What is a Business Model

What is a Business Model
Having a business model is an important part of building a successful company. Here are 10 different types of business models that may be worth exploring as you adapt to new realities.
by Madelyn Young Jan 21, 2021 — 8 min read
What is a Business Model

Starting a business requires planning, and it can be a long process. Though tedious, doing the pre-work will help ensure your business is a success. Will you be selling a product? Or a service? Are you setting up a brick and mortar store or going eCommerce? Who is your target customer, and how will your model make money? You need a solid business model to incorporate into your business plan.

‘Business model’ is a term used to describe a business plan to build a company that makes a profit. The business model identifies services or products a company plans to sell, identifies its target market, and plans for expenses. A business model is just as important a consideration for new businesses as it is for established ones. For new businesses, a business model will help recruit talent, motivate the team, and attract investment. For an established business, regularly updating the business plan will allow a company to adapt to trends. It can also address potential challenges. It’s also a great way to identify issues in the business model.

You can think of a business model as a blueprint for a businesses core strategy. It should include information about products and services and highlight costs and pricing. Investors want to see a strong business model that shows numbers that add up and a well-thought-out and planned idea.

A real-life example is an excellent way to highlight what a business model should include. Using a streaming service as our example, let’s build a business model. A streaming service operates under a subscription model, and it may charge monthly or annually for access to its services. Every subscription model business can alter this to its unique proposition. For example, a makeup subscription business may opt for quarterly subscriptions.

A streaming service sells online access to content.

A streaming service can take a multichannel approach to marketing. They can use word of mouth, social media, advertising, and email marketing,

A streaming service has extensive expenses. They have the cost of employees and headquarters. There is a need to produce unique content and to round out their service with existing content. That’s a lot to consider.

A streaming service might be a major enterprise, but ultimately, there is one way to profit, and it’s through subscription sales. This highlights the initial points and how the business model expects to operate and profit.

The purpose of a business model is just that. It’s to understand the purpose of your business and how you expect to turn a profit. How much money will it take to start the business, what additional costs can you expect and, when will you start moving into profit?

Business models vary in function and form, but the basic components should be present regardless. The essential elements of a functioning business model include your unique value proposition, competitive advantage, and a feasible target market. Without these components, your business does not have a way to generate revenue. Business models go beyond income, it must also consider production costs and any other factor that fits into the big picture. Keep these elements in mind when you create your business model.

This is what makes your services or products attractive to customers.

The competitive advantage works with your unique value proposition. You have established what makes your offer attractive to customers, but your competitive advantage is a feature that the competition cannot easily replicate.

This is the specific audience of consumers who may be interested in your products or services.

Your cost structure should include a full list of variable and fixed expenses required to keep your business running. It should also factor in how these expenses impact pricing.

Resources include financial, physical, and intellectual assets held by your company.

In what ways can your business generate income? That is your revenue stream(s), the more potential streams the better.

Your revenue model is the framework whereby you identify pursuable feasible income sources.

Key metrics like key performance indicators measure the success of your company.

This is a necessary and healthy exercise for all businesses to do. Identify customer pain points and determine how your company will meet them. Pain points are specific problems customers experience in your industry or marketplace.

Profit margin is the revenue that exceeds your business costs.

These elements are key to creating a business model. However, as your business grows and matures, a lot of the information will change. In the beginning, you might not have clear ideas about what each component looks like in reality. However, as you write your plan, your model will start to take shape and give a clearer vision of where your business is going. Additionally, the business model can help inform operational decisions. It won’t, however, solidify your strategy. It will allow for flexibility and change as required.

Many companies make the common mistake of underestimating costs when they create a business model. In particular, the cost of operating the business until they turn a profit. It isn’t enough to count expenses and costs up to the launch date of a product or service. You have to keep your business running beyond that until your revenue stream exceeds your costs.

Now that you have a clear idea of what a business model is, we can break down the variety of business models for you to consider.

Different Types of Business Models To Consider

Brick and Mortar Business Model

As the OG, it’s worth discussing. The brick and mortar business model is perhaps the most well-known of business model examples. This is simply a physical store, where a business provides a customer experience face-to-face. There is a physical presence, whether a store or office and customers and employees interact in person. It’s the traditional idea of a business, whether the owner purchases, rents or leases the physical space.

Brick and mortar businesses are the extreme opposite of an eCommerce store. Brick and mortar businesses require funds for employees, and this may cost more if there is a specialist aspect to what the store does. For example, for direct sales situations, training investments increase. That sales experience can develop in burgeoning relationships that secure customer loyalty. Customers touch, feel, try on, and interact with products before they buy them. A brick and mortar store can focus personalised marketing efforts to upsell or cross-sell based on customer preference. For an easy to use point of sale system that provides team management, cash management and inventory options, Square POS is easy to use.

eCommerce is a growing industry. But major retailers like Woolworths, Bunnings, and Coles still dominate. As with any business model, there are advantages and disadvantages. A brick and mortar business model provides a physical connection to your brand and your customers. Additionally, it offers convenience to see and feel products in person, and customers can instantly access employee expertise. Ultimately, it provides customers with an overall experience. That being said, there are additional costs associated with a physical store, and your location can limit your impact.

