The business model is the means by which your company makes money for the value that you deliver to your customers.
It is the strategy for how you monetize your product or service.
Your customer will be the ultimate judge of whether your business model works or not.
As a result, it may take trial and error to figure out the best model for your business.
Nonetheless, there are some important steps you can take to help ensure you get started with the best business model possible.
Step 1: Evaluate Your Competitors
By simply looking at your competition you will learn about the business models that your customers potential currently have to choose from. Whether you replicate a competitors business model or your deliver additional value to the customer by improving their business model, it is important for you to know what your customers’ options are.
Step 2: Understand Your Customer
Are you selling to men, women, or children? Are you selling to the wealthy or the poor? Is your product or service an everyday purchase or a luxury purchase? What drives your customer to purchase your product? Knowing the answer to these questions and truly understanding where your customer is coming from will help you determine the best model for you.
Step 3: Determine Your Cost of Sales
It is extremely difficult to determine your price and business model unless you know your cost of sales, also referred to as Cost of Goods Sold (COGS). Without this information, you won’t know whether your price generates a gross profit or a loss.
Step 4: Determine Your Operating Expenses
Every business has some cost of running the business that is not directly related to the sale or a product or service. For example, office rent, marketing budget, accounting, etc. It is important that you understand this cost structure as well so that you can turn a net profit once these expenses are accounted for as well.
Step 5: Compare Business Models
You will want to take your top 2 or 3 business models and build out a complete set of financial projections for each so that you can test the key variables of the business models and compare them with one another.
Below is a list of the most common business models:
Whether you open your own brick and mortar retail store or you sell your product wholesale to a brick and mortar retailer, one of the oldest and most basic business models is a traditional storefront.
Direct sales is a method where the company sells directly to the end-user via a sales force. By cutting out the middleman, direct sales usually allows the company to sell the product for less and provide value to the customer via reduced prices.
The most obvious example of a subscription revenue model is a magazine or newspaper. Subscription business model is very popular and lauded among business owners due to its recurring revenue nature where gaining one new customer results in ongoing revenue throughout the lifetime of that customer.
Multi-level market, or network marketing, is a model where independent marketers buy a company’s products and sells them to consumers directly as well as to other “downline” marketers who in turn do the same. Each marketer in the “downline” receive a commission on that sale.
The auction business model is free-market capitalism at its finest where the customer who is willing to pay the most gets the product.
The service industry is very broad and includes many sub-models but at its core, consumers pay a flat rate or an hourly rate for services rendered.