describes an organization and how it functions according to nine specific areas:

• Customer segments: the customer and market segments you serve.
• Value propositions: how you solve customers’ problems and meet their needs.
• Channels: how you deliver your unique value proposition to customers, including communication, distribution, sales, and other channels.
• Customer Relationships: how you maintain relationships with customers and customer segments and the types of relationships you maintain.
• Revenue stream: income and revenue from the sale of your product, service, or idea.
• Key resources: the most important resources needed to deliver your unique proposition to the market.
• Key activities: what you actually do as a company to generate revenue streams and bring your offering to market.
• Key partners: who you partner with outside the company to deliver your proposition, e.g. suppliers, distributors, etc.
• Cost structure: the costs you incur and how they are structured and managed.

How to know Which Business Model Is Best for You?

To determine the best business model for your business, consider the following points:

• Consider the needs of your customers
• Consider how your customers buy
• Analyze the market potential and the level of competition
• What value will you offer your customers?
• Try different business models to find what works best for you.

Most Successful Business Models

1. Subscription Business Model

Subscription business models are based on the idea of selling a product or service to receive a monthly or annual service and collecting recurring revenue to continue providing that service or product.

In subscription business models, revenues are realized in such a way that a single customer pays multiple times for extended access to a good or service.

In this model, which almost any product or service can follow, instead of asking customers to make one-time purchases, companies offer their service as a 12-month service with 12 purchases. This strengthens the company’s revenue model because it guarantees itself sales over a 12-month period rather than a one-time purchase.

Subscription business models can include a variety of businesses and industries, for example, websites, gyms, cable TV, SaaS (Software as a Service) products, and many others.

Today, many companies are moving from a business model where revenue is derived from one-time customer purchases to a subscription model where revenue is recurring in exchange for ongoing access to the delivery of a good or service.

There are newer businesses that operate subscription models, such as subscription boxes like meal delivery services and meal delivery kits.

The advantage of subscription business models is recurring revenue, which means that a business can project its sales over the long term with more accuracy and also helps build strong relationships with customers.

Examples: Netflix, LinkedIn, Amazon Prime, Salesforce

2. platform Business Model

A platform business model in contrast to a traditional linear business (which creates products or services from raw materials and has its own inventory to sell to its customers) facilitates the exchange of value between two or more interdependent groups, typically consumers and suppliers.

The platform business model transforms traditional, linear value chains into multi-dimensional value networks and ecosystems in which suppliers and consumers derive value.

As the number of participants in a platform increases, so does its value – the so-called network effect.

The participants of a platform can have indirect network effects by making transactions easier and cheaper.

Big companies like Airbnb, Uber, Google, Facebook, YouTube, eBay, Alibaba, PayPal, are all platform companies!

The success of these companies has made the platform business model the millstone of business models.

The success of companies that have the platform business model comes from the fact that they have much lower capital costs and overhead because they don’t hold inventory themselves, let alone develop or manufacture products and they don’t face the risks associated with the location.

In some cases, the owner of the platform as such does not manufacture the products that are sold like eBay, Alibaba or does not provide the services that are offered on its platform like, Freelancer, Uber, Airbnb or does not create the content like Facebook, Twitter, YouTube.

The platform business model is relevant for startups because it offers the opportunity to capture a share of established markets and grow quickly, but established companies can also use it successfully.

Some major types of business platform models are:

•  Goods sharing platforms

 The most famous example is Airbnb which helps on the one hand owners/ or hosts to increase the use of their existing assets in order to generate additional revenue and on the other hand help travelers find cheaper accommodation, or at peak times (e.g. during special events) by taking a percentage of each booking.

• Social platforms

 These platforms like Facebook, on the one hand, encourage exchange with friends by creating user-generated content without charging them but use their content for analytics and charges advertisers for the ability to run highly targeted ads and have access to the Facebook audience in general.

•  Platforms for the exchange of goods and services

An example of this type of platform is eBay which on the one hand helps merchants and small online businesses sell items and benefit from being able to start easily, save on advertising, use eBay’s legal and commercial framework, and their Paypal payment platform by charging them per transaction.

On the other hand, buyers can buy comfortably, have a single starting point for their purchases, know that they are getting the items cheaply, and benefit from Ebay’s buyer protection framework, etc.

