BUSINESS MODELS

What is a business model?

A business model is an outline of how a company plans to make money

with its product and customer base in a specific market. At its core, a
business model explains four things:
 What product or service a company will sell
 How it intends to market that product or service
 What kind of expenses it will face
 How it expects to turn a profit
Because there are so many types of businesses out there, business models are
constantly changing—and although we'll discuss some of the most common
types below—there is no one-size-fits-all model that can be applied to every
business.

Business model example

So, with this definition in mind, you might now be wondering: What is a
business model example?
One popular example of a business model, as we'll review shortly, is the
subscription model—in which businesses charge a subscription fee (monthly,
annually, etc.) for customers to access a service. Of course, this type of
business model can be adjusted and customized for each individual business,
but using Netflix as an example, let's break it down based on the four points
we outlined earlier:
 What kind of product or service a company will sell: Netflix sells an online
streaming service.
 How it intends to market that product or service: Netflix uses a multi-
channel marketing strategy and markets its service through social media,
email marketing, advertising, and even simple word-of-mouth marketing.
 What kind of expenses it will face: As a Fortune 500 company, Netflix's
expenses are extensive, but perhaps notably, their expenses will include the
 costs to produce or acquire the content on their platform, as well as the
technology and staff needed to maintain their service.
 How it expects to turn a profit: Even though Netflix is such a large
enterprise, (and has a few different ways of making money) when it comes
down to it, they expect to earn a profit from their subscription sales.
From this example, you can see how the first three points contribute and circle
back to Netflix's business model as a subscription service.
Ultimately, then, it’s imperative to understand how your business will make
money—and enough money to remain profitable after startup and additional
costs are factored into the equation—this is your business model.

COMPONENTS OF BUSINESS MODELS

1. Value proposition: A feature that makes your product attractive to your

customers.
2. Target market: A specific group of consumers who would be interested
in your product.
3. Competitive advantage: A unique feature of your product or service
that can’t easily be copied by competitors.
4. Cost structure: A list of the fixed and variable expenses your business
requires to function, and how they affect pricing.
5. Key metrics: The ways your company measures success.
6. Resources: The physical, financial, and intellectual assets of your
company.
7. Problem and solution: Your target customers’ pain points, and how
your company intends to meet them.
8. Revenue model: A framework that identifies viable income sources to
pursue.
9. Revenue streams: The multiple ways your company can generate
income.
10. Profit margin: The amount your revenue exceeds your business
costs.
 TYPES OF BUSINESS MODELS

1. Subscription model
A subscription business model can be applied to both traditional brick-
and-mortar businesses and online businesses alike. Essentially, as we
explained above in reference to Netflix, the customer pays a recurring
payment on a monthly basis (or another specified timeframe) for access to a
service or product. A company may directly ship you their product in the mail,
or you may pay a fee to use an app.

2. Bundling model
Exactly like it sounds, the bundling business model involves companies
selling two or more products together as a single unit, often for a lower price
than they would charge selling the products separately.
This type of business model allows companies to generate a greater volume of
sales and perhaps market products or services that are more difficult to sell.
However, profit margins often shrink since businesses sell the products for
less.

3. Freemium model
The freemium business model has gained popularity with the prevalence
of online and Software-as-a-Service (SaaS) businesses.
The basic framework goes like this: a software company hosts and provides a
proprietary tool for their users to freely access, such as an app or tool suite.
However, the company withholds or limits the use of certain key features that,
over time, their users will likely want to use more regularly. To gain access to
those key features, users must pay for a subscription.
You can see how Spotify follows this model—they give their users free and
open access to their entire database of music while sprinkling in ads between
songs. At some point, many users opt to pay a recurring monthly fee for the
premium service so they can stream music without interruption.
4. Razor blades model 
To understand the razor blades model, you can simply look to your local
drugstore. You’ll notice that replacement razor blades cost more than razors
themselves.
Companies offer a cheaper razor with the understanding that you’ll continue
to purchase more expensive accessories—in this case, razor blades—in the
future. For this reason, this model is referred to as the "razor blades model."
In addition to the traditional razor blades model, you'll also see companies use
the reverse razor blades model—in which they offer customers a high-margin
product and then promote the sales of lower-margin products that
accompany that initial product.
A classic example of this model is Apple iPhones and Macs—you purchase the
high-margin item, the phone or computer, and then Apple pushes additional
products, tools, and services that accompany that item.

