What Is A Business Model?

30 Types Of Business Models

Your prototype might be ready for presenting to investors or licensees but it is worth nothing if
you do not have a business model in place. How are you going to explain to anyone what your
product does/intends to do and how it is going to add/create
value for customers as well as the company?
You need a business model for that.
It is a term people frequently use but most of them don’t truly understand what it means. Michael
Lewis, the author of The New, New Thing: A Silicon Valley Story, says that a business model is
a “term of art”. Most people know it when they see it but cannot accurately describe it.

We don’t know if we can refute it completely but while we try to explain what a business model
is here, in the next article, we will try to give you a framework so as to help you understand it
better. How you decide to sum up the parts of that framework and look at the bigger picture rests
with you.

What Is A Business Model?

conceptual structure that supports the

viability of the business and explains how
it operates, makes money, and how it
intends to achieve its goals.

All the business processes and policies that a company adopts and follows are part of the
business model.

According to management guru Peter Drucker:

 supposed to answer who your
customer is, what value you can
create/add for the customer and how
you can do that at reasonable costs.

Thus, a business model is a description of how a company creates, delivers, and captures value
for itself as well as the customer.

Components Of A Business Model

An ideal business model usually conveys four key aspects of the business –

1. Customers – Whom the business serves to (the target

market),
2. Offerings – What the business provides (the product),
3. Infrastructure – How it provides the offering (the
operating model),
4. Financials – How the business makes money and what
are the costs involved (the revenue model)
Usually, these components are defined using a business model canvas that’s further divided into
nine components.

The Importance Of Business Model

The business model acts as the blueprint of the business and a roadmap for its success (or
failure).

It is the only documentation that makes clear –

1. The business concept – the market opportunity the business

capitalises on.
2. The target market the business caters to.
3. The problems the business intends to solve.
4. The solution the business offers and how it creates customer
value.
5. How the business gets its customers.

The operating model the business follows.

How the business makes money and what are the costs incurred to get the same.

Moreover, the business model gives a reason for the customers to choose the offering over others
in the market. People chose Facebook because it helped them connect and chat with other people
around the world (operating model) and it didn’t even charge for it (revenue model). Netflix’s
business model was preferred over others as it provided value in the form of consistent on-
demand content instead of the usual TV streaming business model.

The 30 Types Of Business Models

There are different types of business models meant for different businesses. Some of the basic
types of business models are:

1. Manufacturer
A manufacturer makes finished products from raw materials. It may sell directly to the customers
or sell it to a middleman i.e another business that sells it finally to the customer. Examples –
Ford, 3M, General Electric.
 2. Distributor
A distributor buys products from manufacturers and resells them to the retailers or the public.
Examples – Auto Dealerships.

3. Retailer
A retailer sells directly to the public after purchasing the products from a distributor or
wholesaler. Examples – Amazon, Tesco.

4. Franchise
A franchise can be a manufacturer, distributor or retailer. Instead of creating a new product, the
franchisee uses the parent business’s model and brand while paying royalties to it. Examples –
McDonald’s, Pizza Hut.

5. Brick-And-Mortar
Brick-and-mortar is a traditional business model where the retailers, wholesalers, and
manufacturers deal with the customers face-to-face in an office, a shop, or a store that the
business owns or rents.

6. Ecommerce
E-Commerce business model is an upgradation of the traditional brick-and-mortar business
model. It focuses on selling products by creating a web-store on the internet.

7. Bricks-And-Clicks
A company that has both an online and offline presence allows customers to pick up products
from the physical stores while they can place the order online. This model gives flexibility to the
business since it is present online for customers who live in areas where they do not have brick-
and-mortar stores. Examples – Almost all apparel companies nowadays.
 8. Nickel-And-Dime
In this model, the basic product provided to the customers is very cost-sensitive and hence priced
as low as possible. For every other service that comes with it, a certain amount is charged.
Examples – All low-cost air carriers.

