In this article, I’ll show you how business models work and why they have proved to be quite effective. At the end of it all, business modeling is about finding a systematic way to unlock long-term value for an organization. In this article, we’ll see ten business models examples.
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What is a business model?
A business model is a critical element for any startup success as it is what unlocks value in the long-term. In a way, developing a business model isn’t only about monetization strategies. Indeed, that is way more holistic. To develop a business model companies need to create value for several stakeholders. Thus, a business model it is about what makes users go back to your app, service or product. It is about how businesses can get value from your solution. It is about how suppliers grow their business through it. A business model is all those things together. In short, when those pieces come together that is when you can really say to have a business model.
How many types of business models exist?
There isn’t a clear answer to that. However, we can classify business models in the several categories, mainly based on how companies and startups monetize their business. Some business models have always existed, some others are innovative. Some of the business models we identified and discussed in this blog are the following:
Hidden revenue business model
Some examples of hidden revenue generation are Google and Facebook. The two most popular websites on planet earth have a similar monetization strategy. They offer free apps and platforms for a broad audience (billion of people worldwide) while monetizing the data of the same users.
In fact, when you do a search on Google or when you put a like on a Facebook post, this is data those companies are gathering to get you profiled. This data that gets collected anonymously gets sold to businesses in the form of advertising. In fact, each time you click through a link on Google that has the “ad” notation next to it. De facto you’re allowing Google to monetize on a keyword, while you’re making a business monetize on that keyword if you buy the service they provide.
A similar logic applies to Facebook. The news feed is the place where Facebook monetizes most of its ads. Both models both use a hidden revenue generation model as those services work so well that most users barely realize their data is getting sold for advertising.
One-for-one business model
Have you ever heard of TOMS Shoes? As you can understand from the name, this is a company making shoes. What’s new about it? Well, TOMS Shoes founder has come up with a model, in which, for a pair of shoes sold, another pair is given to kids around the world that cannot afford them. This kind of model might be seen as a sort of hybrid that combines profit with non-for-profit models. In reality, TOMS Shoes has proved to be profitable and sustainable over time.
Indeed, the non-profit side of the business model works as an excellent propeller for the business. Anyone wants to take part in the growth of a company that not only sells shoes but takes care of kids around the world. Thus, it isn’t anymore just a pair of shoes; it is a story you want to be part of.
Razor and blade revenue model
Have you ever wondered why a blade costs more than a razor? This is the razor and blade revenue model in action. When a company makes its customers loyal to a product. Then that same companies might leverage on that product to sell related “accessories” for a premium price. Companies like Apple, for instance, use an inverse razor and blade business model. In fact, Apple has created platforms like the App Store and iTunes, which sell app and songs, movies or tv series at a convenient price. While Apple charges premium prices on its devices (iPhone, iPad, and Mac).
The logic is the same, but inverted. As consumers are locked in Apple ecosystem, they feel compelled to buy Apple products at a premium price and with very low price elasticity.
Cash conversion cycle or cash machine business model
Have ever wondered how some businesses survive, nonetheless the thin margin they have? One great example is Amazon. A company that makes low-profit margin yet it has been very disruptive. In reality, Amazon can get its partners finance the business by playing on the short-term liquidity of the business.
Peer-to-peer business model
A peer-to-peer business model is built on the premise of creating value for both demand and offer side, while the company that acts as a middleman monetizes through commissions. Companies like Airbnb have implemented the modern version of the peer-to-peer business model. As technology has quickly advanced, in Airbnb’s case, it won just because it allowed the transactions between hosts and hostee smooth. In fact, the platform works seamlessly, and Airbnb only intervenes to create trust and mitigate risk for the party involved.
Multi-sided platform business model
If I saw, professional social network, at least at the time of this writing, for sure you’ll think about LinkedIn. In fact, with over five hundred million users worldwide LinkedIn is a platform that offers value for several stakeholders. LinkedIn is a source of value for a B2B that is trying to grow; it is a powerhouse for any business developer and a source of value for HR managers and candidates looking to grow their skills. In short, where on a peer to peer marketplace, a company acts as an “invisible” middleman that makes transactions and interactions among sellers and buyers as smooth as possible.
On a multi-sided platform, the company operating that offers services to both sides. For instance, LinkedIn sells subscription services to HR managers to find candidates to fill vacancies. At the same time, LinkedIn provides another subscription service to people looking for job opportunities. As the value of the platform depends upon the ability of LinkedIn to offer skilled candidates to HR manager, that is why LinkedIn also has an online teaching platform that offers together with a subscription, professional courses to people looking for a job.
Direct sales business model
Nowadays, with the advent of AI, machine learning and a new form of advanced technologies, it might seem demode to talk about direct sales. In fact, for many, this is a thing of the past. However, the opposite is true. In an era where everything is getting automated the personal touch is becoming critical. Of course, once technology produces machines to the point of seeming human (see the Google Duplex experiment) that might be a different story.