5. Product to service model

Imagine that you are the owner of a company that makes scooters. Let’s
say you need two pieces of metal welded together. You might ask another
company to weld the pieces of metal together instead of purchasing a welding
machine yourself. In essence, this example shows how the product to service
business model works.
Companies that follow this type of business model allow customers to
purchase a result rather than the equipment that delivers that result.

6. Leasing model 
Under a leasing business model, a company buys a product from a
seller. That company then allows another company to use the product they
purchased for a periodic fee. Leasing agreements work best with big-ticket
items like manufacturing and medical equipment.

7. Crowdsourcing model 
Crowdsourcing involves receiving opinions, information, or work from
many different people using the internet or social media. These types of
business models allow companies to tap into a vast network of talent without
having to hire in-house employees.
 Some traffic apps, for example, encourage drivers to report accidents in
real-time for the benefit of other app users.
8. One-for-one model 
As the name suggests, the one-for-one business model means that a
company donates one item to a charitable cause for every item that is
purchased. This model appeals to the charitable nature and social
consciousness of customers to encourage them to purchase a product or
service, while also allowing both the business and the customer to actually
engage in philanthropic efforts.

9. Franchise model 
Of all the different types of business models, the franchise model is
perhaps the one that people are most familiar with—after all, we each see and
likely visit franchise businesses often in our daily lives.
In short, a franchise works like this: A franchise is an established business
blueprint that is simply purchased and reproduced by the buyer, the
franchisee. The franchiser, or original owner, works with the franchisee to help
them with financing, marketing, and other business operations to ensure the
business functions as it should. In return, the franchisee pays the franchiser a
percentage of the profits.

10. Distribution model 

A company operating as a distributor is responsible for taking
manufactured goods to the market.
Hershey’s, for example, manufactures and packages their chocolate, but
distributors are the agents that transfer and sell the goods from the factory to
a retailer. To make a profit, distributors buy the product in bulk and sell it to
retailers at a higher price.

11. Manufacturer model 

One of the most traditional business models, the manufacturer model
refers to when a manufacturer converts raw materials into a product.
Companies like Dell Computers or Hewlett-Packard, both of which assemble
computers with parts manufactured by other companies, would still be
considered manufacturers.
12. Retailer model 
Finally, the last business model on our list is the retailer model.
A retailer is the last link in the supply chain. These businesses purchase goods
from distributors and then sell them to customers for a price that will both
cover expenses and turn a profit. Retailers may specialize in a particular niche,
such as kitchenware, or carry a range of products.
 MARKETING STRATEGIES

A marketing strategy refers to a business's overall game plan for

reaching prospective consumers and turning them into customers of their
products or services. A marketing strategy contains the company's value
proposition, key brand messaging, data on target customer demographics,
and other high-level elements.

IMPORTANCE OF MARKETING STRATEGIES

 
1. You Know Who Your Customers Are
We can’t be all things to all people. From a marketing and sales
perspective, there has to be a certain type of person or business that is the
most likely to become a long-term customer. When you have someone
specific in mind, you can take their fears, wants, needs, and desires and show
them how your product or service will alleviate their fears, meet their needs,
and solve their problems. Marketing strategy defines your target
customer/market so that you know exactly who needs your business.
 
2. You Know What Your Business is and Why It Benefits Others
A major component of marketing strategy is determining who benefits
from your product/service, how they benefit, and reasons to believe that
benefit. Your business is better than your competitors’ businesses in some way
and it uniquely benefits the people you serve. Defining these items
strengthens your reason for being in business and enables you to stand out
among a sea of competitors.
 
3. You Communicate Your Value In a Consistent Way
Marketing strategy is important because it defines how you
communicate your value to others. You can give your marketing strategy
document to anyone: colleagues, marketing agencies, contractors,
salespeople, etc. and they will know exactly who you are, what you do, and
why you do it. This gives you a consistent face in the marketplace and the
confidence that your business will be accurately represented in all areas of
sales and marketing.
 
