What is the Business model?
A business model is a strategic framework that outlines how a company plans to deliver and capture value in the market. It clarifies how a company’s products or services will fulfill customer needs, how it will compete with other businesses, and how it will sustain profitability over time.
This is a significant factor contributing to the success of start-up companies, as it opens up long-term sustainable growth for the business. Let’s go through the most popular types of business models and see what we can learn:
Most popular types of business model
1. Razor and blade revenue model
The Razor and Blade business model, or “razor-razorblade model,” is a pricing strategy in which a company sells a primary product at a low cost or even gives it away for free, but makes its profits by selling complementary features/services that are required to use or enhance the previous one. This model is named after the concept of selling razors at a low cost and making money from the ongoing sales of razor blades.
This business model requires a careful balance between 2 products. From pricing the initial product attractively to gain a wide customer base and pricing the consumables at a point where the company can generate substantial profits over time. It also relies on creating a level of dependency on consumable products to ensure repeat purchases.
Success case using Razor and blade business model: HP, Gillete, Sony Playstation
2. Peer-to-peer business model
The peer-to-peer (P2P) business model refers to a type of business arrangement that allows individuals or entities to interact directly with each other to share services, resources, or information, without the involvement of intermediaries such as traditional companies or institutions. This model leverages technology platforms to facilitate these interactions, enabling individuals to connect, transact, and collaborate more efficiently.
In a P2P business model, the platform plays as a facilitator role, connecting providers (businesses offering goods or services) with consumers (who seeking those goods or services). The platform often provides tools for communication, transaction processing, and sometimes reputation management to build trust between participants.
Examples of P2P business models include:
- Peer-to-Peer Lending: P2P lending platforms help connect lenders and borrowers for loan transactions like a marketplace. Individuals or small businesses can lend money directly to other individuals or businesses in need of financing.
- Peer-to-Peer Marketplace: Platforms like Etsy and Amazon enable individuals to sell handmade or unique products directly to consumers. This eliminates the need for a middleman and allows artisans and crafters to reach a global audience.
- Peer-to-Peer Knowledge Sharing: Udemy and Skillshare are two outstanding samples of this model. it allows individuals to create and sell online courses directly to learners. Also, enables experts to share their knowledge with a wider audience.
- Peer-to-Peer Accommodation: Platforms like Airbnb enable individuals to rent out their homes or spare rooms to travelers. This allows homeowners to monetize their properties and provides travelers with unique and often more affordable lodging options compared to traditional hotels.
- Peer-to-Peer Transportation: Ride-sharing services such as Uber and Rydo allow individuals to offer rides to others using their personal vehicles. This creates a more flexible and potentially cheaper alternative to traditional taxi services.
- Peer-to-Peer Crowdfunding: P2P crowdfunding platforms such as Kickstarter and Indiegogo allow people to raise funds for creative projects or business ideas from a large number of people, often in exchange for rewards or early access.
The P2P business model is potential due to increased efficiency, lower transaction costs, and the ability for individuals to earn money from their assets. However, challenges can arise when it comes to quality control, trust and safety, and compliance, as well as potential competition with established industries.
If you are interested in this type, remember that while the P2P model can disrupt traditional industries and provide innovative solutions, it also requires effective platform management, good user support, and mechanisms to handle disputes or issues that may happen.
Success case: Airbnb, Uber, Etsy, eBay, Couchsurfing
3. Freemium business model
The “freemium” business model is a pricing strategy applied by many companies, especially in the software and digital services industries. The term itself is a combination of “free” and “premium.” In this model, a company offers a basic version of its product or service for free, while also providing a more advanced or feature-rich version that customers can access by paying a premium subscription or purchasing additional features. You can see its similarity with Razor and blade revenue model but custom for digital products.
Here’s how the freemium model typically works:
- Free Version (Basic): Companies offer a minimal version of their product that provides basic functionality or limited features for free. This free version is often used to attract a wide user base and generate interest in the product.
- Premium Version (Paid): Go along with the free version, the company offers a premium or “pro” version that offers advanced features, enhanced functionality, or additional services. This premium version is typically available through a subscription model or a one-time purchase.
