Being the most discussed part of every business, Business Models are actually the least understood part of the system. Starting a business entails a detailed process of planning the business; how customers would come into the picture, what and how products or services would be offered, how would revenue and profits be incurred off of them.
You will want to select a business model that fits right for your vision and goals and more particularly to the type of product you will be offering.
In this blog, I will attempt to clarify some of the business models that are up and coming in the 21st century.
Let us start by addressing
WHAT IS A BUSINESS MODEL?
A business model is an outline of how a company aims to sell and make money out of it. All in all, it contains:
What product or service a company will sell.
How it intends to market that product or service.
What kind of expenses it will incur
How it expects to make a profit.
There exist many different kinds of models based on the different verticals you consider. The new hybrid models, bringing in a variety of factors from different Business structures, leaving you with a number of options to choose the optimal one from, for your business. There is no one size fits all formula for arriving at the exact right fit.
Let us look over some broad domains of business models
Freemium and Subscription Model:
Subscription-based Models have been around for sometime and have gained immense popularity. These work on selling products and services on a monthly or yearly recurring revenue basis. The focus must be on customer retention rather than only acquisition. Subscription based businesses can vary from big players in software enabling cloud storage, to small businesses like meal delivery kits.
Freemium is an adaptation of the subscription model, wherein services are ‘Free’ as well as ‘premium’. That is, a few of the features and services are provided to the customers free of cost. The rest of the features can be unlocked by opting for the paid premium subscription. The easiest way to describe this would be using Disney+ Hotstar as an example. Hotstar on its platform offers some shows, matches and movies for free. To Access the wide variety of movies and content on the platform, a subscription is necessary.
For models with a large number of free users, the marginal cost incurred on free users must be kept low for this kind of a model to work.
However, many of them compromise on features, performance, and customer service in order to justify making them free and differentiate them from their premium paid services.
One will not be wrong to say,
Freemium is an acquisition channel not a revenue channel
Assess yourself before setting up a business:
Does it have viral adoption potential?
Do you have a compelling migratory path from free to premium?
Can you monetize the free users?
Do you have an infrastructure to serve a mass audience?
Most SaaS based businesses work on an annual subscription basis.
What is a Market Aggregation Model?
The Market aggregation model has become widespread in the recent decade and continues to grow. Most new startups booming in the economy at the moment are based on this aggregation model. An aggregator would simply be the place where the suppliers and consumers are brought under one roof. Suppliers and buyers are connected through a platform using technology and analytics. It brings uniformity in payments, front and back-end technology.
The aggregator company does not produce, manufacture or store the products. Instead it draws data on the goods and services put up on the platform. The Aggregators charge a fee or a commission for enhanced visibility of the services.
Marketplace and Aggregator model are not the same!
The brick-and-mortar model
The brick-and-mortar model refers to business that has physical stores in different locations. The physical presence of storefronts of businesses are called brick and mortar.
In the virtual era now, it is difficult to maintain either a strictly B&M model or a virtual eCommerce like model. While virtual models reduce the overhead costs of a business, storefronts give a more personalized experience for the customers and exert a control on customer relations.
Examples of brick-and-mortar stores could be Walmart, Target, BIgbazaar; or simply the grocery stores near you. Some types of businesses may have a better chance of success as a storefront, like Garments. Despite numerous online marketplaces for garment industry, individuals prefer shopping in person when looking for the right size and feel.
Some challenges may be:
Overhead costs: the costs of setting up the store and bringing up the products for sale may dig a huge hole in your pockets before it starts getting profitable.
Geographic limitations. Spreading out in new locations may take time.
Tip: Even if you want to keep your business to the traditional storefront style, having digital presence is a must!
Let's look at a Franchise Model
In the franchise model, a business (franchisor) allows a third party (franchisee) to operate business and distribute goods and services under their business/ brand name. The franchise fee is taken on a recurring or upfront basis depending upon the revenue structure. The fee paid is known as the licensing fee and apart from that, the parent company charges royalties which is a percentage of gross sales. The franchisor takes care of the business strategy, operations and advertising and positioning themselves.
Franchise models can also be further classified into:
FOCO- Franchise owned company operated
FOFO- Franchise owned franchise operated
COCO- Company owned company operated
COFO- Company owned franchise operated
Read more on the types of franchise models here
Some benefits of the franchise model are:
Existing market demand: The brand has already positioned itself in the minds of their customer base. Setting up a franchise ensures revenue through the already existing demand for that product.
Less risk: Franchise already has an understanding of the market and competition, financial investments required.
Lesser mistakes: Operating system is already in place and uniform. Thus leaving no gaps for mistakes a new entrepreneur might make.
How to select the best model for you:
With all of these different types of business models, how do you choose the right one for your small business?
At the end of the day, there's no absolute answer to this question. Instead, the business model that's best suited for you will depend entirely on the scope of your operations and the costs you may incur along the way.
How will my product or service benefit the customer?
How will I generate revenue?
Who’s my target customer?
What startup costs am I looking at?
Which expenses will be fixed and variable costs?
Do I need support from investors?
A business model is something that can change with time but ensuring your business model has the right mix of important elements like being repeatable, scalable, predictable and ultimately profitable, will definitely increase the chances of your success in entrepreneurship.
Leave a comment on the blog if you want us to explore each business model in greater detail.