While you might think that the first task for an entrepreneur is to create a minimum viable product, there’s actually a step that comes before this. Starting a successful small business begins with understanding the various types of business models.
Your first startup task is to choose a model that aligns with your vision.
So, let us examine what a business model is and which one suits best for you.
The crucial first step for startups
Before you sell anything, you must choose a business model. Here are seven of the most common types of business models to consider:
- Direct sales business model.
- Freemium business model.
- Subscription-based business model.
- Marketplace business model.
- Crowdsourcing business model.
- High-touch and low-touch business models.
- Franchise business model.
A business model can be described as a company's core strategy for making a profit. In simple words, it defines:
- How you sell your product or service to customers (e.g. online, in-person)
- Who those customers are (e.g. consumers, exporters)
- The revenue streams your business will generate
To that effect, your business model is as much a part of defining your purpose and structure as your business plan.
While different types of business models suit different businesses, we bring to you a select few that you can use to succeed in today’s business environment.
1. Direct sales business model
As the name suggests, direct sales is selling products to consumers directly. Sales take place through:
- One-on-one demonstrations of the product or service
- Hosted parties where the products are displayed
- Other personal contact arrangements
What’s interesting is that there are no fixed retail locations under a direct sales business model.
Companies such as Avon, Amway, Herbalife and Tupperware have followed this model for years, with exceptional success. You must connect with the parent company to receive the tools to begin selling their products.
Business owners in direct sales earn a portion of their sales, while the company offering the product retains the remaining revenue.
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2. Freemium business model
In recent years, freemium (a word that combines “free” and “premium”) has become the dominant business model among startups, especially in the internet and technology domain.
Here, a company does not charge for a basic version of the product but demands a subscription for advanced functionality.
Companies such as Dropbox, Zoom Video, LinkedIn, Box, Yammer, Slack, and many others have been successfully using a freemium business model. All of them offer their basic services for free to the user, while the more advanced or additional features come at a cost.
3. Subscription-based business model
Here, customers pay a monthly or yearly fee for an ongoing service. For instance, this subscription can be for a movie streaming service or purchase of a product within a specified period.
Netflix is an example of a movie streaming service that uses this type of business model.
Instead of asking for a huge up-front investment, this model eases the buying decision with a relatively low initial cost. Needless to say, most people will make the decision to invest $10 a month more readily than $120 at one fell swoop.
The best thing is, if the customers enjoy the service you’re providing, they won’t need much convincing to renew their subscriptions.
Related: How to start an online business
4. Marketplace business model
The marketplace business model has proved highly effective for a number of businesses. This model involves maintaining a digital platform. You earn a commission for each deal.
Amazon is one of the leading examples for this type of business model, creating a marketplace for those who wish to sell items. OYO Rooms and Uber have also effectively followed this business model.
In the marketplace model, the owner does not need to maintain any inventory or ship products. Strategic marketing, branding and support can make this model a huge success.
5. Crowdsourcing business model
Crowdsourcing, a word that combines “outsourcing” and “crowd,” has grown in popularity over the last few years.
Now that technology has eliminated the barrier of location, the pool of talent has grown much larger. Using a crowdsourcing platform, businesses can tap into the “power of the global crowd” to solve complex problems and innovate.
Crowdsourcing draws on the wisdom of a group to accomplish a goal.
Examples of crowdsourcing platforms include Amazon’s Mechanical Turk and the GoI’s MyGov, which invites all Indians to actively participate in contributing to the social and economic transformation of India.
6. High-touch and low-touch business models
The “high-touch” business model requires interaction among people and is more of a “person-centric” model. Here, the relationship between the vendor and client is key to gaining and keeping customers. With this business model, customers place trust and partnership with a company.
This model is used by professional services including:
- Consulting firms
- Wealth management groups
- Financial services businesses
- Accounting firms
Personalized services such as specialty restaurants and hair salons and spas also fall under this category.
The low-touch model
On the contrary, the “low-touch” model involves little human assistance or intervention in selling a product or service. Since the company does not have to maintain a huge sales force, it is a low-cost model.
Low-touch companies focus on improving technology to further reduce human intervention, while making the customer experience better at the same time. Examples of companies that use this type of business model include Flipkart, Amazon and ShopClues, among others.
7. Franchise business model
If you are planning to start a small business that can be easily replicated, then franchising may be one of the best ways to expand it at a faster pace. Franchising allows successful business owners to grow their businesses without having to spend substantial amounts of their own money to build new units. Some of the cost is shouldered by the franchisee, who is responsible for coming up with the initial capital.
Franchising can be a lower-risk way to start a business, as the franchisor has already proven it successful.
However, lack of planning or not finding the right franchise partner can ruin your franchising dreams. But if you tackle it well, you can certainly succeed.
Examples of successful franchises include Kidzee, Khadim’s, Domino's Pizza and Pabrai’s Fresh & Naturelle Ice Creams.
7 types of business models explained
To sum up, a business model is a blueprint for small business success. A proper business model helps you to figure out ways to create, deliver and profit from your business idea.
In the real world, however business models aren’t always as straightforward as you may think and no ‘one’ model turns out to be perfect. Therefore, you need not stick to one type of business model. You can judiciously combine two or three business models to maximize the value created by your products and services.
The key thing is that when starting your business, you don’t need to invent a new business model.
Using existing models can help lead you to success because those models are already established. But that doesn’t stop you from innovating in smaller ways within that existing business model to build your success story.