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What is a Business Model and its type?

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While starting a business for the first time, one thing that matters the most is your planning, and how you aim to move along with your idea to turn it into a successful business.

You may be ready with your idea of what your company is going to sell, but it will be of no use if you do not have a business model. Your business model is an outline of how you plan to make money out of your business.

Index:

What is a business model?

A business model of a company is an outline of how it plans to make a profit. Usually, a business model comprises the products or services the company is going to sell, its target audience, the expenses it has to cover and how can they make a profit. It describes how a company delivers value via its product or services to the customers as well as to itself.

Why is a business model important?

A business model acts as a guideline for the company to carry out its activities. It helps in validating the marketing strategies and predicting the expenses and revenues for the company and the margin of the profit. The business model also gives the investors a glimpse at the competitive edge of the company’s products and gives them a sense of the financial situation.

It gives an overall view of the company’s products, business strategies, profit margins, and future prospects. It acts as a blueprint or a roadmap for the company’s success or failure. The business model makes it clear to the audience what product the company plans to sell, the target audience, how to plan to reach the audience, the expenses, and the profits that can be received by it. At times, the success of the company depends not on the product or services but on the business model itself.

What are the components of the business model?

It is important to add all the components in a business model as it provides you with a guide to run the business while creating value for your customers. Ideally, a business model answers the following questions:

  • Who is the customer?
  • What product or services is the business selling to the customers?
  • What are the expenses of the business?
  • How does the business operate?
  • How will the business make money?

So basically a business model has the following components:

  • Customers:

This section of the business model has mainly been used to familiarise the audience with details regarding who your customer is. Mainly, the customer part of the business model comprises the Target market, i.e., The specific group of people who would be interested in your product.

  • Value proposition:

What problem faced by the target audience does your product fix and how is it different from the other products in the niche? The key components of a value proposition are:

  1. Problem: The problem faced by your customers
  2. Solution: The solution through which you aim to solve the problem.
  3. Product: Introduce your product and how it will create value for your customers.
  4. Competitive edge: Any unique feature of your product that sets it apart from the other products in the niche.
  • Operating model:

It includes the viability of the business and how it operates to sell its products. It is broken into many components showing completely how everything works.

The key components of the operating model are:

  1. Key partners: Who you will collaborate with (if any) to launch your business product.
  2. Key resources: The resources used by the company to develop and deliver the products or services.
  3. Marketing strategy: How you will market your product, i.e., make it known to your target audience such that they are interested to buy it.
  4. Customer relationships: Which kind of relationship will the company maintain with its customers.
  • Revenue model:

Elaborating the financials and how a company aims to make money, i.e., earn revenue. The key components of the revenue model are:

  1. The cost structure, i.e., the various expenses that are to be met by your company and the investment needed.
  2. The Revenue Stream, i.e., all the primary and secondary sources from where your product will earn revenue.
  3. Profit margin: How much your revenue exceeds the expenses will constitute the profit margin of your product.
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What are the major types of business models?

So now that we know what business models are and their main components, let’s move on to our next topic which is the main types of business models.

There are numerous types of business models that can be customized according to the need of the industry. Here in this article, we are only going to discuss a few of them but there are a lot more types beyond those mentioned here.

Subscription model:

This can be applied to both brick-and-mortar businesses and online businesses. The idea of this business is to take in recurring monthly (or another time specified basis) payments from the customers for them to access the company’s products or services. Examples of businesses that use this model include:

  • Netflix
  • Disney + Hotstar
  • StitchFix

Bundling model:

This refers to selling two or more products as a bundle often for a lower price. This increases the sale of a company and markets products or services that are difficult to sell when sold separately. Though, in this model, the profit margins reduce as the products are sold for a less price. Examples of businesses that use this model include:

  • Burger king
  • Adobe creative suite
  • AT&T

Freemium model:

This model is used when you provide a limited feature of your product for users to access for free while withholding some essential features that can only be accessed after paying a certain fee, be it a one-time or recurring payment. Examples of businesses that use this model include:

  • Spotify
  • LinkedIn
  • Skype

Advertising model:

This model is used when you allow your customers to watch or read content and then display advertisements to them. You have two customer groups here: i. Readers or viewers and ii. Advertisers. Your readers or viewers may not pay you but your advertisers do. Examples of businesses that use this model include:

  • Youtube
  • CBS
  • The New York times

Disintermediation model:

In this model, there are no middlemen. The company sells directly to the consumers, thus reducing the cost to an extent. By using this model, the company also builds a direct relationship with its customers. Examples of businesses that use this model include:

  • Apple
  • Dell
  • Casper

The manufacturer model:

This is the most basic business model which is used when manufacturers make the product from raw materials and then sell it either directly to the customers or to the middlemen. Examples of businesses that use this model include:

  • Lg Electronics
  • Dell computers
  • Hewlett-Packard

Marketplace model:

This model allows other sellers to list out their items and provide an easier interface for sellers to interact with their customers. It can generate revenue by numerous sources like fees from buyers or sellers or fees for advertising the products/services. Examples of businesses that use this model include:

  • Flipkart
  • eBay
  • Amazon

Aggregator model:

Here in this model, the companies sign contracts with the service providers and sell the services under their own brand name. Examples of businesses that use this model include:

  • Uber
  • Airbnb
  • Oyo

Conclusion:

Business models are an important part of launching a product or service. It must be made with utmost importance as it will shape the future of the company. Hope this article helped you.

You can check for 30+ companies’ Business Models analysis here.

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