Whether you operate a small business or are part of a global behemoth, a business model lies at the heart of your organization. As you begin to explore business models, greater opportunities and possibilities will present themselves because business models are centred around value creation for customers. Today we will explore a few of the most popular and prevalent business models in the marketplace.
Since there may be some confusion, let’s look at the difference between a business model and a revenue model. A business model is a dynamic, strategic model, outlining how a company plans to create, deliver and capture value. A revenue model, on the other hand, only represents the actual revenue generating mechanism for the business. In this article, we will refer to the models listed as business models, rather than revenue models, because a revenue model is only one, small component of a business model; therefore, a revenue model is not sufficient to create a business around.
Examples of commonly used business models include:
Direct: Whether it is a product or service, a direct business model is characterized by the direct sale of knowledge, or an asset, to a customer. An example would be any consulting business or traditional bricks-and-mortar store.
Advertising: In an advertising business model, revenues are generated from advertising sales exclusively. The most notorious example of this is Google in its original form, which made money of contextual search advertising. Nowadays, advertising models are seen as insufficient standalone sources of revenue.
Subscription: A subscription business model generates revenue by charging the customer a recurring fee (monthly or annually, for example) to receive access to the content, or service that a company provides. An example would be the Wall Street Journal, where users can access unlimited content for a subscription fee.
Utility: In contrast to a subscription model, utility models earn revenue every time content is accessed or a service is used. Generally, this is referred to as a “pay-as-you-go” model, where a customer is charged based on usage. This most common example of this model is telecom companies charging users by the minute, but it is also becoming more prevalent in the online publishing industry as a way to monetize content.
Freemium: In what is becoming an increasingly popular term, freemium business models give users access to certain features of a product or service for free and charge users to upgrade to premium services. Generally, freemium business models require a large user-base, as on average 2-5% of users convert to premium paid services. Examples are everywhere, and include Freshbooks, Dropbox, etc.
Brokerage: In a brokerage business model, revenues are generated as fees from a transaction between two parties. Credit card companies like Visa revolve around a brokerage model, while more obvious examples include stockbrokers and real-estate agents.
Leasing: A leasing model works because it allows customers to use, or purchase, a product or service for small payments over time, rather than having to pay full price upfront. Many businesses use this approach, such as furniture shops, car dealerships, and others, as it creates affordable solutions for items with a high upfront cost.
These are just a few of the most popular business models nowadays. Most businesses adopt a hybrid of revenue streams to create a unique business model. For some businesses, it is desirable to keep it simple and stick with a straightforward business model, but for the majority, innovative solutions are required to stay alive. Over the next few weeks we will dive headfirst into business models and talk about them in a number of different ways. We will have a blog series that focuses on building scalable business models, another one that deconstructs current business models, and some posts that specify ways to use currently available tools to augment your business model.
At Lumos, we believe that minor improvements in business design can lead to big things. While a lot of energy is invested into building technologies, we think that an equal amount of time should be put into designing the business ifself. Shoot us an email if you want to take a look at your business model.
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