GUEST BLOG: Building a business model

Let's start with business 101. How is your business going to make sales? What is the unit price for your product or service and your unit cost of each sale? The margin between the two is your profit, if your costs outweigh your price then you make a loss.

Even if you are boot strapping (running a business on a tight budget), you may still need seed funding to get your business started. Either way you will need to pay for fixed overheads such as building a website, hardware, office overheads and perhaps legal and accountancy fees.

This is before you generate any income. You should be able to keep costs fairly minimal with cloud computing and cheap software as a service (SaaS) products aimed at a tighter budget.

Some companies give away products for free in order to promote their brand and therefore delay generating profits. Their intention is create a large and loyal user base to monetise at a later date.

Not all businesses sell physical products; virtual product such as software (which is what we sell at Moonfruit.com) can be profitable too. Another consideration is whether your product is suited to one-off payments for your products, or a subscription service, or both.

Potentially, as is the case with Moonfruit, you could offer a 'freemium' model of your service. We offer a range of website packages to suit different customers, ranging from a free basic version to a richer premium version.

A percentage of the free customers will upgrade over time to premium packages, but even those who opt to not pay contribute to our business as brand advocates. Another option is to cross-sell a different paid product to your free customer base.

Whatever your preferred structure, it's likely that your business model will evolve over time, ideally because you have analysed your business metrics and made decisions to expand or redirect what you do.

We've altered our model several times over the years, adjusting to competition and the changing needs of our customers. Today you might hear this referred to as 'pivoting' your business.

Below is breakdown of a selection of sales models, with examples of how businesses have used them in the past:

1.       Cross-selling model: This is something Gillette manages very will, selling their razors at a (relatively) affordable price, but making their real money on the blades, which have to be replaced by the customer regularly.

2.       Traffic volume/monetising eyeballs model: This is something Facebook has learnt to do extremely well, offering us its platform to share data, photos and other content in exchange for a captive audience for advertisers.

3.       Consultancy model: Where your 'product' is your time and your expertise, sold on an hourly or daily rate. A website here is used primarily as a portfolio/brochure through which you can drive business.

4.       Peer-to-peer market model: Businesses such as eBay, which are brokering buyers and sellers and taking a cut from market transactions. There is also the intermediary model, used by the likes of MoneySupermarket.com, which aggregates information to drive a high audience which is appealing to advertisers.

Mandy Tan White is founder and chief executive of Moonfruit. You can get access to a range of Moonfruit products as part of Smarta Business Builder.

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