What is a business model and how to choose the best one for your venture
You’re here because you want to start a new business. You might have an idea of the type of business you want to run, but you’re not entirely sure. Or you might even be asking, “What is a business model?”
That’s perfectly understandable, starting a new business is filled with uncertainty and excitement.
However, to improve your chances of success, there are a few things you’re going to need to nail down:
- A deep understanding of the problem that you’re solving for your customers.
- A market where your customers can actually pay for what you’re offering.
- A business model that actually makes your business money.
For the entirety of this post, we’re going to dive deep into that third point — finding a business model that aligns with your market and brings in revenue.
Guide to business models
Here is what we’ll be covering:
- What is a business model?
- 9 common business models.
- Affiliate marketing.
- Razor blade.
- Reverse razor blade.
- How to choose the best business model for you.
- Consider your customer needs.
- Consider how your customers buy.
- Consider the market potential and competition.
- Consider your value proposition.
- Consider multiple revenue streams.
- Conclusions and next steps.
Below you’ll learn what a business model is and isn’t, the most common business models out there today, and finally, how you can choose the right business model for your new venture.
What is a business model?
Put simply, a business model is an approach that you’re taking to make money. It’s how you deliver value to your customers, via products or services, in exchange for a set cost.
A business model is an essential element of any new startup, as it’ll help you understand your value over the long term.
Remember, your business model isn’t set in stone. Instead, think of it as a way to experiment and test different ways to monetize your business.
It’s more the revenue model you’re following.
For example, think of a company like Facebook. They started by making the platform completely free, and once the audience was large enough, they began monetizing via advertising. And that’s just one model they could have taken.
Others would have included charging a monthly subscription fee, or selling products and services.
Often, the business model you adopt will depend upon your market and what they’re willing to pay for. There’s a good chance that you might not end with the same business model you started with.
Take Amazon, for example. Today, Amazon AWS is one of Amazon’s biggest revenue generators by providing scalable cloud infrastructure solutions. But, when it was initially created, it was for an entirely different purpose.
Your business model is the revenue-generating approach you’re taking, while a business plan is an in-depth document that outlines your future and how you’ll go about achieving that future.
You can help to streamline the process of choosing and evaluating a business model via business model templates and canvases.
Related: How to write an effective business plan
9 common business models
There are dozens of different business models out there. Typically, businesses will rely on an overarching model and refine it to their own business needs.
The route you choose will depend upon your industry, but even more so, by what your customers are willing to pay for. So what are some of those business models?
- Affiliate marketing.
- Razor blade.
- Reverse razor.
- Agency business.
Here’s a look at nine of the most common business models available to you today.
1. Advertising business model
The advertising business model has been around for a long time. Although print used to be the leading advertising medium, this has drastically switched to online and mixed-media formats.
The approach is simple: You create content that people want to consume and use display ads to monetize your business. You’re not charging your readers or visitors, but instead, are monetizing their attention by selling advertising space.
If you’re running a website, there are all kinds of advertising networks you can partner with to run ads. In this scenario, you usually get paid by clicks or views.
2. Affiliate marketing business model
The affiliate model is another incredibly common and lucrative business model, especially online. With affiliate marketing, you’re recommending products or services in exchange for a commission.
One super popular affiliate program is the Amazon Associates program. Once you join this affiliate network, you can promote any Amazon product in the world in exchange for a commission.
Beyond Amazon, there are thousands of additional products and services you can recommend depending on your niche and audience.
There’s an incredible number of successful case studies, including Pat Flynn of Smart Passive income who generates millions of dollars from affiliate sales. Or, Adam Enfroy, whose 9-month-old site brings in over $18k a month in affiliate revenue.
Related: Affiliate marketing: How to start affiliate marketing on your blog
3. Franchising business model
Most of the examples here apply to the online space, although they can still be translated to the offline world as well.
However, the franchising business model is primarily an offline model.
Nearly every single 7-Eleven, McDonald’s, and other fast-food restaurant chain is a franchise. In the case of McDonald’s, over 90% of its locations are franchised.
This model works incredibly well if you’re focused on expansion.
The franchisor will license most aspects of it’s business to a franchisee, which then sells those products or services for a royalty.
Sometimes, the franchisor will also get a piece of the revenues, as is the case with the real estate giant RE/MAX.
4. Freemium business model
The freemium business model is another one you’re probably very familiar with. This is where you give away an aspect of your product or service for free, then you charge for the premium version or for add-on features.
The critical distinction with freemium is that it’s free forever. You could essentially have a large group of users who never upgrade to the premium version.
There are a ton of different examples of this, especially in the software space.
