WHAT REVENUE MODEL WORKS FOR YOU?
Peter Cockcroft
Strategic Emissions Reduction Advisor to Governments and Corporations, Published author on Carbon Management, ESG; renowned international negotiation coach
What is a business model?
A business model is the plan your business has for making money. It’s an explanation of how you deliver value to your customers at an appropriate cost. This includes descriptions of the products or services you plan to sell, who your target market is, and any required expenses. I prefer to call these a Revenue Model, as it is less ambiguous.
Agility is Important in 2022
The definition of a business model is how every component of your business works on its own and in relation to every other component of your business.
Let’s unwrap that definition. A business is made up of many separate components like marketing, creating and improving the product, finances, employees, consumer relationships, inventory management, and much more.
However, there are many different components that go into a successful business model. It’s not easy to make all these pieces fit perfectly because they're constantly changing and you have to keep adapting while still ensuring your plan remains cohesive at its core, but this is exactly what we've seen during COVID-19 so far!
Remember that neither your business model nor your business plan are static. They evolve over time and you must constantly refine them.
As businesses get started, grow, and evolve, the management team must constantly evaluate every component of the business model to ensure that they continue to work well together.
What are the key components of a business model?
Noah Parsons from Bplans.com has described a simple way to describe a business model:
The Difference between business plan and business/revenue model
A business plan describes what your company does. This written document states your company’s operational and financial goals for the future and how it proposes to meet them. A business model describes how and where you choose to operate your company. The model you choose is detailed in your business plan.
The business model is the mechanism through which the company generates its profit while the business plan is a document presenting the company's strategy and expected financial performance for the years to come.
As you can see, the business model is at the center of the business plan.
The business model describes how the company is positioned within its industry's value chain, and how it organises its relations with its suppliers, clients, and partners in order to generate profits. The business plan translates this positioning in a series of strategic actions and quantifies their financial impact.
How do you know if your business model will be successful?
A successful business model just needs to collect more money from customers than it costs to make the product. This is your profit - simple as that.
New business models can refine and improve any of the three components mentioned above. Maybe you can lower costs during design and manufacturing. Or, perhaps you can find more effective methods of marketing and sales. Or, maybe you can figure out an innovative way for customers to pay.
You do not 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 usually operate on a standard business model but focus their strategy by targeting different kinds of customers.
Board of Innovation
The Board of Innovation, a Belgian-based strategic think tank does a deep dive into different revenue models, dividing them into B2B and B2C (www.boardofinnovation.com ).
Different types of revenue 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 model examples you can use to?start your own business.
1. Advertising
Here the goal is to generate revenues by selling advertising space.
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.
On the Internet this model can be segmented based on the type of advertising:
Advertising business model examples:
CBS, The New York Times, YouTube
2. Affiliate
The affiliate business model is related to the advertising business model but has some specific differences. Most frequently found online, the affiliate model uses links embedded in content instead of visual advertisements that are easily identifiable.
For example, if you run a book review website, you could embed affiliate links to Amazon within your reviews that allow people to buy the book you are reviewing. Amazon will pay you a small commission for every sale that you refer to them.
There are a number of different payment methods within the online affiliate model:
Affiliate business model examples:
TheWireCutter.com, TopTenReviews.com
3. Brokerage/Commission
The company acts as an intermediary between the seller and the buyer and takes a cut of every sell it helps generate.
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.
The company acts as an intermediary between the seller and the buyer and takes a cut of every sell it helps generate.
This business model is generally less risky than others (and therefore less profitable) as the level of investment required can be minimal.
4. Concierge/customization
Some businesses take existing products or services and add a custom element to the transaction that makes every sale unique for the given customer.
For example, think of custom travel agents who book trips and experiences for wealthy clients. You can also find customization happening at a larger scale with products like Nike’s custom sneakers.
Customization business model examples:?
NIKEiD, Journy
5. Crowdsourcing
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 its 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.
Crowdsourcing business model examples:
Kickstarter, Patreon
6. Disintermediation
If you want to make and sell something in stores, you typically work through a series of middlemen to get your product from the factory to the store shelf.
