The Most Common Types of Business Models and Why Entrepreneurs Need One

usinesses big and small need a plan for generating revenue and making a profit, and a business model is a vital tool that every business should have in its toolbox. A business model walks through the products or services you plan to offer and how you plan to market and sell them. 

While there are seemingly endless types of business models used today by small businesses and corporations alike, some models appear more frequently than others. Many companies employ existing business models, while others invent their own. Here's a look at different types of business models and why every business owner should consider using one. 

What is a Business Model? 

A business model outlines how a company plans to generate money through its products or services to a specific customer base or market. It's a vital component of any successful business. When designing a business model, entrepreneurs should address the products and services they will offer, any production expenses, all revenue streams, a marketing plan to draw in consumers, and finally, a sales plan for profitability. 

What Comprises a Business Model? 

A business model should address three primary components: production, sales, and payment. 

1. Production: Production involves everything it takes to design, create, and produce a product. It includes labor, manufacturing, raw materials, and anything else that could fall under the umbrella. 
2. Sales: The sales component of a business model includes every aspect of the sales process for your company, from how you market it to how you process the sale. Advertising and marketing are crucial elements to the sales component of a business model. Don't forget about product distribution and delivery. 
3. Payment: Lastly, your business model should also address payment for products and services. This component includes payment methods and timing. It also includes how you manage your pricing strategy. 

Business plans that include these three components have a better chance of success than those that don't. 

Why Utilizing a Business Model is Important

A solid business model is also a key component of your business plan, and it’s imperative for any small business these days. There are several reasons why you should consider employing a business model in your overall business plan. 

Using a suitable business model helps define how they will generate revenue. It can also help you to create a long-term growth plan. If your company hires employees or contractors, having a business model gives them a better understanding of how you operate and how your business achieves its goals. It also gives them an idea of where they fit into the equation. 

A business model is also a tool entrepreneurs use when working with investors or lenders. You'll be better prepared to communicate company goals and how you'll achieve them, your plan for profitability, and answer any questions they may pose. 

Types Of Business Models

As technology advances, it opens the door for more business model development. Below is a list of some of the most popular business models used today. Remember that this is not an exhaustive list but can help you determine the model that best fits your business needs. 

Affiliate

The affiliate business model uses affiliate links embedded in online content to generate revenue. Review websites like Nerdwallet and The Wirecutter use the affiliate business model. As consumers read product and service reviews, they can click on the embedded links to buy those products. Amazon and other affiliate sites pay businesses and online entrepreneurs a small commission for each referral sale. 

Subscription

Subscription services have become increasingly more popular over the past decade. Consumers pay a subscription fee for access to a service or product in a subscription business model, typically monthly or annually. 

The concept isn't new. If you've ever had a magazine or newspaper subscription, it's the same concept, except online services and subscription boxes have taken over the space. Companies that utilize the subscription model include Netflix, Hulu, Bark Box, and Hello Fresh. 

Marketplace

The marketplace business model is another example of a model that's adapted over time. Marketplaces give individuals a home base to list and sell items. They are third-party websites and services that act as middlemen between buyers and sellers, providing additional tools and services to protect both parties. 

Examples of companies that use the marketplace model include eBay, Airbnb, Etsy, Craigslist, StockX, and Poshmark. 

Brokerage

The brokerage business model is similar to the marketplace model in that they both connect buyers and sellers. Brokerage businesses tend to deal in higher dollar transactions, though. Real estate agencies, like ReMax, are a type of brokerage business model and earn money by charging fees to the buyer, seller, or both parties. Other examples include investment banks and firms, e-commerce platforms, and even the stock exchange. 

Freemium

Businesses that use the freemium business model give away part of their product or service to consumers for free. Then, they offer paid premium features or services, although it’s important to note that purchasing premium features isn't an eventual requirement to be a customer. Freemium businesses may offer free trials of premium services, but users can still access the free services whether they choose to upgrade.

The freemium model is popular among SaaS businesses like Microsoft, Adobe, LinkedIn, MailChimp, Canva, Slack, and Zoom. 

Franchise

The franchise business model has been around forever, most recognizable today in the restaurant industry. Companies like McDonald's have seen astronomical growth utilizing this business model. In a franchise model, entrepreneurs pay a company to access the company's trademark, branding, and intellectual property to operate an individual company branch. The franchise typically provides training and support to help franchisees get up and running. Franchisees usually pay a royalty fee and possibly other fees to open their franchise. 

Examples outside the restaurant industry include Allstate, State Farm, Marriott International, Century 21, and Ace Hardware. 

Advertising

The advertising business model is a content-based model that generates revenue through advertisements for readers or viewers. Readers or viewers may pay for content access, but often it's provided for free. Advertisers pay to place ads within the content. Examples include YouTube and The New York Times. 

Direct-to-Consumer (Disintermediation)

The Direct-to-consumer business model is precisely how it sounds. Instead of relying on an intermediary, like a retail store or online marketplace, to sell products, businesses sell to consumers directly. 

In many cases, direct-to-consumer companies still sell products through retailers but offer access to lower prices or exclusive features to consumers who engage in direct sales. Direct-to-consumer businesses include Apple, Dell, Dollar Shave Club, Warby Parker, and Casper.  

Crowdsourcing

The crowdsourcing business model relies on users and consumers to form ideas, solve problems, and generate content, goods, or services. This model allows companies to utilize a larger audience to create ideas or prove concepts instead of relying only on paid employees. Some crowdsourcing sites allow users to submit ideas or products in exchange for a portion of the revenue generated if it ends up sold. Crowdsourcing business model examples include Wikipedia, Waze, Kickstarter, Patreon, and Threadless. 

Razorblade 

Gillette first popularized the razorblade business model. With this model, companies provide a product (in Gillette's case, a razor) at a discount or loss to generate revenue through companion consumable goods (replacement razor blades). 

Examples of the razorblade business model include Proctor and Gamble, Keurig, Microsoft, Nintendo, and HP. 

Brick-and-Mortar

Brick-and-mortar businesses utilize physical storefronts where they sell goods and services. These businesses receive products from distributors and then sell them to consumers. Many of these businesses offer online storefronts now but still use physical store locations as part of their overall business strategy. 

Examples of brick-and-mortar businesses include Best Buy, Dick's Sporting Goods, Home Depot, Target, and Trader Joe's. 

Do You Need to Invent a New Business Model? 

In general, you don’t need to create a new business model, even as a startup – there's no need to reinvent the wheel. Using an existing business model and tweaking it for your needs is usually the way to go. 

It’s quite common to see competing companies with similar business models. While they may target slightly different customer bases or use other marketing tactics, they utilize the same basic business model underneath. 

The Takeaway

To position your business for success, think about what type of business model makes the most sense for your company. Focus on the basic structure of your business, starting with the production, sales, and purchase components mentioned above. Then, build out a business model that will help you define your company strategy and become an integral part of your overall business plan.