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When you hear the term business model, what is the first thing that pops into your head?
For most entrepreneurs, it’s “how you can make your business profitable.”
However, that’s only the tip of the iceberg.
Having a thorough understanding of what a business model is – and what it is not – is crucial to the success of your company.
Thankfully, this is not something you have to create from scratch. You can just build up on tried and tested business models, which is exactly what this article will guide you through.
What is a Business Model?
A business model is a big deal. In fact, The Big Short author Michael Lewis refers to it as a “term of art.”
While you can use fancy terms for it, a business model simply means how your company plans to make profits. It identifies the services and products that your business wants to sell, and how and where you will sell them to your target market.
Business models are integral not only for startups. Established businesses are also urged to constantly update their business model if they don’t want to fall behind their competitors.
A good business model not only helps you make money but also attracts the best talent. It even does wonders to motivate your staff.
Types of Business Models
The following are just some of the most popular business models today.
This is the most common type of business model today. Retailers are usually the last entity in a supply chain
In a retail business, you sell goods or services directly to your customers. Retailers typically buy finished goods from a distributor or manufacturer and bring them to their customers directly.
Some of the most common retails include grocery stores, samgyupsal restaurants (which we are currently obsessed with), and most stalls you see in the mall.
Popular examples of Retailers in the Philippines:
- SM Department Store
Manufacturers produce goods and deliver them to retailers, distributors, or directly to their customers. They are in charge of sourcing their materials and producing the goods through labor, machinery, and equipment.
Manufacturers may make highly replicated, custom, or mass produced goods.
Popular examples of manufacturers:
- Ford Motor Company
- San Miguel Corporation
- Nestle Philippines
This model focuses on labor and services instead of selling products. A business that follows this model may charge a fixed cost for a specific service or an hourly rate.
Most fee-for-service companies offer specialized insight that is not common knowledge. Clients of these companies are not just individuals, but also communities and firms.
Popular examples of service-based business models:
- Law Firms
- Construction Companies
The goal of subscription businesses is to attract more clients with the hopes of turning them into loyal customers.
These types of businesses offer products that require ongoing payment, in return for a fixed duration of the benefit.
This is the model that is followed by:
For this business model, the goal of companies is to attract customers by letting them use a basic yet limited-scope product.
Although users may choose to stay on the free and basic model forever, companies still try to urge them to upgrade for more advantages.
Popular examples that follows this business model:
Bundling is when businesses sell customers multiple products that are incentivized through discounts. With just a single customer, a company can still make more money.
One great example of this business model is a yoga studio that bundles a certain number of classes per month. Their clients save money, and they get more profits. It’s a win/win situation.
- Bundled Insurance Products (VUL)
- Value Meals
- Online Courses
Product as a Service
This business model charges customers to use a physical product. It can charge a subscription fee or a per-use fee.
An example of a business that follows this model is motorbike rental companies that charge on a per-day basis (think: you go to Bali or Siargao and rent a motorbike for the day).
Marketplaces such as Shopee and Lazada have become popular today.
The goal of this business model is to become a platform where sellers can conduct their business safer, easier, and faster. Other examples of online marketplaces include Carousell and FB Marketplace.
This model is also similar to crowdsourcing where a business can bring together people to contribute content to a site to sell goods or services.
An affiliate is an individual or business that promotes the sale of a product or service in exchange for a commission on each sale. An affiliate typically promotes products by placing affiliate links on its website or social media pages. If a person buys a product through their affiliate link, they receive a commission.
Companies that follow this business model, typically look for an influencer or someone who is a trusted figure in their niche to promote their services or products.
Popular example of affiliate sites in the Philippines:
This business model’s goal is to sell durable products below cost to generate high-margin sales of a disposable component of a product. This is exactly why it’s called the razor blade business model.
Aside from famous razor brands (obviously), printer companies are another good example of those who follow the razor blade business model.
Think about it: you buy a printer one time, and then buy ink for it for the rest of your life.
Reverse Razor Blade
As its name implies, this is the opposite of the reverse razor blade business model. instead of selling high-margin companion products, this model only sells a high-margin product up front.
But to use the product, a low-cost or free companion product is provided to promote the sale. Further use of the product won’t be profitable for the business anymore.
Apple is a great example of a company that follows this model since they sell iPhones that come with apps.
Franchises work by selling the rights to operate a business. Franchises are typically given to experienced business owners who are able to follow the policies and regulations of their company. In return, they get rights to their own business.
Although this is not a new business model, franchising is still one of the most popular ways for businesses to grow. Franchising’s goal is to maximize profit for both the franchiser and the franchisee.