Disintermediation is when you sidestep everyone in the supply chain and sell directly to consumers, allowing you to potentially lower costs to your customers and have a direct relationship with them as well.
Disintermediation business model examples
Casper, Dell, Apple
7. Fractionalization
Instead of selling an entire product, you can offer just part with a fractionalization revenue model.
One of the best examples of this business model is timeshares. Where a group of people owns only a portion of a vacation home, enabling them to use it for a certain number of weeks every year.
Fractionalization business model examples:
Disney Vacation Club, NetJets
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8. Franchise
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.
Franchise business model examples:
Ace Hardware, McDonald’s, Allstate, Starbucks
9. Freemium
The company offers 2 versions of its product. A free version with a limited set of features which goals are either to raise awareness about the product or to create a network effect. And a paid version, comprising more features, from which it can generate enough margin to cover the cost of the free users.
With a freemium business model, you’re giving away part of your product or service for free and charging for premium features or services.
The keys to success with this business model are to be able to generate huge network effect (example: LinkedIn) and/or to convert a sufficient number of free users into paid customers (example: Uservoice).
Freemium isn’t the same as a free trial where customers only get access to a product or service for a limited period of time. Instead, freemium models allow for unlimited use of basic features for free and only charge customers who want access to more advanced functionality.
Freemium business model examples:
MailChimp, Evernote, LinkedIn
10. Leasing
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.
Leasing business model examples
Cars, DirectCapital
11. Low-touch
With a low-touch business model, companies lower their prices by providing fewer services. Some of the best examples of this type of business model are budget airlines and furniture sellers like IKEA.
In both of these cases, the low-touch business model means that customers need to either purchase additional services or do some things themselves in order to keep costs down.
Low-touch business model examples:
IKEA, Ryan Air
12. Marketplace Platform
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, recently for freelancer platforms.
Marketplace business model examples:
eBay, Airbnb, Upwork
13. Pay-as-you-go
Instead of pre-purchasing a certain amount of something, such as electricity or cell phone minutes, customers get charged for actual usage at the end of a billing period. The pay-as-you-go model is most common in home utilities, but it has been applied to things like printer ink.
Pay-as-you-go business model examples:
Water companies, HP Instant Ink
13. Production
It's the most basic business model, the company sales the products and services it produces.
In order for that business model to be viable, the company needs to generate enough sales to cover its production , distribution, and storage costs.
14. Razor blade
The razor blade business model is named after the product that essentially invented the model: sell a durable product below cost to increase volume sales of a high-margin, disposable component of that product.
This is why razor blade companies practically give away the razor handle, assuming that you’ll continue to buy a large volume of blades over the long term. The goal is to tie a customer into a system, ensuring that there are many additional, ongoing purchases over time.
Razorblade business model examples:
Gillette, Inkjet printers, Xbox, Amazon Kindle
15. Reverse razor blade
Flipping the razor blade model around, you can offer a high-margin product and promote sales of a low-margin companion product.
Similar to the razor blade model, customers are often choosing to join an ecosystem of products. But, unlike the razor blade model, the initial purchase is the big sale where a company makes most of its money. The add-ons are just there to keep customers using the initially expensive product.
Reverse razorblade business model examples:
iPhone & iTunes, Peloton
16. Reverse auction
A reverse auction business model turns auctions upside down and has sellers present their lowest prices to buyers. Buyers then have the option to choose the lowest price presented to them.
You can see reverse auctions in action when contractors bid to do work on a construction project. You also see reverse auctions anytime you shop for a mortgage or other type of loan.
Reverse auction business model examples
Priceline.com, LendingTree
17. Subscription Model
The company receives revenues from its subscribers at regular intervals.
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.
This business model has one clear advantage: the company knows in advance how much revenues it is going to generate. The flip side is that it often takes several months to recover the subscriber acquisition costs leading to a lower cash generation at the beginning of the cycle.
Subscription business model examples:
Netflix, Salesforce, Comcast
Be Creative with established business models
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.As mentioned previously, if you want a more detailed list, please refer to www.boardofinnovation.com and Bplans.com .
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.
If you think I should add another business model to this list, please send me a message and let me know.