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How To Choose A Business Model That Makes Sense

Choose A Business Model

Whether you are just starting out or already in business, there is a need to choose a model to propel your business.  

In this article, we are going to learn how to choose a business model.

What Is A Business Model?

In a nutshell, a business model is a strategy you use to generate revenue. And a business ultimate worth can only be fully appreciated if it has a sound business model.

Keep in mind that your business’s model is flexible and subject to change.

Consider a business model as an opportunity to explore and try a new marketing strategy or angle for your business.

For example, think about an organization like Facebook. 

Having begun by offering their site for free, and as their user base grew, they added advertisements to make money. 

And that’s just one possible approach.

Monthly subscriptions or selling services would also have been other options.

What your customers are willing to pay is often a determining factor in the business model you choose. 

Even if you succeed as you grow, your business model may change with time from what it was when you started.

Another good example of this is Amazon. 

With its scalable cloud infrastructure solutions, Amazon Web Services (AWS) has grown into one of Amazon’s main income producers in the last several years. 

However, when it was first established, it was used for a very other reason.

A business model is not the same as a business plan, as many people assume:

  • A business model is a strategy you’re using to generate money, but a 
  • A business plan is a comprehensive document outlining your goals and the steps you’ll take to achieve them.

What Are Examples Of Business Models?

Comparing two rival business models for the rental and sale of movies is a good way to illustrate this point. 

After investing $4 million in movie inventory, both companies (A & B) generated $5 million in sales. This equates to a net profit of $1 million ($5 million minus $4 million) for each company. 

Both all share the same gross profit margin, which is 20 per cent of gross profit divided by income.

However, with the advent of the internet, everything has changed. Rather than renting or selling hard copies, Company A decided to be streaming movies online. 

The company model is impacted favourably by this development. The license charges remain the same, but the cost of storing inventory was significantly reduced. 

To put it another way, this move saves $2 million in storage and delivery expenditures. The team’s current gross profit is $3 million, a decrease of $2 million from the original $5 million. 

Company B, on the other hand, has a lower gross profit margin since it has not updated its business model. 

As a consequence, the company’s revenues start to decline. Even if Company A isn’t generating more revenue, its new business model has allowed it to drastically cut expenditures.

What Are The Types Of Business Models?

Starting a business does not need the creation of a brand-new business model. 

However, the great majority of companies adopt established business models and enhance them to get a competitive advantage. 

This is the norm. So here are business model ideas to get you started.

Product/Service Model:

In the product/service model, businesses produce and sell their goods and services. 

For example,

  • A company producing eyeglasses may decide to put up their online store 
  • An architectural firm may choose to put up its service-based website.

In this model, Products and services may be delivered in a variety of ways, such as physical goods, digital downloads, one-time transactions, and recurring subscriptions, among others.

Reseller Model:

If you want to go for this model, you don’t have to create or even store the products you sell. 

For example, 

  • Affiliate marketing 
  • Value-added reselling
  • Dropshipping

Many eCommerce businesses, such as JustBats.com, as well as many eBay and Amazon merchants, fall under this category. The majority of retail businesses follow this concept as well.

Broker Model:

In the broker model, you act as an intermediary between the buyer and seller and collects a service charge for doing so. You may also offer services that facilitate the transaction.

With the rise of online marketplaces that allow buyers and sellers from all over the globe to connect, this market has grown tremendously. Business models such as this often entail the development of an online marketplace, processing transactions and maintaining data protection. 

For example,

  • Fiverr.com is connecting freelancers with clients
  • Paypal is helping merchants process their transactions with their customers. 

There will always be an actual transfer of funds in this instance.

Aggregator Model:

You can develop communities and then charge members to join them. It’s a common practice for magazines and news sites to charge advertising to have access to their subscribers, and in many cases, this model may be used for these types of businesses.

For example,

  • Some quora.com premium spaces
  • Entreprenuship.com and medium.com uses this model as well
  • Daily deal sites like Woot and Shopzilla are good examples too.

How Does A Business Choose A Business Model To Use?

To pick the optimal model for your business idea, you need to take into account the criteria listed below:

Market Potential

It is a great thing to figure out how large the market opportunity is for your business idea. And there’s nothing bad with focusing on a small market, but you may end up with a different business model if there is a lot of room for growth in that particular market.

Competitive Landscape

You need to know who else is currently carrying out what you want to accomplish and what their value proposition is. It is not always a negative thing to have rivals who create and demonstrate demand for your idea(s), rather it is evidence that there is a potential market for your idea.

Prospective Customer

At first, it may be an assumption, but it is important to identify the features and attributes of your ideal consumer. From this point on, you will have a clearer idea of the market’s volume and how to effectively penetrate it.

Value Proposition

You must be able to answer the question “why you?” with conviction to effectively communicate your value proposition. 

Every entrepreneur has a passion for their ideas, but if you can not clearly articulate why a market would choose your idea towards another, you are doomed to stumble when you attempt to expand your business.

Distribution Channels

There are a plethora of methods to get your product, service, or idea into the hands of customers. Customers may buy from a company’s own sales representatives and distributors as well as online retailers. 

Even in certain circumstances, you may combine multiple of them. When it comes to making a profit and a loss, this is a critical choice.

Revenue Streams

It is important to have a primary source of income for your business. An effective business model must, however, take into account other methods of adding value and bringing in revenue. 

For example, 

  • You may add premium upgrades for your customers
  • Extra coaching and consulting
  • Or a bumper package
  • As well as advertising, speaking, and books as income sources.

Strategic Relationships

Several business models need strategic relationships with other businesses, such as:

  • Software firms, provide goods or services that are critical to a business. 
  • A marketing agency helps other businesses to market their goods and services.

Finding the right business model is an exercise in learning the typical models and eliminating those that are not a good match for your idea.

Conclusion

Certain business models have been around for hundreds of years, as you can see from this list. 

Others are considerably more recent, but they’re growing quickly and trying to take over the market quickly enough to make a difference.

In the end, the ideal business model is the one that works best for your business. Let your consumers and the market decide how much money you make.

Lastly, don’t forget that your business model is not carved in stone; most companies use various models and adjust their strategy over time.

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