Yet as of now, companies like ConvertKit use direct sales as a powerful weapon to grow their business, fast! Below you can see a simple Trello board put up by Nathan Berry, founder of ConvertKit when he decided to create a mail marketing tool from scratch just to see it grow to over a million dollar in monthly recurring revenue in only six years:
Thus, direct sales can be a powerful way to develop a business if done correctly. In fact, one of the secret to a successful direct sales strategy is about the qualification of your target audience. If you try to sell your service or product to anyone, this is more spamming. The more you qualify your audience, the more you create value.
Freemium business model
Free can be a powerful weapon for growth. Many in the tech industry and more specifically in the SaaS business model use the Freemium to grow their business. In fact, the freemium is a mix of free and paid service. The company offers a basic version of the product that works just like the premium product but it either has limited usage, or it has limited features. Thus, the free version is used for lead generation (capture contacts of people) and invite them to upgrade to the paid version or simply have the users with a free account to advertise their product.
Take SumoMe, a tool that allows you t grow the audience of a blog through newsletter forms, pop-ups, A/B tests and heat maps:
If you get the freemium version of the tool, you still have a lot of features for free. SumoMe will invite you to upgrade over time, and it will show a small link “powered by SumoMe.”
Source: jackpdean.com
In short, the free product can be leveraged in several ways. First, for lead generation. Second, as a way to trigger upsells for non-paying customers. Third, as a virality tool, with CTAs and links placed in strategic places to have free publicity from non-paying users.
If appropriately implemented the freemium model can be a great way to grow a brand and a business fast.
Affiliate marketing business model
Let’s say you have a website with a large amount of traffic each month. Yet you don’t sell any product or service, which is yours. How do you make money? Well, thanks to affiliate marketing you don’t need either a product or a service, you have many from other companies. Thus, you’ll make money by simply featuring other product or services and getting a commission for that. Affiliate marketing done right can be a powerful source of income. Take, Pat Flynn from Smart Passive Income, which has been generating millions of dollars with affiliate marketing:
Subscription business model
Think those two scenarios. You have a series of online courses that you sell as a one-off. You’ve sold 100 courses in one month at $100, you’d made $10,000. Next month to have the same level of revenue generation you’ll have to sell other 100 courses. This means you either find more students or you produce new courses. Imagine the second scenario. You have a few courses and you make them available for a monthly subscription at $75. If you have 100 subscribers this means that each month you’ll have $7,500 without having to find new students.
Given this example, you can understand why the subscription business model is so powerful. Today companies like Netflix, Amazon (with Prime), LinkedIn and many others use subscription-based models to monetize part of their business. However, a subscription-based business model also needs a lot of resources.
Take Netflix. I’ll keep paying my subscription only if they will give me fresh content on a regular basis. That is why Netflix also produces series that are quite successful. Yet those series have massive production costs. In other words, to sustain a subscription-based business model you also need a lot of resources needed to create new content, have an awesome support or service that motives subscribers to keep paying. In fact, the curse of the subscription business model is churn!
Key takeaway
In this article, we analyzed ten successful business models used in the tech business world that can unlock value for the business in the long run. If we were to cover all the existing business models a book alone wouldn’t fit them all.
Does it mean that you can choose any of those business models alternatively? In reality, you can’t. Some business models are better suited for some businesses, not for others. For instance, if I pay a service I don’t want to see advertising. Thus, in a way a paid service and advertising are in most cases not compatible. Think of a paid version of Facebook. If you were paying that, would you still want to see ads? Of course, you wouldn’t.
Another critical aspect is the fact that often business modeling is about trial and error. In fact, not only the business model is usually a choice of the founders of a company but also a choice of the users. Take Wikipedia; if Wikipedia was going to show ads would you still trust it? Probably not. In fact, Wikipedia might only make sense as a free, non-profit organization. Was Wikimedia Foundation trying to cash on Wikipedia; chances are it would also lose the support of all its editors that have been working for free on its content, just because it was meaningful for them.
A third aspect that is critical for business modeling is about experimentation. Take Google. When Bring and Page started it, they didn’t think at all about the advertising business model. In fact, one of the reasons Google was so successful, even though it was one of the last movers in the search engine industry; was the fact that it offered more relevant results, with less spam and no advertising. In fact, back then in a way advertising was associated with spam. Yet when Google came out with Google AdWords and AdSense, those mechanisms allowed several stakeholders to make money online. In short, sometime a business model will be the result of a more sophisticated method of creating value for several players in an industry. Other times it might be as simple as just a one-off sale of a product.
Did you find your business model yet?
If you think we should cover other business models feel free to leave a comment below!
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