As a true-blooded Pinoy, what better example would there be for a Franchise business model than Jollibee?
Pay as you Go
Think about your utilities. Specifically, your electricity and water bill. You only pay for what you consume. That’s exactly what this business model follows.
A brokerage is a business that buys and sells products and services on behalf of clients. Brokers earn revenue from commissions and fees for their business.
The brokerage model is also very similar to the affiliate model since both earn commissions for each sale made.
Popular examples of businesses using this model:
- Real Estate
- Stock Brokers
If you’ve seen Mad Men, then you probably have a clue about what this business model is. For this model, an agency basically sells services based on processes and relationships they’ve developed internally to other businesses.
While old agencies look very different from the new ones today, the goal and structure of both kinds are very much the same.
Popular examples of businesses using this model:
- Public Relations
- Web Design & Development
- Talent Management
- Human Resource
An eCommerce business is one that operates as an online store that sells products and services to customers. This business deals with orders, products, and payments over the web.
In recent years, the popularity of e-commerce has been on the rise. This is because the internet provides convenience and ease for both buyers and sellers. Because there is no need to go to a physical place, this business model has been growing faster than traditional sales.
Here are some of the top ecommerce brands in the Philippines:
Business to Consumer (B2C)
Business to consumer, also known as B2C, is a type of business model where companies sell their products directly to the public.
For instance, when you buy from online stores, from clothes to household cleaning products, to art supplies, you’re buying from a company that follows this business model.
Compared to the B2B model, the decision-making process of this process is easier so it’s faster to close a sale, especially if you’re selling low-cost items.
Business to Business (B2B)
This business model is just like B2C, but its focus is on business-to-business goods or services. Businesses that follow this model can take advantage of a longer sales cycle, higher orders, and more recurring purchases.
It’s common to confuse the Aggregator business model with others. Companies that follow this approach organize or build a populated secret in one brand.
Then, they act as a middleman while still keeping a tight rein on the experience of users. Two popular examples of companies that follow this model are Grab and FoodPanda.
How to Choose the Best Business Model for You
Now that you are familiar with the different business models, you might be wondering: which is the best?
Unfortunately, there is no single answer to this question. The right model for you will depend on your business goals, market, and industry.
We’ve gathered these pointers below to guide you choose the best model for your business.
Think about what your customers need
One important thing to remember when choosing the right business model is to focus on what your target audience needs.
You should keep in mind the preferences and expectations of your customers. If you don’t, then you might end up going in the wrong direction.
Analyzing your target market is more than just finding out their demographics, but also taking the extra mile and learning about their behavior and psychographics.
Study your competition
As an entrepreneur, it’s very important to study your competition. You will want to know what your competitors are doing and how they are positioning themselves.
By doing so, you will be able to identify their strengths and weaknesses, and you can capitalize on them.
Consider how you want your customer to buy from you
Another thing you should take into consideration when choosing the right business model is the experience of your customers.
You should make a conscious effort to know how your customers want to buy your products or services. Are they better off buying directly from you? Or would they feel secure buying through an affiliate?
Assess how you will stand out
Just because you love your product doesn’t mean everyone else will, too. It’s important to know how you plan to stand out from the crowd, especially in today’s hyper-saturated market.
As much as you can, take advantage of your Unique Value Proposition and ensure your consumer understands how your product or service will solve their problem.
If you consider yourself a very good player in your niche and you want to use the same game plan as your competitors in a hyper-saturated sales channel, then you might want to consider a different business model.
List your distribution channels
Technology has made it easier for people to get their businesses to the market. Whether you choose marketplaces, an eCommerce platform, a physical store, or an affiliate, make sure selling your product will be easy in your channel of choice.
In most cases, you need to choose a number of distribution channels.
Think about building multiple revenue streams
If you want to get the most out of your business, it’s important to diversify. That’s because you might not get the results you want in just one income stream.
For instance, you may be following a franchise model for your physical stores, but for your eCommerce store, you may prioritize affiliates.
How will you scale your business?
This may not be a factor to consider when you first start out. But when you are ready to scale up and grow, this is an important factor to keep in mind.
Scalability refers to your ability to manage the demand of the market as your sales grow.
Always remember that your business model should make it easy for you to implement your growth strategy. Otherwise, you may end up not reaching your full potential.
Learn More: 17 Ways to Grow & Scale your Business
Calculate the costs
Before starting out, it’s important to have a clear idea of your potential costs. It’s possible that you will go with a model that isn’t profitable at first, but it’s a decision you need to stand by.
Additionally, you should also think about non-monetary costs. For example, how long would it take for you to set up your website for your eCommerce store? Do you need to constantly maintain it?