In short, a business model is the way a company creates value and, in return, profits.
As you can imagine, the possibilities are wide and varied.
So let’s look at some business models and the steps to set one up.
These are somewhat theoretical concepts, but they carry over into the real world, which is why they matter.
Let’s start with the basics.
What is a business model?
A business model is the way or strategy a company uses to generate profits.
If what a company does is the “what”, the business model is the “how”.
How the company creates value that customers are willing to pay for.
Think, for example, of a company that makes chairs.
That’s what it does: make chairs.
But there are many ways it can turn those chairs into money:
- Selling them directly to end customers (B2C)
- Selling them to other companies (B2B)
- Renting them
- Selling them online
- Setting up a franchise network
- Etc.
This would be the “how”: how the company makes money from what it does or makes.
Each business model can cover various aspects, but the main ones are usually:
- Value proposition: the solution or benefit your product or service offers the customer. And, ideally, how it stands out from the competition.
- Target audience: who your product or service is aimed at. Whether it’s other businesses, end customers, etc.
- Distribution channels: how the product or service reaches customers (physical store, online store, direct distribution, etc.).
- Customer relationship: how you interact with your customers and keep them loyal.
- Revenue streams: how your business makes money (direct sales, subscription fees, advertising, commissions, etc.).
- Cost structure: the costs of running the business (production, marketing, staff, technology, etc.).
- Key resources: the core assets your company needs (people, capital, patents, infrastructure).
- Key activities: the essential actions and processes needed to deliver your value proposition (product development, logistics, marketing, technical support).
- Key partners: important alliances or suppliers that help the model work (collaborators, distributors, technology partners).
Together, all these aspects make up the business model.
Of course, the most important thing is for profits to exceed costs.
Why is it important to have a clear business model?
Having the right business model can be the difference between a profitable business and one that isn’t.
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 work out the business’s value proposition, which is in turn aimed at the target customer.
With both of these, the business proposition and the target customer, you can focus on finding the most profitable markets for your product or business.
· Competitive advantage:
Standing out from the competition is always very useful.
The business model itself can help with this in some cases.
If the business model leads you to do things differently from how they’ve been done until now, you already have a differentiator, which can in turn become a competitive advantage.
This doesn’t mean you’re obliged to look for a different business model if that’s not what you want.
However, it is something to consider.
· Better decision making:
Of course, knowing what your company will do, and how, can help you calculate costs and, to some extent, predict the income needed to sustain the business.
In fact, the business model completely shapes how you generate revenue, so choosing one or another matters in that respect.
· Attracting investors:
Some business models seen as more innovative or groundbreaking can attract investors more easily.
That is, as long as the business model clearly shows how it will generate profits.
· Adaptability:
The business model has to be adaptable.
You need to be able to make changes if necessary to adapt it to changing market needs or to your own results.
If the business model doesn’t allow for adjustments, any external change could cause a lot of problems.
Don’t forget: the business model is the foundation on which your marketing, sales, production and other strategies will be built.
That’s why it’s so important to set it up calmly and carefully.
Next, we’ll keep looking at why.
The importance of digital marketing in your business model
Your business model needs a digital marketing strategy.
It’s how customers come to know your product, the first step toward buying it.
Within digital marketing, we of course highlight email marketing as one of the most effective and cost-efficient channels.
There are many ways to integrate email marketing into your business:
- Informative newsletters
- Promotional campaigns
- Welcome emails
- Abandoned cart emails
- And many more.
At Mailrelay, because we know this is an important tool for new businesses, we’ve put together an exceptional free account.
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 unlike most tools, you’ll always have human support via chat, email and phone.
This enables you to execute effective online marketing strategies without high costs.
Strategies that will also give you useful information you can use to adjust your business model.
Types of business models
Since there are many possible business models, we’ll 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 company’s customer is another company, not an end consumer.
Take our own case: Mailrelay is a service aimed at businesses, so it would be B2B (although it’s also a SaaS model).
In some cases, B2B sales cycles tend to be longer, because more people are involved and decisions usually carry a greater impact and cost.
Deciding to buy a new TV isn’t as quick as deciding to replace a company’s vehicle fleet.
· B2C (Business to Consumer)
In this case, there is a relationship between the company and the end customer.
Most small shops would fit this business model, where there’s direct contact with the end consumer.
Most ecommerce stores would also fit here.
Even streaming platforms like Netflix use this type of business model (among others).
As you can easily imagine, the average B2C order is smaller in value than in B2B, at least usually.
· C2C (Consumer to Consumer)
This is an interesting business model in which consumers themselves offer their services or products to other consumers.
In many cases, what we have is a platform, such as:
- eBay
- Wallapop
- Mercado Libre
- Etc.
The platform can make money by charging a commission per transaction, through advertising, priority placement in results, etc.
· C2B (Consumer to Business)
It’s a business model that does exist, even if we might think it doesn’t.
From consumer to business.
This would be the case of influencers and content creators who sell online “visibility” to brands.
It’s not a business model suited to every company, but it’s out there, and it’s good to know about it.
· Marketplace
A business model similar to the C2C model we mentioned earlier.
However, in a marketplace there is a B2C relationship offered through the marketplace.
In other words, there are companies selling their products/services, which are promoted through the marketplace, and the marketplace makes money through commissions, fees or advertising.
Amazon could be an example of this business model.
What you do need to keep in mind is that this type of business model requires volume.
Marketplaces are scale businesses.
They need lots of sellers and lots of buyers to work; otherwise, they die out for lack of supply or demand.
· Electronic commerce (ecommerce)
Although ecommerce isn’t a business model in itself but a marketing channel, it’s true that many businesses are purely ecommerce, so we’ve included it even though it’s a bit of a gray area.
Many B2C and B2B companies use ecommerce to sell online.