4. You Have a Guide for Your Marketing Plan and Budget
A marketing plan is how you promote your business throughout the
year, and your marketing strategy informs your marketing plan. Your strategy
defines what marketing channels you’ll use (print, social media, commercials,
digital ads, direct mail, etc.) and your plan defines what activities you will do
throughout the year within each channel and the timeline for doing those
activities. Your marketing strategy ensures that the way you promote your
company aligns with your overall goals, and it enables you to achieve the
greatest value from your marketing.
 
5. You Know What Success Looks Like
Paraphrasing Peter Drucker, you can’t manage what you don’t measure.
Marketing strategy will help you define what success looks like for your
company and how you can measure that success. The goals you set within
your marketing strategy will inform the metrics you use to measure the
success of the marketing activities in your marketing plan. You’ll know which
activities were successful for you and which need tweaking for the future.
 
6. You Know How You Stack Up Against the Competition
When you have a marketing strategy in place, you know exactly what
you do, who you benefit, how you go to market, and how you can measure
success. You also know your competitive landscape and how you can best
compete against similar businesses. It gives you a leg-up in your industry,
especially if your competitors haven’t documented their marketing strategy.
You have a clear vision of who your company is, its strengths, its weaknesses,
and everything in between. You know where you win and how to promote
your company to win.
 
7. You Exude Professionalism
When you have a clear understanding of who you are and know exactly
how to talk about your business, you exude confidence and professionalism.
When you are certain about who your customer is and how you will benefit
that customer, you are able to focus your time, energy, and money reaching
that customer. Your business will seem more professional because it is more
professional with a marketing strategy in place.
 
With marketing strategy, every activity you do, every action you take
leads towards helping your customers solve their problems. Marketing
strategy builds brand loyalty and customers for life while giving you a clear
path to follow and a concise way of explaining your value to others.

4 TYPES OF MARKETING STRATEGIES

1. Cause Marketing

Cause marketing, also known as cause-related marketing, links a company and

its products and services to a social cause or issue.

2. Relationship Marketing

Relationship marketing focuses on customer retention and satisfaction in

order to enhance your relationships with existing customers to increase
loyalty.

3. Scarcity Marketing

Scarcity marketing creates a perception of a shortage which aims to entice

customers to purchase out of fear that they may not be able to get it in the
future.

4. Undercover Marketing

Undercover marketing, also known as stealth marketing, involves marketing to

consumers in a way that they do not realize they are being marketed to.
6 COMPONENTS NEEDED TO MAKE MARKETING PLAN EFFECTIVE

1. Set your company apart from your competitors.

Define your strengths and opportunities against your competitors. How

do your products and services stand out? Are your competitors’ brand images
stronger than yours? In what ways can you increase your brand value? Are
there multiple channels leading to your products and services?

2. Set clear goals and objectives.

Do you have the resources for success? An effective plan means

knowing how to measure success and target growth. Are you prepared to hire
new employees, ramp up production, fine-tune customer service, or provide
better distribution methods?

3. Use market segmentation to find your target audience.

Your target customers are those who will invest their time and money
into your products and services. Your marketing plan will be much more
efficient when you trim the fat. Determine who your products and services will
serve based on lifestyle, social class, activities, geographic region, hobbies,
values, attitudes, and personality traits.

4. Develop an appropriate, multi-channel marketing strategy.

Connecting with your customers has never been more complicated.

Today’s customers value convenience, reliability, and choice—and they want
to be able to connect to your brand from anywhere. Digital marketing
strategies include emails, websites, social media, SMS messaging, apps, SEO
content, and more to engage your customers across multiple touchpoints.

5. Plan your budget.

A well-organized plan will draw investors. A wise strategy includes

planning for success as well as setbacks.
6. Measure and collect data.

From social media followers to open rates on emails, the details can help

guide you to a more effective campaign. Setting up weekly, monthly, and
quarterly goals can help you keep track of important landmarks along the way.
Consider using an agile mindset and methodology that helps you measure
your marketing effectiveness through team-oriented initiatives and innovative
approaches. Use data to your advantage and change your company culture at
the same time.