If you have a business or intend to establish one, you need a business model. If you do not, you run a grave risk. Your business model, whatever the size and type of your enterprise, is crucial to your success.
Definition of “Business Model”
A business model is a concept. This concept describes the way in which you should operate your business to generate revenue streams and ensure a profit. Thus, your business model clarifies what you are selling or manufacturing, how you are doing so, and what expenses you have to meet. In this regard, your business model is a cornerstone of your overall business plan.
The Types of Business Model
You must have a business model that matches your business circumstances. Consequently, your business model may well be unique; however, it will have elements in common with businesses similar to your own. These common elements make it possible to list the most popular business models in general terms.
- The franchise model. When you purchase a franchise, you buy a business model that is already in place. You cannot change this model because you agree to follow the franchise owner’s established practices.
- The freemium model. The freemium business model has developed rapidly among businesses that provide services on the Internet. In brief, the model works as follows: You initially offer free services to your customers; you then charge for related, but more sophisticated, services.
- The subscription model. If you are offering your customers a product or service that is difficult or even impossible to buy outright, you would probably use a subscription business model. Your customers pay regular subscriptions for the use of the product or service.
- The direct sales model. With this business model, you visit customers at work or home and sell products and services supplied to you by a third party. You then take a share of the revenue.
Revising Your Business Model
Once you decide on a business model, you need to keep an open mind. In other words, be prepared to make revisions. Obviously, it may be difficult to change a franchise model. But if you are working with another model, you may have to adjust it in the face of changing circumstances. When you next hear about the struggles or failures of companies, study their situations. Part of such companies’ difficulties is an inability to adapt their business models to changing environments.
Measuring Your Business Model’s Success
The first aspect of measuring your business model’s success is intuitive: Does the business model make sense? You need to ask yourself whether the model you are following is sensible within your type of business. One way of confirming that you are on the right track is to look at similar businesses to your own. For example, are they using the same business model? If not, find out why. The second aspect of measuring your business model’s success is your gross profit. The gross profit of your business is your total revenue minus the costs you have incurred for all the products and services sold. Naturally, you want the gross profit to be at a level you judge to be worthwhile.
Your business model represents part of the foundation of your business. This does not mean that you must invest hours of work into creating and refining it. You simply have to be clear about the type of model you are using.