Understanding the different business models
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Processes, strategies, methodologies… There are many elements that need to be planned in a company for it to succeed and not just remain an idea that got lost along the way. Among all these, today we want to highlight one of great value: the business model.
This instrument is what you will use to define how you will generate income with your company and how you will be profitable. According to Failory’s 34% of startups fail by not achieving Product-Market fit, a situation that can be solved by defining a solid business model. We tell you how to do it.
What is a business model?
A business model is the formula each company uses to ensure success in the market. It will help you add value to what you offer, better understand your customers and work more profitably. But a business model not only defines how you will earn money, but also answers questions like:
- The value proposition you offer
- Who your customers are
- Defines the revenue model
- Establishes how you relate to customers
- Identifies the key resources to launch your model
- Calculates the costs associated with the operation of your activity
- Defines the most appropriate and effective distribution channel
On the other hand, before looking at the different types that exist, it is important to be clear that is not the same as a business plan. Although both are closely related, they have different functions:
| Business model | Business plan | |
| Definition | Detailed explanation of how you will generate value and how you will deliver it to your customer. | Document that gathers everything about a business opportunity and elaborates a forecast of economic and human resources to achieve the objectives. |
| Focus | Define cómo se venderán los productos o servicios. Defines how the products or services will be sold. | Specifies step-by-step how business goals will be achieved, identifying methodologies and ways of working. |
| Range | The formula to generate incomes and being profitable. | A comprehensive document that includes the business model, along with market analysis, marketing strategies, financial projections, etc. |
| Conclusion | It is a component within the business plan. | It contains the business model as part of its structure. |
Types of business model
Now, let's explore the different types of business models that exist. Here are some of the most commonly used:
- Manufacturer. A manufacturer converts raw materials into finished products, which can be sold directly to customers or to an intermediary who then sells them to the public. Companies that sell products to other businesses wholesale use the manufacturing business model. Clear examples of this are car manufacturers.
- Franchise. An already established company grants the rights to its business model to expand. This means that much of the work, such as brand recognition and processes, is already done for you. McDonald's is an example of this type of model.
- Long tail. The goal is to sell a small quantity of many products, attracting small niche customer groups who normally don't find what they are looking for in the mass market. Amazon is an example.
- Bait and hook. A product (the bait) is offered at a very low price to incentivize sales, with the aim of retaining the customer through recurring purchases of functionalities, accessories, or spare parts for that product or service, thereby generating periodic income. A classic example of this is razors as the bait and blades as the hook.
- Freemium. Popular among companies offering services, in this model, customers can access the basic features of a service for free, and if they want to access more advanced functions, they will have to pay a fee. Examples of this are Spotify or Canva.
- Subscription. A business model on the rise among companies. It consists of charging customers a recurring fee so they can continue to use their services or products. For example, Netflix or Adobe.
- Peer to Peer (P2P). Through a platform, users exchange products, services, or information with each other. Typically, companies operating with this business model generate income through the monetization of transactions that occur thanks to their platform, which acts as an intermediary or facilitator. An example of this is Airbnb, which generates income through a commission to the host and a service fee to the guest.
- wo-sided or multi-sided. This model offers something of value to two or more distinct but interdependent customer groups, facilitating interaction between them. In these models, one group of customers directly depends on the number and participation of the other. For example, companies that manufacture video game consoles that connect the general public with video game developers.
- Ecommerce. Very popular in recent years, it is the business model for many companies and consists of selling through websites, applications, or social media. Shopify is a widely used platform for developing this model.
- Software as a Service (SaaS). This allows users to connect to an application through the cloud. This model is based on offering a software solution acquired from a service provider through a pay-per-use model, meaning it allows companies to pay for applications as if it were a service, instead of buying a permanent license.
Ultimately, understanding and correctly defining your company's business model is key to building a solid and sustainable foundation. Do you already know which one suits you best?