- Value Proposition: Companies often entice users to upgrade by highlighting the benefits of the premium version, such as increased storage, advanced tools, exclusive features, enhanced customer support, and more.
- Upselling and Monetization: The goal of the freemium model is to convert a portion of the free users into paying customers. Companies use the free version to demonstrate the value of their product or service, enticing users to upgrade to the premium version for a better experience.
- Limitations of Free Version: The free version typically has limitations that encourage users to upgrade. For example, it might include ads or have storage restrictions
- User Growth and Virality: Offering a free version can help drive user adoption and grow the customer base. Satisfied free users may become an ambassador, and recommend the product to others, leading to organic growth through word-of-mouth.
Popular examples of companies using the freemium model include:
Spotify: Spotify offers a free version with ads and limited skipping. With the premium version, users can have ad-free listening, offline downloads, and more control over playback.
Evernote: Offer a basic free version with limited note syncing across devices, while the premium version offers features with advanced search, additional storage, and unlimited sync
The freemium model can be an effective way for companies to attract a wide audience, demonstrate the value of their product, and convert a large group of free users into paying customers
Read more: Startup Funding Guideline
4. Subscription business model
The subscription business model has gained significant popularity in recent years, particularly in industries such as software, entertainment, e-commerce, etc. This model provides a predictable revenue stream for businesses and often brings customers a convenient way to approach products without a large upfront cost. Here are the key benefits of the subscription business model:
- Recurring Payments: Instead of a one-time purchase, customers commit to paying a recurring fee for a period of time, such as monthly, quarterly, or annually.
- Customer Retention and Loyalty: Subscribers are more likely to continue using a product or service over time due to the ongoing relationship and investment they’ve made.
- Predictable Revenue: Businesses can forecast their revenue more accurately due to the consistent stream of subscription payments.
- Upselling and Cross-Selling: Businesses can offer tiered subscription plans with different levels of features or benefits, encouraging customers to upgrade. Cross-selling additional products or services within the subscription can also boost revenue.
- Churn Management: This is about the churn rate at which subscribers cancel their subscriptions. Businesses need to manage this rate by consistently delivering value, maintaining product quality, and resolving customer concerns.
- Flexible Pricing: Subscription models can offer different pricing for each customer segment, from basic plans with limited features to premium plans with more comprehensive offerings.
- Trial Periods: Many subscription services offer free trials to attract new customers and allow them to experience the product or service before committing to a paid subscription.
Netflix is an example of a subscription-based business model. They offers subscription-based access to a vast library of movies and TV shows through its streaming platform.
Or Adobe Creative Cloud which provides subscription access to Adobe’s suite of creative software tools, like Photoshop, Illustrator, and Premiere Pro
5. Franchising business model
Franchising is a business model that highlights a contractual relationship between two parties: the franchisor and the franchisee. In this model, the franchisor grants the franchisee the right to use its established brand, business formula, and intellectual property to operate a business. The franchisee, in turn, pays fees and royalties to the franchisor for this privilege.
Here’s how the franchising business model typically works:
The Franchisor
The original business that are already well-known in the market. Their role is to provide the franchisee with the necessary tools, method, training, and continuous support to help replicate the franchisor’s success.
The Franchisee
The franchisee is an individual or a group that purchases the rights to open a business using the franchisor’s brand, systems, and support. The franchisee allows to use the established brand identity, business processes, and a higher likelihood of success compared to starting a business from scratch.
Types of franchising business model
There are several types of franchising business models, each with its own set of advantages and disadvantages. Here are some common types of franchising models:
1. Product Franchising
In this model, the franchisee sells the franchisor’s products under the franchisor’s brand name. This relationship is the same as the supplier-dealer relationship but the franchisee may distribute the products on an exclusive or semi-exclusive basis. Whereas a supplier-dealer relationship may allow the dealer to sell several different brands at once.
Advantages: Franchisees benefit from established products and brand recognition. Manufacturing and supply chain support may be provided by the franchisor.
Disadvantages: Franchisees might have limited control over product offerings and pricing. Competition from other franchisees selling the same products could be a big issue.
