How to Pick the Perfect Business Model

 
How do you plan on making money? Answering this seemingly simple question can help you decide on the right business model for your new venture.

Only about one in four businesses survive 15 or more years, which goes to show how great the failure rate is for any given company. Those that really succeed tend to have a solid business model to follow.

You need a business model to outline your plan for generating revenue & achieving sustainability. It’s honestly one of the first things that you should decide on when developing your business plan. In this article, we’ll examine the basics of business models and the factors that go into choosing the right one.
 

 

Why Do You Need a Business Model?

 
First, what exactly is a business model? It’s a strategic blueprint for how your business creates and delivers value to customers.

The model you choose provides a guide for your business decisions. It’s essential for any business. Here are a few of the reasons to select a business model that matches your goals..

Provides a Clear Framework

Your business model helps create a framework for ensuring that all aspects of your business are aligned and working towards common goals. You can use it to define the various components of your business, including your value proposition, target customers, revenue streams, and cost structure.

Attracts Investors and Funding

Investors & lenders want to know how a business plans to make money and achieve profitability. With a good business model and plan, you can provide them with the clarity they need. You can demonstrate the viability of your business plan and its potential for returns.

Improves Your Operational Efficiency

A business model provides a starting point for defining work processes and workflows. It helps you identify the key activities needed to deliver your value proposition. This can help reduce waste, optimize resources, and improve your overall operational efficiency.

Clarifies Revenue Streams

Having a business model outlines the ways that you plan to generate revenue. This may include multiple revenue streams. Diversifying your income sources helps reduce your dependency on a single revenue stream and opens the doors to new areas for growth, which is essential for established businesses.

Research and Resources

Choosing a business model makes it easier to find resources that apply to your specific situation. You can focus on solutions that are geared towards businesses following a similar model. For example, if you decide to follow the advertising business model, you can research strategies and techniques for attracting advertisers and visitors.

Drives Long-Term Success

Your business model can function as a roadmap for achieving your goals. It helps ensure that the company remains focused on its initial mission, which is essential for success and sustainability.

 

What Are the Main Types of Business Models?

 
You have a wide range of tried-and-true business models to consider, from retail to advertising. Each model has a different approach when it comes to selling products or services & generating income. There are literally tons of different types, so for the sake of time- we’re going to focus on some of the most popular.

So here’s a quick look at some of the main types of business models:

Manufacturing

If you make tangible products in-house, from crafts to automobile parts, the manufacturing business model may be a good fit. Manufacturers make things. They produce goods using internal resources and sell them directly to consumers or through other businesses. For example, General Electric makes a large variety of products, most of which are sold through retailers.

Retail/E-commerce

The retail business model covers both online shops and brick-and-mortar stores. It’s one of the most common business models, as it involves selling products directly to consumers.

Retailers typically obtain their products from manufacturers or distributors. This business model may make sense for an entrepreneur looking to open an e-commerce shop or a physical retail store.

Distribution

The distribution business model is followed by.. you guessed it ..distributors. They buy products from manufacturers & sell them to retailers or directly to consumers. Distribution companies and wholesale distributors typically collaborate with retailers, as they tend to buy and sell bulk items or high-ticket items.

Subscription Based

The subscription model involves charging customers a recurring fee to access a product or service. Businesses that can maintain or grow their subscriber base receive consistent, predictable revenue streams.

Examples of subscription models include most streaming services, such as Netflix and Spotify. Weekly or monthly food delivery services also follow the subscription model.

Advertising

The advertising business model generates profits by selling advertising space. Businesses that follow this model typically provide services or free content to generate interest.

This model relies on your ability to attract visitors, whether you’re driving foot traffic to a physical location or online traffic to a website. The more visitors you receive, the more you can charge advertisers.

Affiliate Marketing

Affiliate marketing can work in conjunction with the advertising business model as well. Simply put, They promote specific products or services to their visitors. Influencers, bloggers, and comparison websites all use affiliate marketing to generate revenue. They typically earn commissions for each sale or referral.

Crowdfunding

The crowdfunding business model relies on funds provided by the public. It’s a way to raise funds by usually asking a large number of people to donate a small amount of money. Those who provide funds may receive something in return.

For example, backers for Kickstarter projects typically get a copy of whatever product they’re backing, such as the development of a board game, graphic novel, or music album.

Freemium

The freemium business model requires you to offer a variety of free and premium features. It’s an interesting customer acquisition model that splits people into either the free tier or paid, premium tier that they actually pay for. You offer basic services for free while charging for the more premium features.

Cost-Leadership Model

The cost-leadership model revolves around becoming the lowest-cost producer of a product or service in a specific industry. Businesses that follow this model typically try to minimize production & operational expenses. They also offer products or services at competitive prices.

 

Top Factors for Choosing the Right Business Model

 
So, how do you pick the right business model for you? You’ll really need to consider a variety of details related to how your business operates.