Also Read: Uber Business Model | How does Uber Make Money?

9. Freemium
This is one of the most common business models on the Internet. Companies offer basic services
to the customers for free while charging a certain premium for extra add-ons. So there will be
multiple plans with various benefits for different customers. Generally, the basic service comes
with certain restrictions or limitations, such as in-app advertisements, storage restrictions etc.,
which the premium plans shall not have. For example, the basic version of Dropbox comes with
2 GB storage. If you want to increase that limit, you can move to the Pro plan and pay a premium
of $9.99 a month for it. Some online image editors allow you to edit only a certain number of
images in the free basic plan while an unlimited number of images in the paid plan. Youtube’s
free plan comes with ads while the premium (Red) plan has no ad interruption plus it has other
benefits too. This model is one of the most adopted models for online companies because it is not
only a great marketing tool but also a cost-effective way to scale up and attract new users.

10. Subscription
If customer acquisition costs are high, this business model might be the most suitable option. The
subscription business model lets you keep customers over a long-term contract and get recurring
revenues from them through repeat purchases. Examples – Netflix, Dollar Shave Club.

11. Aggregator
Aggregator business model is a recently developed model where the company various service
providers of a niche and sell their services under its own brand. The money is earned as
commissions. Examples – Uber, Airbnb, Oyo.
 12. Online Marketplace
Online marketplaces aggregate different sellers into one platform who then compete with each
other to provide the same product/service at competitive prices. The marketplace builds its brand
over different factors like trust, free and/or on-time home delivery, quality sellers, etc. and earns
commission on every sale carried on its platform. Examples – Amazon, Alibaba.

13. Advertisement
Advertisement business models are evolving even more with the rise of the demand for free
products and services on the internet. Just like the earlier times, these business models are
popular with media publishers like Youtube, Forbes, etc. where the information is provided for
free but are accompanied with advertisements which are paid for by identified sponsors.

14. Data Licencing / Data Selling

With the advent of the internet, there has been an increase in the amount of data generated upon
the users’ activities over the internet. This has led to the advent of a new business model – the
data licencing business model. Many companies like Twitter and Onesignal sell or licence the
data of its users to third parties who then use the same for analysis, advertising, and other
purposes.

15. Agency-Based
An agency can be considered as a partner company which specialises in handling the non-core
business activities like advertising, digital marketing, PR, ORM, etc. This company partners with
several other companies that outsource their non-core tasks to them and is responsible to
maintain privacy and efficiency in their work. Examples of such agencies are Ogilvy & Mathers,
Dentsu Aegis Network, etc.

16. Affiliate Marketing

Affiliate marketing business model is a commission-based model where the affiliate builds its
business around promoting a partner’s product and directs all its efforts to convince its followers
and users to buy the same. In return, the affiliate gets a commission for every sale referred. An
example of a business operating on affiliate marketing business model is lifewire.com.
 17. Dropshipping
Dropshipping is a type of e-commerce business model where the business owns no product or
inventory but just a store. The actual product is sold by partner sellers who receive the order as
soon as the store receives an order from the ultimate customer. These partner sellers then deliver
the products directly to the customer.

18. Network Marketing

Network marketing or multi-level marketing involves a pyramid structured network of people
who sell a company’s products. The model runs on a commission basis where the participants are
remunerated when – They make a sale of the company’s product.

19. Crowdsourcing
Crowdsourcing business model involves the users to contribute to the value provided. This
business model is often combined with other business and revenue models to create an ultimate
solution for the user and to earn money. Examples of businesses using the crowdsourcing
business model are Wikipedia, reCAPTCHA, Duolingo, etc.

20. Peer 2 Peer Catalyst/Platform

A P2P economy is a decentralized internet-based economy where two parties interact directly
with each other to buy or sell goods or to conduct a transaction without the intervention of any
third party. A P2P catalyst is a platform where these users meet. Examples of P2P platforms are
Craigslist, OLX, Airbnb etc.

