What is a Business Model? An Explanation With Examples

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What is a Business Model? An Explanation With Examples

If you’re interested in starting a business, you need to know how you plan to make it work. The best way to flesh your idea out is with a business model. If you’re unfamiliar with the term, a business model consists of the following elements:

  • Revenue Sources – How you plan to make money (i.e., selling products or services).
  • Customer Base – Who are you selling to, and why will they want your products or services?
  • Products – A breakdown of what you plan to sell and your average profit margin.
  • Financing – How will you pay for your business venture, both now and in the future? Do you need a loan or money from investors?

Creating a business model is an excellent way to ensure that you build a strong foundation for your new enterprise. However, it’s easy to talk about business models in the abstract sense. To help you make yours more stable, let’s look at some successful business model types and why they work so well.

Subscription Service – Hulu

These days, streaming services are about as abundant as coffee shops. However, one of the first providers was Hulu, which is still going strong by offering a mix of broadcast TV, original content, and movies.

Virtually all subscription services work the same way – customers pay the company a monthly flat rate for access to its content. So, the more desirable the content, the more subscribers sign up.

Hulu is also unique because it offers a . Those on the bottom pay the least, but they have to watch advertisements during programming, much like broadcast TV. One tier higher, and users don’t have to worry about ads interrupting their content. Hulu also offers live TV in a bundle so that customers can get the best of both worlds.

As you can imagine, Hulu also makes money through advertisers that want to capitalize on Hulu’s captive audience. So far, Hulu is the only streaming service with ads, but other companies may likely follow suit.

Freemium – Tailor Brands

For the uninitiated, “freemium” means a free version of a product that comes with premium features. For example, Hulu used to offer a free version of its service with ads. The goal of a freemium business model is to show customers the value of the product up front so that they’re more willing to pay for it later.

Tailor Brands is an excellent example of this model, thanks to its , where they allow you to create a logo for free. Businesses, bloggers, and entrepreneurs can design a captivating logo for free as many times as they want. Then, once they find a logo they like, they pay Tailor Brands for the design and its rights.

The company goes a step further and offers various graphic and web design elements. So, once a business has a snappy logo, they can put it on a website, swag, business cards, and more. Since Tailor Brands has a menu of services, companies only pay for what they want.

There are two ways to operate a freemium business model:

  • First, you can offer a free version that stays free no matter what – the customer never has to upgrade.
  • Second, you can offer the freemium model for a limited period, such as 60 days or a certain number of projects. This option works well because it forces users to upgrade to keep using the product.

Crowdsourcing – Kickstarter

One side effect of modern technology and the internet is the empowerment of individuals to pay only for things they want. For example, instead of paying for cable and its 200+ channels, users can choose which subscription service they want (i.e., Hulu or Netflix). take this mentality to another level. Instead of buying physical products outright, users are investing in the products they want to see.

Sometimes, crowdsourcing works well for items, but it can also be valuable for creative endeavors. For example, many filmmakers have used crowdsourcing sites to get funding outside of the studio system.

This business model works by taking a percentage of each successful campaign. For example, Kickstarter takes five percent from each funded project, which is on top of a three percent payment processing fee.

If you’re starting a new crowdfunding service, your success depends on the success of your user’s projects. So, the easier it is for someone to get funding through your platform, the faster you can get paid. So, elements like social sharing and SMS funding can enable users to earn money more quickly.

Franchise – Domino’s

In some ways, the easiest business model is also the oldest. Instead of selling digital products online, you have a brick-and-mortar location. That said, you can still utilize digital tools to facilitate orders and customer service to strengthen your bottom line.

Franchising is an excellent way to start a business without as much inherent risk. Since you can choose a brand that people trust already, you have a built-in audience that can help you succeed.

Domino’s is one of many examples of a franchise opportunity. In this case, franchisees run their stores independently and pay a fee to Domino’s based on their sales. So, the better a franchisee does, the more money Domino’s makes. Each franchisee has to use Domino’s packaging and ingredients, but stores can utilize unique marketing and customer service practices.

On the flip side, you may start a business that becomes successful enough to franchise out to other business owners. In this case, you need to develop a set of standardized rules and regulations for franchisees to follow. The purpose of this standardization is so that customers have the same experience no matter which store they visit.

The benefit of having a franchised business is that you can rely on passive income. This revenue stream can help overcome financial obstacles for particular stores or allow you to retire sooner.

Affiliate – Clickbank

If passive income is what you’re interested in, you may want to start an affiliate business. In this case, you make money not by selling individual products or services. Instead, you earn payments based on how many people buy from a third-party company.

Although affiliate marketing can be a passive way to earn money, you need to put in a lot of work upfront. The goal is to build as broad of an audience as possible so that each link you provide can deliver more cash. For example, let’s say that your conversion rate (the number of people buying the products you’re linking to) is 10 percent. If you can send the link to 100,000 instead of 10,000, you’ll see a massive increase in revenue.

is a perfect example of affiliate marketing in action. The platform connects customers, manufacturers, and marketers in one place so that everyone wins. Producers can access a wider audience, affiliates make money by expanding that audience, and customers can find high-quality products that they wouldn’t have access to otherwise.

Overall, once you build your audience, you can take a much more hands-off approach to your business. It’s also easy to manage an affiliate website since it can likely run on autopilot most of the time.

Now that you’ve seen how well different business models work in the real world, you can determine which one is right for you. The best way to build a business model is to utilize your skill set, experience, and resources to make the process as seamless as possible. For example, if you already run a blog or website, it’s much easier to get into affiliate marketing than it would be to run a franchise.

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Author: Firdaus

I work as an IT consultant in the Toronto area and I love to write blogs about a variety of subjects. My passion for writing stems from the desire that everyone should have access to meaningful information. Whether it is a blog about society, culture, technology, or social media, I don’t want to miss the opportunity of sharing my thoughts with my friends and audience. Since I believe in mutual exchange of ideas, I am always on the lookout for a feedback on my writings.

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