2. Trademark Licensing
This model allows franchisees to use the brand name and trademarks of the franchisor to sell their own products or services.
Advantages: Franchisees can capitalize on brand recognition without being restricted to a specific product lineup. Especially flexibility in product offerings.
Disadvantages: Franchisees need to build their own products/services, which demand significant effort and resources that are costly.
3. Business Format Franchising
This is the most common type of franchising, where franchisees use the entire business model, including branding, operations, and support. The franchisee also has access to marketing and sales strategies
Advantages: Franchisees get a complete business package with established processes, training, and ongoing support.
Disadvantages: Franchisees have less freedom to innovate or deviate from the established model. Initial and ongoing fees can be substantial.
Typical franchise sample: Coca-Cola, McDonald’s, Ford Motor
6. Blockchain business model
The blockchain business model applies blockchain technology as a core component of its operations or value proposition. Due to its characteristics, blockchain enables secure and transparent record-keeping of transactions across a network of computers. It can be applied beyond cryptocurrencies, including supply chain management, financial services, identity verification, healthcare, and more.
Advantages of a blockchain business model
- Decentralization: Blockchain gets rid of the need for a central authority to validate transactions. This can lead to increased trust among participants and reduced reliance on middlemen.
- Transparency and Immutability: Transactions recorded on a blockchain are highly resistant to distortion or alteration. It is nearly impossible to change without consensus from the network.
- Tokenization: Businesses can use digital tokens or cryptocurrencies for things like owning something, having value, or getting permission. People can use these tokens for different reasons, like making transactions easier and safer or being part of a group that works together without a central authority
- Data Security: Blockchain cryptographic features enhance data security and privacy at the highest level, making it impossible for unauthorized parties to access or manipulate information stored on the blockchain
Types of blockchain business models
- Network fee charge: This type of blockchain business model applies to diverse blockchain solutions such as Ethereum or dApps that charge a small amount for the user for different activities on the network. Take Ethereum for example, their network charges developers Ethereum for making their dApp live.
- Tokenized Assets: Token blockchain business model helps business operations and turns into a token-based economy. This allows customers to revenue sharing or bonuses from transaction-based payments made between each other.
- Blockchain-as-a-Service (BaaS): Offering blockchain infrastructure and tools as a service to other businesses, simplifying the process of adopting blockchain technology.
Success case: Ethereum, Binance
7. Fee-for-service business model
The fee-for-service business model is a simple way of charging customers for the specific services or products they require. It’s commonly used in various industries, such as healthcare, consulting, legal services, and more.
The process of the Fee-for-service business model
- Services or Products listing: The business offers a different range of services or products that customers can choose from based on their needs.
- Usage or Selection: Customers select the specific services or products they demand, and the business provides them accordingly.
- Payment: The business charges customers a fee that is customized for each service or product they acquire. The fee is typically based on the quantity or complexity of the service or product.
Advantages of the fee-for-service business model
- Customization: Customers only pay for what they use. Allowing them to reduce the cost by only purchasing to their specific needs.
- Flexibility: The business can adjust pricing based on market demand which can increase the selling opportunity
- Direct Revenue: Revenue is directly tied to the volume of services or products delivered, providing a clear correlation between effort and gain.
- Clear Value Proposition: Customers understand what they are paying for and can evaluate the cost against the benefits received.
However, there are also potential drawbacks to this model:
- Variable Revenue: Revenue can change based on customer demand, which can impact unpredictable income.
- Limited Recurring Revenue: This model may not provide consistent recurring revenue, leading to long-term financial stability.
Businesses applying the fee-for-service model should carefully analyze their market, target customers, and pricing strategy to make sure they can balance revenue generation effectively.
Salesforce, Adobe, Netflix
Find your suitable business model with a lean startup canvas
The Lean Canvas is a popular business model used by many Unicorn startups. It helps outline and plan the key elements of a startup business in a minimal way. Similar to Business Model Canvas, Lean Canvas is customised to apply for startups and support early adopters to come up with solutions apparently
By filling out this template, you will have an overview of your startups and quickly validate your idea. This is a good start to come up with informed decisions
If you are on the path of product development, Enosta can be your acceleration partner. Contact us to discuss more!
