What are business models? Discover the most important ones

Briefly, the business model is the way the company generates value and in exchange for this, profits.

As you can imagine the possibilities are very wide and diverse.

So we are going to see some business models, and the steps to establish it.

These are somewhat theoretical concepts that, on the other hand, translate to reality, which is why they are important.

Let’s start with the basics.

What is a business model?

A business model is the form or strategy that a company uses to generate profits.

If what a company does is the “what”, the business model is the “how”.

How the company generates a value for which customers are willing to pay.

Think for example of a company that manufactures chairs.

That is what it does, manufacture chairs.

But there are multiple ways in which it can transform those chairs into money:

• Selling them directly to final customers (B2C)
• Selling them to other companies (B2B)
• Renting them
• Selling them on the internet
• Setting up a franchise network
• Etc.

This would be the “how”, how the company makes money with what it does or manufactures.

Each business model can cover diverse aspects, but the main ones usually are:

• Value proposition: the solution or benefit that your product or service represents for the client. And ideally, how it differs from the competition.
• Target audience: who your product or service is aimed at. If it is to other companies, final customers, etc.
• Distribution channels: how the product or service reaches the customers (local store, online store, direct distribution, etc.).
• Customer relationship: the way in which you interact with your customers and maintain loyalty.
• Revenue sources: in what way your business earns money (direct sales, subscription fees, advertising, commissions, etc.).
• Cost structure: what are the expenses to operate the business (production, marketing, personnel, technology, etc.).
• Key resources: the fundamental assets that your company needs (people, capital, patents, infrastructure).
• Key activities: the essential actions and processes to offer your value proposition (product development, logistics, marketing, technical support).
• Key partners: important alliances or providers that help the model work (collaborators, distributors, technological partners).

All these aspects combined make up what would be the business model.

Of course, the most important thing is that the benefits exceed the costs, of course.

Why is it important to have a clear business model?

Counting on the correct business model can be the difference between a profitable business and another that is not.

This is because it allows you to make better decisions in different areas of the business:

· Strategic focus

From the business model, you can also deduce the value proposition, which targets the ideal customer.

With both values, the business proposition and the target customer, you can focus on searching for the most profitable markets for your product or business.

· Competitive advantage:

Differentiating from the competition is always something very useful.

The business model itself can help in this in some cases.

If the business model leads you to do things in a different way than how it was done until now, you already have a differential, which can in turn represent a competitive advantage.

This doesn’t mean that you have the obligation to search for a different business model if it is not what you desire.

However it is indeed something to consider.

· Better decision making:

Of course knowing what your company will do and how can help you calculate the costs, and, in some way, predict the necessary income to maintain the business.

In fact the business model totally influences the way of generating income, so deciding on one or another is important in that sense.

· Attracting investors:

Some business models seen as more innovative or groundbreaking can attract investors more easily.

This as long as the business model clearly shows how it is going to generate profits.

· Adaptability:

The business model has to be adaptable.

You need to be able to make changes to adapt it to changing market needs or your own results.

If the business model does not allow adjustments, any external change could entail many problems.

Don’t forget, the business model is the foundation upon which you will develop marketing, sales, and production strategies.

Hence it is so important to establish it calmly and carefully.

Now we will continue seeing why.

The importance of digital marketing in your business model

The business model needs the digital marketing strategy.

It is how customers get to know your product, the first step to acquiring it.

Within digital marketing of course we highlight email marketing, as one of the most effective and profitable channels.

The ways to integrate email marketing in your business are multiple:

• Informative newsletters
• Promotional campaigns
• Welcome emails
• Abandoned cart emails
• And a long etc.

As we know that this is an important tool for new businesses, we have prepared an exceptional free account for Mailrelay users.

The Mailrelay free account allows you to send up to 80,000 emails per month for free, to a list of up to 20,000 contacts.

And contrary to the case of the majority of tools you will always count on human support by chat, email and phone.

This enables you to execute effective online marketing strategies without high costs.

Strategies that will also return useful information with which to make adjustments to your business model.

Types of business models

As there are multiple possible business models, we are going to focus only on the most important ones.

· B2B (Business to Business)

In the B2B model a company sells its products or services to other companies.

In other words, the client is another company, not a final consumer.