Peer To Peer Business Model

In the peer-to-peer business model, individuals carry out direct transactions with each other. There is no intermediary involved or a third party involved in the decision-making process. P2P is about decentralisation. The parties involved in this business model are the means and tools of production. It can also involve contractors or individuals who provide customers with services, such as independent plumbers or electricians. However, generally, there is a platform facilitating the buying and selling process, so that individuals can connect with each other directly.

The traditional approach requires firms to own the finished product or the means of production, but this model flips that on its head. It could be individuals lending money without involving a bank. Or trading houses or even loaning a car.

The best peer to peer business model examples includes eBay, Lyft, Uber, and Fiverr. There are many peer to peer businesses available on online marketplaces. This makes it easy for buyers and sellers to meet and carry out transactions. eBay does not produce, stock or manufacturer items for sale; they merely facilitate the meeting between interested parties. Fiverr is the platform where clients can find freelancers in a variety of fields.

The P2P business model is an excellent way to monetise your skills or resources. There are minimal costs involved. The platform takes a cut, but it provides both parties with an easy way to be found. It also provides people with the platform to do what they do best. A copywriter doesn’t need to worry about marketing or, advertising and a plumber doesn’t need to concern themselves with copywriting. This model is changing the way we operate in business and enhancing specialisation.

Affiliate Marketing Business Model

If you have ever looked for reviews about a product before you buy, you will have encountered an affiliate marketing business model. These companies attract an audience with tutorials, suggestions, product reviews, and rankings. Within these posts, they provide links to purchase products from partner websites. If you follow a link and make a purchase, the business earns a commission from your sale.

The best way to think of this model is as pay for performance. Your affiliate partner provides you with a unique link, and every click, lead or sale is registered to you. You then receive payment, whether it’s per sale, referral or lead. It’s a win-win for all parties involved. And, it’s as simple as starting a website and creating high-quality content to build trust with your audience. Likewise, you need a niche. Choose a topic you are profoundly passionate about. It takes time to build an audience and start earning income.

E-Commerce Business Model

This promising platform allows buyers and sellers to come together on an online shop. There are several different eCommerce business models, including business to business (B2B), customer to customer (C2C), customer to business (C2B), and business to customer (B2C). There are several examples of this business model, from Amazon (B2C) and Alibaba (B2B) to eBay (C2C, B2C) and Google Adsense (C2B).

Square Online simplifies running an eCommerce business. With an easy to use store builder, your site can be up and running in no time. It’s suitable for businesses of all types and can help drive customers to your site.

Drop-Shipping Business Model

The business owner in this model relies on working with several wholesalers or suppliers. The owner lists their products on their website and takes the sale. When the order is placed on the owner’s site, they instruct the supplier to drop-ship the item directly to the customer. The owner does not hold stock; it’s all with the suppliers. There is a third party managing shipping and logistics. As far as business model types go, drop-shipping is the simplest. You don’t need storage space, retail space or employees. All you need is a great idea, a good website, and a reliable supplier.

Social Enterprise Business Model

The social enterprise model is based on the idea that no company should profit while actively harming others. Or, more to the point, they can spend part of their profits on humanitarian efforts that aid living conditions. For example, the Italian luxury brand Brunello Cucinelli donates around a fifth of its profits. Aravind Eye Hospitals is another excellent example, where patients who can afford to pay the full price do, while patients who cannot, don’t. The company provides the services regardless. Approximately 50% of the patients do not pay for their surgeries.

A social enterprise model seeks to apply business solutions to societal problems. The goal is to support the business sustainably. There are no shareholders to keep happy; it’s a non-profit built to give back. Any profit earned goes directly back into the work the social enterprise does.

Pay As You Go Business Model

The pay as you go business model, also known as the utility model, is often used by governments to distribute common goods. For example, for distributing solar home systems to rural communities across India. They pay for these in small instalments over a long period. The purpose of this model is to give people what they need, and what they can afford. When it’s devices, such as a smartphone, ownership is gradually transferred to the customer. It isn’t the same as a pay-per-use model as used by web service companies or utility companies. The major difference between these two is the transfer of ownership until it is permanently unlocked. If payment is not made, the service or service can be locked or cut off. This is often the most efficient way for someone with a poor or no credit history to access certain services.

Square offers a range of options for businesses, so check out our Resource Centre today and find out everything you need to know when you’re getting started.

Madelyn Young
Madelyn Young is a Brooklyn-based writer covering business-, finance-, and technology-related topics. Prior to going freelance in 2018, Madelyn spent ten years as an in-house writer and editor for various B2B startups, agencies, and media companies – first in Cleveland, OH, then Miami, FL, then NYC.


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