What is a business model? – Common business models explained

Last updated on 10 October 2023

In today’s fast-paced business environment, understanding various business models is essential for sustained success. Whether you’re an entrepreneur on the cusp of launching a start-up or an executive considering a pivot in business strategy, your choice of business model can be a make-or-break decision.

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This article aims to demystify some common business models prevalent in the UK and globally, to help you make an informed decision for your business.

What is a business model?

A business model outlines the way an organisation creates, delivers and captures value. It is the blueprint that defines the structure and operations of a business, guiding its activities, revenues, and expenses. A well-defined business model can provide a competitive advantage in the market.

Common business models

1. Brick and mortar

This is one of the oldest and most traditional business models, where businesses operate through a physical location. It’s typical for retailers, restaurants, and service providers. The model is highly dependent on location, footfall, and customer service.

2. Ecommerce

In this digital age, the ecommerce business model has surged in popularity. Businesses operate online, offering products or services directly to consumers through a website. Companies like ASOS and Ocado have thrived using this model.

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3. Subscription model

Businesses like Netflix and Spotify use the subscription model, where customers pay a recurring fee to access products or services. This model helps in predicting revenue and encourages customer loyalty.

4. Freemium

Here, a basic version of the product or service is offered for free with the option to upgrade to a paid version with additional features. This model is common in software businesses, like antivirus programs or cloud storage services.

5. Affiliate marketing

In this model, businesses earn revenue by promoting other companies’ products and receive a commission for each sale made through their marketing efforts. It’s commonly used by bloggers and influencers.

6. Licensing

Licensing allows businesses to generate revenue by permitting another company to use its intellectual property, technology, or brand name. This model is prevalent in sectors like technology and entertainment.

7. Franchising

Companies like McDonald’s operate on a franchising model, where a franchisee pays an upfront fee and ongoing royalties to a franchisor for the right to operate under their brand name.

8. Direct sales

In the direct sales model, products are sold directly to consumers, bypassing any middlemen like wholesalers or retailers. This model can be seen in the case of brands like Avon and Tupperware.

9. B2B and B2C

These aren’t business models in the traditional sense, but rather ways to describe the target customer. B2B (Business to Business) entities like SAP or Oracle sell products and services to other businesses. B2C (Business to Consumer) companies like Tesco or Amazon sell directly to end consumers.

Key considerations

When selecting a business model, consider factors like your target audience, capital requirements, scalability and how well the model aligns with your core competencies. Different models offer various advantages and disadvantages, and your choice can significantly impact your long-term success.

Conclusion

Understanding common business models can arm you with the insights needed to choose the right model for your business. A well-thought-out business model can not only ensure sustainability but also offer a competitive edge in today’s ever-changing business landscape.

FAQ for business models

What is a business model?

A business model is a framework that outlines how a company creates, delivers, and captures value. It serves as a blueprint for your business operations, dictating your revenue streams, cost structure, and customer engagement strategies.

How important is a business model for a start-up?

A business model is crucial for a start-up as it provides the foundation upon which the company is built. A well-designed model can guide decision-making, attract investment, and provide a roadmap for scaling the business.

Can a business have more than one business model?

Yes, a business can operate using multiple business models. For example, a company might use both a subscription and an e-commerce business model.

How do I choose the right business model for my business?

Choosing the right business model involves a thorough analysis of your target audience, market demand, competition, and your unique value proposition. It should also align with your long-term vision and objectives.

How does a business model differ from a business plan?

A business model is a conceptual structure that explains how the business operates, whereas a business plan is a document that outlines specific objectives, strategies, financial projections, and operational plans for a business.

How often should a company review its business model?

There’s no hard and fast rule, but in today’s rapidly changing business environment, it’s advisable to review your business model at least annually or when significant shifts in the market occur.

What are the key components of a business model?

Key components typically include customer segments, value propositions, channels, customer relationships, revenue streams, key resources, key activities, key partnerships, and cost structure.

How does technology impact a business model?

Technology can radically impact a business model by opening new revenue streams, scaling operations, and improving efficiency. It can also necessitate a change in business model to remain competitive.

Can a business model be patented?

Business methods, which are a part of a business model, can sometimes be patented, although the requirements for this can vary by jurisdiction and are generally quite stringent.

Is a franchise a type of business model?

Yes, franchising is a type of business model where the franchisee pays the franchisor for the right to operate a business under an established brand and business model.

What is a scalable business model?

A scalable business model allows for increased revenue with minimal incremental cost. This means that as the business grows, costs don’t rise at the same rate, leading to higher profits.

How do market trends affect a business model?

Market trends can significantly impact a business model by influencing customer behaviour, competition, and regulations, often requiring businesses to pivot or adapt their existing models.

What is a disruptive business model?

A disruptive business model upends existing market dynamics by offering innovative solutions that are often cheaper, more accessible, or otherwise superior to existing options.

How is a B2B business model different from a B2C business model?

A B2B (Business to Business) model involves selling products or services to other businesses, while a B2C (Business to Consumer) model focuses on selling directly to individual consumers.

What is a subscription business model?

In a subscription business model, customers pay a recurring fee to access a product or service, leading to predictable revenue streams and increased customer loyalty.

How does a freemium business model work?

In a freemium business model, a basic version of a product or service is offered for free, with premium features available for a fee.

What are the risks associated with choosing the wrong business model?

Choosing the wrong business model can result in financial losses, reduced market share, and even business failure. It can also make it difficult to pivot or adapt when market conditions change.

Can a traditional business model co-exist with a digital business model?

Yes, many businesses operate both traditional brick-and-mortar stores and digital platforms. The key is to ensure that the two models are complementary and aligned with the overall business strategy.

How do you validate a business model?

A business model can be validated through methods like market research, A/B testing, and financial modelling. It often involves iterating based on real-world feedback and performance metrics.

What is a social enterprise business model?

A social enterprise business model aims to achieve social objectives along with financial profitability. Revenue is often reinvested into social initiatives rather than maximising shareholder value.

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