It therefore requires a reliable online platform and online marketing methods (such as email marketing) to attract traffic.
· Subscription model (SaaS and others)
The SaaS (Software as a Service) business model is clearly on the rise.
In this business model, customers (subscribers to the service) pay on a recurring basis (monthly, quarterly, yearly, etc.) to access and use a service.
Although it’s something we commonly see in the online world, it can also be found in the more “physical” world, for example with a bottled water subscription service.
In any case, we usually find more examples online, with streaming platforms like Netflix or Spotify.
Or even services like Adobe Creative Cloud and Microsoft 365, among others.
A key concept in this type of business is the churn rate, that is, the percentage of customers lost.
It’s normal to lose contacts over time, but good service and customer care can go a long way toward retention.
It’s the best way to avoid losing customers.
· Freemium model
Another novel and interesting model.
In this case, the company offers a basic version of its product or service for free and keeps the advanced features for the paid versions.
Another option, very common in mobile apps, is to offer the service completely free, but with ads in the free version that disappear in the paid versions.
What’s the advantage of this business model?
The most obvious one is that it’s a business model capable of attracting a large volume of users.
Yes, they’ll be free users, but they’ll be getting to know your service, which isn’t easy to achieve in most cases.
Then you’ll need to plan how to monetize this user base by turning them into paying customers.
· Franchise
This is a business model aimed at rapid expansion: the “original” company (franchisor) pursues this expansion through third parties (franchisees).
You’re probably thinking of companies like McDonald’s or similar.
It’s a business model that allows the franchisee to take advantage of the brand, know-how and advertising of the franchisor.
On the other hand, if you want to be a franchisor, you’ll need to offer that security and know-how to franchisees, which makes it a more interesting business model for established, successful businesses than for a newly created one.
· Advertising
As we mentioned when talking about the freemium model, it’s possible to offer a product or service for free in exchange for advertising.
Think, for example, of Gmail, which is offered for free in exchange for showing some 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 as long as costs don’t exceed those profits.
· Affiliate model (affiliate marketing)
This is a business model in which a company rewards others (affiliates) for promoting its products and generating sales or leads.
The affiliate, which can be a website, blog, influencer or similar, recommends the product or service through links or mentions.
An important example is the Amazon Affiliate Program.
You can create a website showcasing Amazon products and link to 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
Even if the business model is sometimes quite obvious for your business, it still requires planning.
For example:
· Identify an opportunity or need in the market
This is essential.
Even if it seems obvious that your product or service solves a problem or need, there are some questions to ask yourself:
- 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’s not a problem if these questions have a more or less negative answer; it would just indicate that you may need to invest more in advertising and marketing.
On the other hand, the business model itself may be the answer.
Maybe your competitors don’t use a subscription business model, for example.
And that could be an option for you.
· Define your target customer segment
We’ve looked at many types of business models above.
Now you need to consider which type of customer best fits each one.
For example, if you’re targeting businesses (B2B), your ideal customers won’t be individual consumers.
· Design your value proposition
In short, what does your product or service do for your customer?
Always think about benefits first, not your product’s features.
Once you have that, it’s also a good idea to analyze your competitors and look for something that sets you apart.
Benefit + differentiator.
· Establish your revenue streams
This depends on the business model. A subscription business model doesn’t generate profits the same way as a B2C one, so you need to 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 topic, but for our purposes, let’s assume your sales channel is digital.
In that case, if you sell online, you’ll need to do online marketing.
Email marketing, SEM, content, etc.
These are the tools you can use to attract customers to your website, build their loyalty and get them to come back.
· Identify key resources, activities and partners:
These are other topics that go a bit beyond the scope of an introductory online article.
Put very briefly, it means thinking about what you need to carry out your business:
- Employees
- Suppliers
- Tools
- Premises
- …
And, of course, what all of that would cost: you need to know how much money it will take to run your business.
· Calculate the costs
With everything we’ve seen so far, you’ll be able to calculate all your business costs.
If you also make a sales/profit forecast (a realistic one, please), you’ll be able to check whether that business model is viable or whether you’ll need to cut back somewhere.
· Test and adjust your model
This is important.
Once you launch your business, the business model will show whether it works or 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 this time with real data.
Remember that tools like the Canvas model, SWOT analysis or market research can help you plan more effectively.
Common mistakes to avoid when defining your business model
As we’ve seen, preparing a business model is a delicate process, and it’s clear we can make mistakes.
Some of the most common are:
· Not researching the market thoroughly
This often happens when we have an idea that seems so good to us that we think there’s no need for much research, since surely everyone will feel the same way.
But sometimes that’s not the case.
It’s worth doing some research first, before investing time, effort and money in an idea that isn’t 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 a common tendency.
We think that this way we’ll get more customers or a better chance 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
Costs are something you can calculate precisely if you set your mind to it.
These are figures you can normally check.
Profits, however, are harder to predict.
You don’t know how well your product or service will be received, or the actual number 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
Here you need to strike a balance between opinions and data.
And it isn’t easy.
Monitor sales data, sign-ups, and other metrics, and compare them with customer feedback.
A few negative opinions shouldn’t make you change your business model if the rest of the metrics look good.
But they might represent opportunities for improvement, so analyze them carefully.
· Not considering scalability
If you want your business to grow, at some point you will have to consider how to scale it.
And the same business model might not work for you.
So even if it’s not something you need to think about from the start, you can at least make sure your business model isn’t so rigid that you can’t grow.
In conclusion
I think we’ve covered the most important aspects of business models: their types, how to create them, mistakes…
From here, you have a lot of work ahead, but it’s necessary work, and rewarding when you succeed.
Best of luck!
Jose Argudo
CMO at Mailrelay. Writes about email marketing, copywriting and conversion for small businesses and entrepreneurs.