21. Blockchain
The Blockchain is an immutable, decentralized, digital ledger. It is a digital database that no one
owns but anyone can contribute to. Many businesses are taking this decentralised route to
develop their business models. Models based on blockchain are not owned or monitored by a
single entity. Rather, they work on peer-to-peer interactions and record everything on a digital
decentralized ledger.

22. SAAS, IAAS, PAAS

Many companies have started offering their software, platform, and infrastructure as a service.
The ‘as a service’ business model works on the principle of pay as you go where the customer
pays for his usage of such software, platform, and infrastructure; he pays for what and how many
features he has used and not for what he hasn’t.

23. High Touch

The High Touch model is one which requires lots of human interaction. The relationship
between the salesperson and the customer has a huge impact on the overall revenues of the
company. The companies with this business model operate on trust and credibility. Examples –
Hair salons, consulting firms.

24. Low Touch

The opposite of the High Touch model, the low touch model requires minimal human assistance
or intervention in selling a product or service. Since as a company, you do not have to maintain a
huge sales force, your costs decrease, though such companies also focus on improving
technology to further reduce human intervention while making the customer experience better at
the same time. Examples – Ikea, SurveyMonkey.

25. Auction-Based
Mostly used for unique items that are not frequently traded and that don’t have a well-established
market value, like collectables, antiques, real estate, and even businesses.

This business model involves the listing of an offering by the seller and the buyers making
repeated bids to buy that offering while fully aware of other bids by other buyers. The offering is
sold to the highest buyer with the auction broker charging a listing fee and/or commission based
on the transaction value.eBay is one such auction platform.
 26. Reverse-Auction-Based
A reverse auction is an auction where the roles of a buyer and seller are exchanged, i.e. sellers
bid prices instead of buyers.

The reverse-auction-based business model is often used when there are several sellers selling a
similar offering to a single buyer. These sellers lower their price with every bid and generally the
bidder with the lowest bid wins the auction. However, there are cases when the bidder with a
price higher than the lowest bid wins the auction as the buyer likes his offer (offering with add-
ons).A platform which lets sellers bid for government contracts is an example of a reverse
auction based business model.

27. Razor And Blades

Razor and blade model is used by companies which deal in complementary or companion
products like razors and blades.

It involves selling the high-margin root product at a low price to increase the volume sales of the
complementary or related low-margin product. By using this model, businesses create a stream
of recurring income over the life of the root product.

Companies dealing in razors, mosquito vaporizers, and other refillable products employ this
business model. The game industry also makes use of this model by providing the gaming
console at a very economical price and making good profits with the sale of games.

28. Reverse Razor And Blades

A business employing a reverse razor and blades model offers the low margin item at a very less
price or below the cost to encourage the sale of the high margin product. Amazon employs this
business model to sell its Kindle e-reader. It provides Kindle ebooks at a price lower than their
actual cost so to make people consider Kindle as a one-time investment to enjoy low-cost books
throughout its life.

29. On-Demand
An on-demand model is a model where a customer’s demand is fulfilled by delivering goods and
services on demand (usually immediately). This business model is driven by the use of the
internet and mobile phones. It works like this –

The customer order for products on services through a web-app.

The request is received by the company’s employee or a demand fulfilling partner.

The employee or a partner fulfils the demand by delivering the ordered product or service either
immediately or in the time promised.

Uber, Instacart, and Postmates are some examples of an on-demand business model.

30. User Community

Driven by the network effect, this business model involves granting access to a community or a
network in return for a membership fee. Glassdoor is a good example of such a user community.

Final Thoughts
Of course, most companies do not operate on any one of these business models but rather on a
combination of some. Like it is perfectly possible for you to be a Bricks-and-clicks Low Touch
Retailer or a High Touch Subscription-Based Manufacturer.