Platform business models are flexible and scalable because they save companies time with seamless data exchanges that can be aggregated and leveraged to gain insights, innovate and generate additional revenue.

3. Affiliate Marketing Business Model

Affiliate marketing is one of the basic business models of earning income by promoting other companies’ products and earning commissions for each sale made.

You usually get paid every time someone buys something or performs the desired action. As you can see, the affiliate business model works on a commission basis.

 Merchants advertise their products and pay commissions for actual sales or measurable success made by their affiliates through affiliate sites and other means.

Affiliates who promote the products or services of other companies by introducing, reviewing, and recommending to their target audience receive a unique link that includes their unique identity code.

Every click, lead, and sale from that link is tracked by the merchant or network, and affiliates are paid according to the contract per referred visitor, per lead collected, or per sale.

This model is a win-win situation where the affiliates receive the profit in a similar proportion to what they help the merchants earn. Some merchants even pay a commission every time the referred customer renews their subscription or purchases the product again.

Some affiliate programs will pay you long after you’ve made the sale, in the form of well-known chargebacks. Affiliate marketers use channels such as blogs, videos, and even social media profiles and pages to promote their partners’ products.

There are many affiliate networks to list them all, here are a few of the most well-known: Clickbank.com, CommissionJunction.com, Wealthy affiliate, …

4. Franchise Business Model

A franchise business model is a franchise agreement between the owner of a business (the franchisor) and a third party (the franchisee) to allow the franchisee to operate a business and distribute goods and/or services using the franchisor’s business name and systems in exchange for a fee.

 When you purchase a franchise unit, you benefit from a proven business model and well-developed strategies that will help you make a profit right from the start.

The franchise fee can be in the form of upfront payment or an ongoing payment based on profits earned or a combination of both. Franchisees can then enjoy the winning formula and profitability of the franchise.

Franchising allows the franchisor to license its resources, brand, intellectual property, and the rights of a franchise to sell its products and services in exchange for a fee. It is the best way to expand the business.

Fast food restaurants are good examples of this type of franchise business model. The best-known examples are McDonald’s, Burger King, and Pizza Hut.

5. Freemium Business Model

Freemium represents a business model in which a company offers a service to users for free in order to lay the foundation for future transactions and charges extra for additional or advanced features.

This term is a combination of the words “free” and “premium” which consists of offering customers both complimentary and paid services.

In this business model, a company provides simple and basic services for free that the user can try out; it also offers more advanced services or additional features for a fee.

Freemium business model has been a common practice among many software companies since the 1980s. Today, freemiums are also particularly popular among companies in the Software as a Service (SaaS) and internet-based companies as well as gaming companies.

It is a popular tactic for companies that are just starting out and trying to attract users to their software or service. They offer basic programs to consumers, which can be tried for free but have limited capabilities; to get the full package, one must upgrade and pay.

Examples: MailChimp, Evernote, LinkedIn

6. Razor and Blade Business Model

The razor blade business model is a business model in which one item is sold at a low price or given away for free to sell large volumes of another component of that product.

The razor blade business model is named after the product that basically invented the model and the most famous example of this is, of course, disposable razors.

Another common example is inkjet printers that require the purchase of replacement ink cartridges over and over again. The price of the inkjet printer itself is a one-time expense, but replacing a new ink cartridge is an ongoing expense for consumers.

Another example is game consoles that require accessories and software. This model is great if you have a loyal customer base and can create some sort of lock-in situation with customers.

Example: Gillette, Inkjet printers, Xbox, PlayStation Video Games, 

7. Reverse Razor and Blade Business Model

This business model is the opposite of the razor blade model. Instead of selling a low-priced product up front, you sell a high-margin product upfront and offer low-margin product sales later on.

This business model uses the strategy with a unique offering for the premium product and acquires more revenue from secondary items in the long run.

 A famous example of this business model is Apple.  If you buy a new MacBook, chances are you’ll end up buying apps from the App Store, songs from Apple Music, and maybe even an iPhone.

So this model guarantees one or more high-end purchases, followed by a series of smaller purchases over the long term.

Example: iPhone, iPad, (Apple’s App Store and iTunes sell apps, movies, songs, etc.)

8. Advertising Business Model

The business model of advertising is one of the old forms of a business model that was already practiced in print and nowadays has found a stronger impact to the benefit of online and mixed formats.