For example, Sumo is a suite of free apps to help your website generate more revenue. The free tools are packed with some serious power and will be more than enough for a majority of website owners.
But, there’s also a sliding scale of premium options that provide website owners with more advanced features.
Another great example is Evernote. The organization and planning app has a freemium version that will suit most users’ needs, while the Premium and Business plans are equipped with higher-level features.
5. Razor blade business model
The razor blade business model is named after the product that basically invented it. I bet you can guess what it is?
The business model is selling a particular aspect of your product at below cost — basically giving it away — to sell high volumes of another component of that product.
The most famous example of this is, of course, disposable razors. They give away the razor handle for free and make their money back on the high volume of blades you buy over the lifetime of the product.
Another common example of this is a printer. You buy the printer once, and you have to buy replacement ink cartridges time and time again (probably more often than you’d like).
6. Reverse razor blade business model
This business model flips the above approach on its head.
Instead of selling a low-margin product at the outset, you sell a high-margin product upfront and offer sales of low-margin products down the line.
With both of these products, you’re joining a product ecosystem.
For example, let’s look at the Apple ecosystem of products. If you buy a new MacBook, there’s a good chance you’ll end up buying apps from the App Store, songs from Apple Music, and maybe even an iPhone.
This model ensures a single (or multiple) high-end purchases, followed by a series of smaller purchases over the long-term.
7. Subscription business model
The subscription model goes back to the day of magazines, newspapers and even milk bottle home delivery.
No doubt, you already have a handful of subscription products you pay for every month.
The process is simple. Your customers pay a monthly fee to continue using your product or service. This is incredibly common for SaaS and content-driven businesses.
Netflix is a classic example of the subscription model. You pay your monthly subscription and get access to the entire streaming library.
Related: Subscription-based sales — A primer for small businesses
8. Agency business model
The agency model involves generating quality leads and selling them on services and marketing campaigns. This model has been alive and well for more than 200 years. The first advertising agency was founded back in 1786 by William Taylor.
The modern agency is obviously quite different from the first agencies, and the “Mad Men” days, but the process and work are similar. You manage marketing-related projects for several different clients.
For example, digital marketing superstar Neil Patel runs his own digital marketing agency and generates leads via his blog.
This model isn’t as scalable as selling subscription software or your own products, but it can still generate some serious revenue.
Ecommerce is the fastest-growing retail sector. When most people think ecommerce, Amazon typically comes to mind. But, with beginner-friendly tools like GoDaddy’s Websites + Marketing Ecommerce and WooCommerce, starting your own ecommerce store is only a couple of clicks away.
There are countless success stories in the ecommerce space.
How to choose the best business model for you
As you can see, when you’re launching your new startup, you’re going to have a lot of different choices regarding your business model.
Do you use the subscription model, ecommerce, freemium or something else entirely?
Here’s a process you can follow to help you determine the best one for your new venture:
1. Consider your customer needs
The model you choose should align with your customer’s needs and expectations.
For example, if you’re taking the subscription model approach, then you’ll be doing your customers a disservice if you also include advertising.
You can most definitely combine multiple models, but they need to place customer experience, and not profit, above all.
2. Consider how your customers buy
Some markets will be challenging to monetize. If you have a content-driven website that gets a high volume of traffic but doesn’t convert well to product sales, then the advertising model is probably your best bet.
Do your customers often make high-end purchases? Or, will they be more receptive to a recurring subscription or a low-end product?
3. Consider the market potential and competition
Spend some time analyzing your market to see how other companies are generating revenue. If they’ve been in business for a while, then they’ve probably found a model that can be replicated.
So don’t feel like you’re stuck doing only what’s been done before.
4. Consider your value proposition
What makes you stand out in the marketplace? If you’re running an ecommerce business, do you only use U.S.-based manufacturers?
Or, do you offer a freemium version of an app in a marketplace dominated by paid app subscriptions?
Related: What is a value proposition?
5. Consider multiple revenue streams
Most successful businesses will rely on multiple revenue streams. In the early days of your new business, it’s all about experimentation.
Now that you know what a business model is, feel free to play around with different ones until you find one that deeply aligns with your business.
Most of the business model examples above can be combined to enhance one another to bring in more revenue for you.
Conclusions and next steps
As you can see, some business models have stood the test of time and are hundreds of years old. Others are much newer, but scaling rapidly and taking over the marketplace.
Overall, there is no best option, but instead, the best business model for you. Let your market and customers dictate how you’ll generate revenue.
Finally, remember that your choice isn’t set in stone, most businesses rely on multiple models and refine their approach with time.
This article includes content originally published on the GoDaddy blog by Robin Walters.