The Write Path: Crafting Your Future With An Online English Degree – The term business model refers to a company’s plan to make a profit. It shows the products or services the business plans to sell, its target market and any projected revenue. Business models are important for both new and established businesses. They help new, growing companies attract capital, recruit talent, and motivate management and employees.
Established businesses must continually improve their business model or fail to anticipate upcoming trends and challenges. Business models also help investors evaluate companies they are interested in and understand the future of the company employees want to join.
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A business model is a high-level plan for operating a profitable business in a specific market area. A key element of a business model is the value proposition. It is a description of the goods or services offered by the company and why customers or consumers need them, in a way that differentiates the product or service from competitors.
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A new business model should also cover start-up funding and funding sources, the business’s target customers, marketing strategy, competitive analysis, and revenue and cost projections. The plan may also outline opportunities for business integration with other established companies. For example, the business model of an advertising business may see benefits from a referral system and a publishing company.
Successful businesses have business models that allow them to meet customer needs at a competitive and sustainable cost. Over time, many businesses update their business periodically to reflect changes in the business environment and market needs.
When evaluating a company as a potential investment, the investor must look at how it will make its money. It means how the company does business. Of course, a business model doesn’t tell you about a company’s prospects. But an investor who understands the business model can make better use of financial data.
A common mistake many companies make when setting up their businesses is to minimize the cost of paying until the business becomes profitable. Price calculation is not sufficient for product placement. A firm must continue in business until its revenues exceed its costs.
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One way analysts and investors gauge the success of a business model is by looking at a company’s profitability. Gross profit is the amount earned by the company less cost of goods sold. However, gross profit is misleading. Analysts also want to look at cash flow or net income. It is gross profit minus operating expenses and represents how much profit the business makes.
The first two letters of a company’s business model are prices and costs. A company can raise prices and get inventory at discounted prices. Both actions increase profits. Most analysts consider gross profit as the most important factor for evaluating a business plan. Good money means good business plan. When costs are out of control, the management team is held accountable and problems are addressed. As it turns out, many analysts believe that companies operating on high-quality businesses can run on their own.
When evaluating a company as a potential investment, learn how it makes its money (not what it sells, but how it sells it). This is how the company does business.
There are as many types of business models as there are businesses. For example, direct selling, franchising, advertising-based and brick-and-mortar stores are all examples of traditional business models. There are also hybrid models, such as businesses that combine Internet stores with brick-and-mortar stores, or sports organizations like the NBA.
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Below are some common types of business models. Note that the examples given can fall into several categories.
One of the most common business models that most people interact with frequently is the merchant model. A retailer is the last organization in a retail chain. They usually buy finished goods from manufacturers or distributors and interface directly with consumers.
A manufacturer is responsible for finding resources and making final products using in-house labor, machinery and equipment. A manufacturer can create customized items or highly recycled, mass-produced products. A manufacturer may sell goods to distributors, retailers or even directly to consumers.
Rather than selling products, fee-for-service business models focus on providing operations and services. A fee-for-service business model may charge an hourly rate or a fixed price for a specific contract. Pay-for-service companies often provide insights that are unique, lack common knowledge, or require specialized training.
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Subscription-based business models attempt to attract customers in hopes of persuading them to become long-term, loyal patrons. This is usually done by offering a product that requires ongoing payment, rather than a fixed period of service. Although it is primarily offered by digital companies for software access, the subscription business model is also popular for physical items such as subscription boxes for monthly recurring cultivation/delivery.
The Freemium business model attracts users by introducing them to unique, small-scale products. Then, as the customer uses their service, the company tries to convert them into a premium, high-end product that requires payment. The company tries to show the benefit of an upgraded membership, even if the customer can imagine staying on freemium forever.
Some companies may occupy multiple business models for the same product at the same time. For example, Spotify (subscription-based model) also offers a free version and a premium version.
If a company is concerned about the cost of attracting a single customer, it can try bundling products to sell more products to a single customer. Bundling takes advantage of existing customers by trying to sell different products. This can be encouraged by offering lower prices for purchasing multiple products.
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Marketplaces are straight forward: Instead of accepting a platform to trade, the marketplace charges a fee. Although trading takes place without a market, this business model seeks to make trading easier, safer and faster.
Affiliate business models depend on marketing and the broad reach of a particular product or platform. Companies pay an affiliate to promote a good, and that affiliate often receives a fee in exchange for their promotion. That fee can be a fixed fee, a percentage of sales from their promotion, or both.
Aptly named the pharmaceutical manufacturer model, this business model aims to sell a product that is always below cost to generate higher sales for the disposable part of the product. Also known as the “razor and blade model,” razor companies offer cheaper deals with the assumption that consumers will continue to buy razors over time.
“Tethering” is an illegal laser blade mode that requires you to purchase an unrelated item before purchasing a separate (and often desirable) item. For example, imagine that Gillette releases a line of lotion and requires all customers to purchase three bottles before being allowed to purchase disposable razors.
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Instead of relying on a high-quality product, the Reverse Blade business model strives to sell a high-quality product. Then, using the product, cheap or free products are offered. The goal of this model is to encourage early sales, not to make more money by increasing product usage.
A franchise business model leverages an existing business plan to expand and replicate the company elsewhere. Often food, hardware or fitness companies, franchisors work with potential franchisees to finance the business, develop new locations and manage operations. In return, the franchisor receives a portion of the money from the franchisee.
Instead of charging a fixed fee, some companies may do a pay-as-you-go business model, where the amount charged depends on how much the product or service is used. The Company may charge a fixed fee for providing the Service in addition to a monthly variable fee based on usage.
The brokerage business model connects buyers and sellers without selling directly. Brokerage companies usually receive a portion of the fees paid when the deal closes. Mostly seen in real estate, brokers are also popular in construction/development or transportation.
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There is no “one size fits all” when it comes to creating a business model. Different experts may recommend different steps to take when building a business and planning your business model. Here are some broad steps a person can take to create their own plan:
Instead of reinventing the wheel, think about what competing companies are doing and how you can position yourself in the market. You can easily spot gaps in other people’s business models.
John Magaretta, former editor of the Harvard Business Review, notes that there are two key elements to measuring business models. When business models don’t work, he says, it’s because the story isn’t understood and/or the numbers don’t add up.