Some of the most critical areas to consider include:

1. Customers
2. Market demand
3. Revenue streams
4. Cost structure
5. Scalability
6. Competition
7. Distribution channels
8. Value proposition

 

Customers

Your customers are truly the biggest consideration when it comes to choosing a business model. Decide how you plan to attract, keep, and engage customers. This includes deciding between selling to consumers and other businesses.

It also helps to define your target audience. Think about who you plan to sell to. Analyze their needs, preferences, and behaviors. You can also analyze demographic information, such as age, gender, income, and location.

Consider how your product or service can address their pain points or enhance their lives. Tailoring your business model to match their expectations and preferences may boost your chances of success.

For example, if your proven target audience prefers online shopping, a retail business model with a focus on e-commerce may clearly make the most sense for you.
 

 

Market Demand

Evaluate the real market demand for your specific product or service. Make sure that your business model aligns with the current market trends. Conduct thorough market research. This includes analyzing industry trends, market size, and growth potential. Try to find gaps in the market where your offerings can fulfill unmet needs.

Understanding market demand helps you pick a model that matches that consumer interest. It helps ensure that there is a big enough market for your product, which is obviously really important to have confidence in.

For example, if you’re entering a market with high demand, you may choose a mass-market approach, such as distribution or retail. However, a niche market may require you to be a bit more creative & have a more specialized business model.

 

Revenue Streams

Clearly define potential revenue streams. Consider whether you’ll generate income through direct sales, advertising, or other methods. Evaluate the sustainability and profitability of each of these revenue streams.

Diversifying your revenue streams decreases risk but may also increase the complexity of your operations. You may want to start with a primary revenue stream then incorporate more options as your business grows.

 

Cost Structure

Thoroughly analyze your cost structure. You need to ensure that your model is financially sustainable. Estimate the fixed and variable costs that come with running your specific business.

Your revenue potential should exceed your costs if you want to achieve profitability. Consider economies of scale & how they can affect your cost structure as your business continues to grow.

For example, a manufacturing business model includes high setup costs. However, it also comes with lower marginal costs. Yet, a service-based business may need to deal with lower fixed costs and higher variable expenses.

 

Scalability

Consider the scalability of the model that you choose. Some models allow for more growth without significant increases in operational complexity or costs.

For instance, opening an e-commerce store is more scalable compared to opening a brick&mortar retail store. Expanding a physical store may require moving to a new location, acquiring more inventory, and hiring more staff. An e-commerce store can simply add bandwidth to accommodate more traffic.

 

Competition

Study your competition. Understand their business models to identify opportunities and even the threats.

Analyzing your competition can also help you differentiate your model to provide customers with unique value. If your competitors rely heavily on traditional foot traffic, you may want to explore an online-only retail business model.

 

Distribution Channels

Deciding how you plan to distribute your product or service to customers can also help you pick a business model. Choose channels that maximize your reach and efficiency.

Consider the costs, reach, and efficiency of each channel. The right distribution strategy can significantly affect your market research and customer satisfaction.

 

Value Proposition

Clarify your value proposition. Make sure that it communicates the unique benefits and value your product or service offers to customers. Having a strong value proposition helps align customer needs and market demand, guiding your business model choice.

If a company offers premium, high-quality products, they may want to follow a luxury business model. However, a company that focuses on affordability and convenience may benefit from a cost-leadership model.

 

Evaluate and Tweak Your Business Model

 
The model that you choose should function as a true blueprint for your business, but this doesn’t mean that you can’t update it. After developing and implementing a business plan, continue to evaluate your results and tweak your processes as needed.

Collect and analyze data on customer behavior, preferences, and satisfaction. You can use surveys, interviews, and analytics tools to understand how your product or service is performing.

Look for gaps between your expectations & the actual results. For example, customer feedback may show that people are not happy with your pricing or specific features. You can adjust your offerings to better meet their needs.

Update your business model based on that valuable feedback you get. Experiment with different pricing strategies, distribution channels, and marketing approaches.

A/B testing can be particularly useful for comparing the effectiveness of different tactics. This involves running two separate campaigns or strategies with only a few minor differences to see which options work best.

Remain flexible & open to change. Always remember that the business environment is dynamic. What works today may not work as well tomorrow. Regularly revisit and refine your business model to adapt to market shifts, technological advancements, and evolving customer preferences.

 

Last Thoughts on Choosing a Business Model

Choosing the right business model can be a very important piece of the puzzle to the success of your business. It provides a roadmap that you can use to keep you headed in the right direction. Think about how these models align with your business plans, starting with how you plan to interact with your customers.

Analyzing your customers, market demand, revenue streams, and other factors can help you decide. It mostly comes down to what you plan to sell, how you want to sell it, and who you want to sell it to.

As a final suggestion, adapt the model to better fit your business operations. Use the options discussed as a starting point for crafting a framework that matches your specific needs. We are all on our own unique business journey, so make sure you choose the model that fits best with your vision!