If you run a website, there are all kinds of advertising networks that you can partner with to run ads.  In this business model, your marketing efforts should generally be geared towards generating traffic to your site, to increase click-through rates and page views or time spent browsing your site.

Businesses using this advertising model focus on creating and delivering content to drive high traffic to their site on an ongoing basis and use advertisements to monetize their business. You are not actually charging your readers or visitors, but you are monetizing their attention by selling advertising space.

In this case, Advertisers pay website owners to display an advertisement to their site visitors, or refer visitors to the advertiser’s website, or display advertisements and provide click-through functionality to the advertiser’s site.

9. Agency Business Model

This is a project-based business model in which an outside firm is hired to perform a specific task. Some niche agencies are digital marketing, design, and architecture, surveys, promotion, media, public relations, branding, website development, social media, etc.

Companies that lack in-house expertise use agencies to get a solution tailored to their needs.

10. E-Commerce Business Model

 E-commerce is a simple but very promising business model. E-commerce allows buyers and sellers to connect and transact using an online platform. It has particularly allowed businesses to expand their market presence by providing cheaper and more efficient distribution channels for their products or services.

E-commerce can be done on computers, tablets, or smartphones. Individual sellers have increasingly engaged in e-commerce transactions via their own personal websites.

There are several types of e-commerce business models,

– Business-to-Business (B2B) commerce,

– Business to Business (B2C),

– Customer to customer (C2C)

– Customer to customer (C2B).

Almost every product and service imaginable is available through e-commerce transactions, including books, music, airline tickets, and financial services such as stock investing and online banking.

For example, Amazon launched its business with an online product sales and delivery model, and digital marketplaces like eBay or Etsy serve as exchanges where multitudes of buyers and sellers come together to do business.

11. Multi-Sided Business Model

The business model of a multisided platform, also identified by the acronym MSP, is basically a service or product that connects two or more groups of participants, playing a kind of intermediation role.

Multisided platforms have gained importance thanks to the power of the internet and the digital world.

This business model can work for startups, young companies, and established brands, making it easier for them to find and connect with each other.

 Some of the world’s most valuable startups, such as PayPal, Uber, Alibaba, eBay, Linked In, and Facebook, have adopted the multi-sided platform business model.

 The success of these large companies with this business model has made it the choice of many new entrepreneurs.

12. Cash Machine Business Model

The cash machine business model comes from a well-known metric, the cash conversion cycle (CCC), which indicates how long it takes a business to convert its resources into cash.

 This metric tracks the number of days it takes a business to sell its products or services, get paid for them, and pay its suppliers. Firms using the cash machine business model typically have a short cash conversion cycle and offer cash sales or have significantly reduced credit terms, allowing them to receive cash quickly from their customers.

These businesses have low-profit margins to generate high volume sales and use their cash resources to pay suppliers quickly to avoid lengthening their cash conversion cycle.

However, for some, the need to maintain low margins may come from the disruptive industry in which they operate. The cash machine business model is best suited for companies that maintain inventory.

One of the best examples of the cash machine business model is Amazon, which generates a massive amount of cash from its online store before paying its suppliers.

Example: Amazon, Alibaba, Apple

13. Peer-to-Peer Business Model

The peer-to-peer business model, also known as P2P, involves some sort of platform that provides contact between the two parties while establishing rules, payment systems, and any type of process that may be necessary for the transaction between two individuals in terms of purchasing and delivering the product or service.

The peer-to-peer business model acts as an intermediary between individuals and reduces the risk that the seller cannot deliver the product or service and the buyer cannot pay for it.  In addition, it reduces production costs and investments, which results in lower prices for the consumer.

Both the buyer and the seller benefit from companies that operate as intermediaries, in order to connect the two parties. The peer-to-peer business makes money through commissions.

The internet has made this P2P business model a viable system, making transactions more accessible, faster, and more secure and allowing millions of users to connect, form groups, and collaborate with each other. The P2P business model has enabled a wide variety of business models, such as multisided, marketplaces, or crowdsourcing.

Some of the most famous examples of businesses based on peer-to-peer business models include:

– Uber, Lyft, Blablacar: ride-sharing applications, which connect drivers/car owners with users.

