Establishing a business model

Selecting a clear business model is an essential part of business planning. Whether you're launching an online business, a retail business or even a consultancy, get the business model right, and the rest will follow.

What is a business model?

  • Put simply, the business model is how your business makes its money. You may have one business model - for example, selling products - or you may have a few, such as direct sales and affiliate marketing.
  • If you get it right, a solid business model will mean you can react quickly to adverse market conditions or competition and prevent your business from being overtaken by newer businesses.
  • Your business model will help you to think more clearly about how the business itself is structured. Ask yourself what you want to sell and how you want to sell it: King Gillette, the inventor of the Gillette razor, famously gave away razors to sell the blade. How do you plan to make your money?
  • With the internet providing new scope for innovation, entrepreneurs are constantly coming up with new ways of making money and new business models. Reassess your business model on a regular basis to ensure it stays fresh.
  • Be as detailed as possible to avoid any confusion when it comes to how you make money. If you are clear on your business model, it should be easy to pursue possible revenue streams.

How to work out your business model

A business model can be divided up into four separate propositions:

  • Your business' infrastructure: this not only looks at the internal structure of your company - who is employed by the business, what their capabilities are, and how the management team is structured - but also at your allegiances with other businesses and how your business and its customers benefit one other.
  • Your offering: it may seem obvious, but the products or services your business offers demonstrate how it distinguishes itself from competitors and businesses in the same space. If you can't differentiate your business, there is no reason customers should buy from you.
  • Your customers: your customers' habits, level of income, age and gender will be a huge determining factor in your model. If they are creatures of habit, they will be more likely to return to your business again and again - whereas if they are more experimental, you will need a strong channel to draw them back to the business. The relationship you have with your customers will determine your distribution channels, marketing strategy and ultimately, your proposition.
  • Your finances: look at the different revenue streams available to you. How will you make your money? Think back to the razors vs razor blades model - how you structure your costs will be an important determinant in how much money you make.

Examples

  • Ad-supported - web- or media-based businesses give away their product for free in return for revenue generated by advertisers who pay based on the size of the audience.
  • Bait and hook - the best known example of this is King Gillette's method of giving away razors to sell the blades.
  • Barter - businesses which swap their products or services for products or services from their customer. Most businesses use barter as a way to supplement another business model.
  • Broker - businesses which bring together buyers and sellers and take a commission or fee. Banks, insurance companies and estate agents fall into this category.
  • Charity - charities are generally non-profit organisations which give all their money to a good cause. The model works by the customer giving money to the charity, which then sends it on.
  • Experience sales - businesses which sell experiences, such as theme parks or holiday companies.
  • Franchise - businesses such as McDonalds, Subway and even Bang & Olufsen all sell franchises: franchisees pay to use the branding, products, and the reputation the company has already formed.
  • Pay-what-you-want - only tried out occasionally, pay-what-you-want businesses allow customers to pay based on how much they think a product or service is worth. This has worked in both the restaurant and music industries.
  • Product sales - businesses which produce goods and sell them to customers, such as agricultural businesses, artists and manufacturers.
  • Retail - businesses which buy goods and sell them on for a profit. Retailers and online shops fall into this category.
  • Service sales - businesses which sell their services - cleaning businesses, beauty salons, IT outsourcing companies.
  • Social enterprise - social enterprises work by selling goods or services, the profits of which then go to supporting a good cause. Don't confuse this with charity - the founders of social enterprises draw salaries and profits go back into the business as well as to good causes.

Resources

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