For example in our own case, Mailrelay, is a service oriented to companies, therefore it would be B2B (although it is also a SaaS model).

B2B sales cycles are usually longer because they involve more people, and decisions have a greater impact and cost.

Deciding to buy a new television is much faster than replacing a company’s vehicle fleet.

· B2C (Business to Consumer)

In this case indeed there is a relationship between the company and the final customer.

The majority of small businesses would fit in this business model, where there is direct dealing with the final consumer.

Also the majority of ecommerce stores would fit here.

Even streaming platforms like Netflix work with this type of business model (among others possible).

As you can imagine, the average B2C order is typically smaller than in B2B.

· C2C (Consumer to Consumer)

This is an interesting business model, in which the consumers themselves offer their services or products to other consumers.

What we have in many cases is a platform, such as:

• eBay
• Wallapop
• Mercado Libre
• Etc.

The platform can earn money charging a commission per transaction, advertising, preference in results, etc.

· C2B (Consumer to Business)

Although we might think this business model doesn’t exist, it does.

From consumer to business.

It would be the case of influencers and content creators who sell online “visibility” to brands.

Although we might think this business model doesn’t exist, it does. It is not suitable for every company, but it is good to know about.

· Marketplace

A business model similar to the C2C that we mentioned before.

However in the marketplace indeed we have a B2C relationship that is offered through the marketplace.

That is, there are companies that sell their products/services that are promoted through the marketplace, which becomes profitable through commissions, fees or advertising.

Amazon could be an example of this business model.

What indeed you have to consider is that this type of business model requires volume.

Marketplaces are scale businesses.

They require many sellers and buyers to function; otherwise, they fail due to lack of supply or demand.

· e-commerce

Although ecommerce is not in itself a business model, but a marketing channel, it is true that many businesses are purely ecommerce, so we include it even if it is somewhat ambiguous.

Many B2C and B2B companies use ecommerce to sell online.

It requires therefore a reliable online platform and online marketing methods (like email marketing) to attract traffic.

· Subscription model (SaaS and others)

The SaaS (Software as a Service) business model has a true upward trend.

In this business model, the customers (subscribers of the service) pay recurrently (monthly, quarterly, annual, etc) for access and use of a service.

Although common in the online world, you can also see this in the physical world, for example, with a bottled water subscription.

In any case we usually find more examples in the online world, with streaming platforms like Netflix or Spotify.

Or even services like Adobe Creative Cloud, Microsoft 365, among others.

A key concept in this type of businesses is the churn rate, that is the percentage of loss of customers.

It is normal that over time contacts are lost, however good service and customer attention can help a lot with retention.

It is the best way to avoid the loss of customers.

· Freemium model

This is another innovative and interesting model.

In this case the company offers a basic version of its product or service for free, and leaves the advanced features for the paid versions.

Another option, very common in mobile applications, is to offer the service completely free, but with ads in the free version, and they are removed in the paid versions.

What are the advantages of this business model?

The most evident is that it is a business model capable of attracting a large volume of users.

They won’t pay, but they will be getting to know your service, something that is not easy to achieve in the majority of cases.

After that you will have to plan how to monetize this customer base, converting them into clients.

· Franchises

This business model seeks rapid expansion, where the “original” company (franchisor) grows through third parties (franchisees).

Surely you are thinking of companies like McDonald’s or similar.

It is a business model that allows the franchisee to take advantage of the brand, knowledge and advertising of the franchisor company.

On the other hand, if you want to become a franchisor, you need to offer security and knowledge to franchisees, making this model more suitable for established, successful businesses than for new ones.

· Advertising

As we have commented when we talked about the freemium model, it is possible to offer a free product or service in exchange for advertising.

Consider Gmail, for example, which is offered for free in exchange for displaying ads.

As in other cases, this business model is only profitable if you can reach a wide audience that allows you to generate profits from advertising.

And ensuring that the costs don’t exceed those profits.

· Affiliation (affiliate marketing)

This is a business model in which a company rewards others (affiliates) to promote its products, generate sales or leads.

The affiliate can be a web, blog, influencer, or similar recommends the product or service via links or mentions.

An important example is the Amazon Affiliate Program.

You can create a web where you show Amazon products and link them with affiliate links.

If the customer buys after using your link, you will receive a percentage of the sale.

