June 22, 2022
A business model is effectively an overarching plan that helps a business make a profit. This plan addresses ‘how’ a business will operate and make money. There are numerous different models upon which businesses can be run, depending on the nature of the business and what products or services it manufactures, distributes or sells.
What are the best business models to use for effective management of your partners or suppliers? Below are three of the more popular business models we can identify for these purposes. Bearing in mind every business is different, and owners or operators will have different methods they choose to run their businesses their own way. One size definitely doesn’t fit all.
A very common model, this is perhaps what many of us have been used to for most of our lives. A traditional business model involves buying and selling goods, with a manufacturing component in between. With many different business models falling under this umbrella, they are often seen as the most common.
As times continually change and with the exponential growth of e-commerce over the years, the ‘traditional’ business model has been somewhat replaced by online business models. Due to the effects of the pandemic and operating through various restrictions, online business models flourish as many traditional businesses were forced to quickly adapt or close their doors.
A royalty-based business model sees the owner or inventor of a product choosing to sell their product to a third party in exchange for a fee. The fee will be earned for future sales of the owner's products.
For example, after the first $100k of product has been sold, it may go to a profit share system, whereby a percentage of the net profit before tax is earned. This method incentivizes through growth and can be extremely effective.
Example of a royalties-based model: during the product launch and early growth phase, a royalty is paid for every component, because mass production is not established, and the project still contains many uncertainties. After the product reaches a given monthly sales volume, both parties agree to switch to a profit-share system under mass-production conditions. Under both arrangements, both parties are incentivized to improve the product to deliver more customer value and ultimately increase sales.
A collaboration or strategic partnership business model will involve two businesses sharing everything for mutual benefit and to ultimately reach a larger audience. A development fee or non-recurring engineering (NRE) fee may be charged by one party for doing the research, design, development and testing of new components or products. How the profits are shared later will depend on the product or service and will be agreed on a case-by-case basis, again with trust and for mutual benefit, so it is a win-win.
There are of course many other existing business models and there will be one to suit any type of business you can think of. Below are a few examples of popular or newer business models that really work. Again, these may not be suitable for every business type, but are all effective in their own right.
As the name implies, a subscription-based business model offers customers the option to purchase goods or services from you while you receive recurring revenue. This model ensures you receive a steady stream of income, as you’re being paid a fixed amount monthly, regardless of how often your customers use your services. Some heavyweight examples of this model include Netflix, Spotify and YouTube. The model is more suited to customer retention rather than customer acquisition.
By merging the words ‘free’ and ‘premium’, a pricing strategy is created that offers a basic service on a free version with limited access to features, while a premium version has access to more features or services for a fee. This type of business model is particularly popular among software applications and internet-based businesses. The model can be advantageous for acquiring a large amount of initial users or customers, particularly as there is no upfront cost for them to join and use the service on a ‘free trial’.
Ultimately there are many different types of big data business models in existence. A big data business model will effectively use data to present to consumers products and services that might be relevant to them. They will do this by mining data – the more they know about the buying habits of consumers, the more their experiences can be personally tailored to them. Large companies such as Amazon have been based on a big data business model since their creation.
In our online world, outsourcing work to others not just locally, but anywhere in the world can be hugely beneficial. There are numerous advantages of getting help in your business through specialized human resource based overseas. These include savings in cost and time, along with freeing up existing staff to concentrate on activity helping to grow the business rather than repetitive or day-to-day tasks. Often it can make perfect sense to have a part of your business’s workload completed outside of your four walls.
A platform-based business model provides the opportunity to form a network of prospective customers and build a community with which to communicate with directly. Facebook is an obvious example of this model. It allows the platform to gain a lot of insights into the communities that are created. The business can also monitor activity and respond in real time to the needs of its potential customers.
A business model that is tech-based will be one that is in the tech innovation space. Think of those that are in AI, virtual reality (VR), augmented reality (AR), etc. With the rate of technological advancement and the automation of many everyday things, businesses solving problems in this space cannot really go wrong.
More value-based, but one that all businesses should incorporate into their business model. It goes without saying that the customer is (or should be) your priority. Making their buying experience more personalised and simple ensures they will feel appreciated and happy with you. Businesses are there to improve people’s lives by providing what customers need, solving their problems, and generally to do things better and make life easier.