– Fiverr, Freelancer, Upwork: platforms that connect freelancers and clients in various fields, such as marketing, translation, graphic design, and programming.

– eBay, Amazon, Etsy, Alibaba: sellers list their products for a small fee (or for free) and buyers purchase through the platform.

– Airbnb, Tripping, HomeToGo: these apps connect people who can earn extra income by renting out an under-utilized property with people who need a place to stay.

14. One-for-One Business Model

the “one for one” business model, also called “buy one, give one is a form of social entrepreneurship business model that encourages customers to receive a product they need while helping someone in need.

While there are debates about its long-term sustainability, many companies are changing their business models to meet the needs of socially conscious millennials.

Proponents of this model suggest that the “one for one” model is a viable way to create more social and business value in society because consumers tend to place a higher priority on brands that try to help those in need.

Critics suggest that these actions use poor households as a marketing opportunity, especially if the donation model lacks transparency.

The best example of a “one for one” business model is TOMS Shoes, which provides shoes to underprivileged children around the world for every pair of shoes sold. 

Examples: TOMS Shoes, Warby Parker (donated eyeglasses),

15. Hidden Revenue Business Model

A hidden business model refers to a revenue-generating system in which users do not have to pay for the services offered, but the company still receives revenue from other sources.

The hidden revenue business model is a model used by companies that do not charge users directly for their services. 

Instead, these companies charge other companies, usually third parties, to reach customers while the customers do not realize that the company is dealing with third parties to generate money.

This business model is most common in the media, service, and IT industries because they provide customers with a service they can use without charging them for using their service.

In the case of the media industry, these third parties take the form of publishers who pay for access to their customers.

The publisher benefits from access to the company’s customers, the company benefits from revenue generation, and the customers benefit from using the products or services offered by the company without having to pay for them.

Of course, for this win-win business model to work, customers must always interact with the products or services to generate revenue for the company.

Thanks to the Internet, the hidden revenue business model is widespread among some giant technology companies.

An example of this business model is Google, which uses an advertising business model, in which companies participate in an ad network called AdWords.

This model allows companies to offer their ads to interested users and pay based on what users click.

One of the main advantages for publishers is to be listed by Google which is the source of traffic.

These publishers can rent part of the space of their web pages to Google to place banners of companies belonging to the AdWords network. When users browse or click on the pages containing the banners, these publishers can monetize their content, which is called AdSense. 

Examples: Google, Facebook, Instagram, Twitter

16. Direct Sales Business Model

In a direct sales business model, the product or service is presented directly to the end consumer through a network of sales representatives.

Unlike traditional retail, where products are sold to distributors and stores before reaching the end consumer, the direct sales business model aims to eliminate intermediaries such as regional distribution centers, wholesalers, and stores.

Thus, products are sent directly from the manufacturer to the sales company, then to the sales representative or distributor, and finally to the consumer.

This allows the company to sell more directly to consumers, reduces the cost, and enjoy higher margins through a more personal relationship with consumers.

This business model also allows the company to adapt production and total staff to its real needs.

This business model, therefore, relies heavily on a network of salespeople and a close relationship with the customer who associates the products and the company with a person towards whom they can feel affection or loyalty.

Some companies practice this business model on the internet, which is similar to direct marketing, to increase the benefits of the direct sales model.

An example of a direct seller is Boeing, which offers its products directly to airlines.

Other examples include Tupperware, personal care, and nutrition brands like Avon, Arbonne, and Herbalife.

Types of direct sales business model

Single-level direct sales

This type of direct selling is typically done through door-to-door, face-to-face, or online presentations.

Salespeople earn their income through commissions and occasional bonuses paid by the company that provides the products. They do not recruit other salespeople to receive more income.

Host or party-plan sales

The main method of generating leads in this type of sale is to hold a social event and offer products for sale.

Multi-Level Marketing (MLM)

In multi-level marketing (MLM), the revenue generated is based on sales commissions and sales made by other business partners recruited into the company.

 These direct selling methods can sometimes be used in combination.

References: 

[1] Drucker, P.F. (2008) The Five Most Important Questions You Will Ever Ask About Your Organization, San Francisco, Jossey-Bass.

[2] Osterwalder, A. and Pigneur, Y. (2010) Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers, Hoboken, NJ, John Wiley & Sons.