Steps for creating a business model

Although sometimes the business model is quite evident for your business, it still requires planning.

For instance

· Identify an opportunity or need in the market

This is indispensable.

Although it seems obvious to you that your product or service solves a problem or need, there are questions to ask oneself:

• Do customers really want to pay for a solution?
• Is it perceived as a real problem by a sufficient number of people?
• Are there competitors already in the market?
• and alternatives?

It is not a problem if the answers to these questions are negative; it simply indicates that you may need a greater investment in advertising and marketing.

On the other hand the business model itself can be the answer.

Perhaps the competitors don’t do it in the subscription business model, for example.

And that could be an option for you.

· Define your target customer segment

We have looked at many types of business models.

Now you need to consider which type of customer best fits each one.

For example, if you target companies (B2B), your ideal customer will not be a private consumer.

· Design your value proposition

In summary, what does your product or service do for your customer?

Think always first about benefits not features of your product.

Once you have this it is also convenient to analyze your competition and search for something that differentiates you.

Benefit + differential.

· Establish your revenue sources

This depends on the business model. A subscription business model doesn’t generate profits the same as a B2C, so you must decide.

Once you decide, ensure it aligns with your target customer so that, for example, the payment format feels natural to them.

· Choose sales and marketing channels:

This can be a complex subject, but, for what concerns us we will imagine that your sales channel is digital.

In that case, if you sell online, you will have to work with digital marketing.

Email marketing, SEM, content, etc.

These tools allow you to attract customers to your website, build loyalty, and ensure they return.

· Identify resources, activities and key partners:

These subjects go slightly beyond the scope of an introductory online article.

In a very summarized form it would be to think about what you need to develop your activity:

• Employees
• Providers
• Tools
• Premises
• …

And regarding the cost of all that, of course, you need to know how much money it will take to develop your activity.

· Calculate the costs

With everything that we have seen until now you will be able to calculate all the costs of your business.

If you also make a forecast of sales/profits (realistic please) you will be able to check if that business model is viable, or it will be necessary that you cut at some point.

· Test and adjust your model

This is important.

The business model, when you launch your business, will show if it is valid or it is not.

As you gather data, you will be able to see its viability, whether your forecasts were accurate, and what areas are worth changing.

But already with real data.

Remember that tools like the Canvas model, the SWOT analysis or market research can help you to plan more effectively.

Common errors to avoid when defining your business model

As we have seen, preparing the business model is a delicate process, and it remains clear that we can make mistakes.

Some of the most common are:

· Not researching the market thoroughly

This happens often when we have a good idea, and it seems so good to us that we think that it is not necessary to investigate much, since it is clear that everyone will opine the same.

What happens is that sometimes it is not like that.

It is worth doing a previous study, before investing time, effort and money in an idea that is not mature enough.

If you have a great idea, but there is no one willing to pay for it, perhaps it is not so great.

· Trying to serve “everyone”

This is many times a tendency.

Thinking that in this way we will have more volume of customers, or more possibilities of success.

However, few products or services today are really suitable for everyone.

Furthermore, if you are just starting out, it is better to find a profitable niche and perhaps expand from there.

· Underestimating costs or overestimating revenue

In this sense, costs are something you can calculate exactly.

These are figures you can normally check.

Yes, you can make estimates, but not with precision, so it is better not to overestimate the data and allow for a margin of error.

You don’t know the market acceptance of your product or service, or the actual volume of buyers.

Yes, you can make estimates, but not with precision, so it is better not to overestimate the data and allow for a margin of error.

· Ignoring customer feedback

In this you have to find a balance between opinions and data.

And it is not easy.

Monitor sales data, sign-ups, and other metrics, and compare them with customer feedback.

A few negative opinions should not make you change your business model if the rest of the parameters are positive.

But perhaps indeed they represent opportunities for improvement, so you should analyze them well.

· Not considering scalability

If you want your business to grow, at some point you will have to consider how to scale it.

And perhaps the same business model will not be a good option for you.

Therefore, although you don’t need to think about this from the start, you should ensure that your business model is not so rigid that it prevents growth.

In conclusion

I believe we have covered the most important aspects of business models, their types, how to create them, and common errors.

From here you have a lot of work left, but it is a necessary work, and gratifying when success is achieved.

Best of luck!