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Strategic Planning: What is Your Business Model?

No matter what your business, you have a business model--the essential core of what you do and how you do it. A business model can be simple or very complex. A restaurant’s business model is to make money by cooking and serving food to hungry customers. An online business model can vary from advertising to selling products to creating a community, or can even be a combination of models.

Every industry has a different breakdown of business model types. That said, following are example business models in many industries:

  • Add-on model: The core offering is priced competitively, but numerous extras drive the final price. All airlines are an example of this model.

  • Advertising model: Although this model may seem outdated, the advertising model is still alive and well. Many Internet companies successfully deploy this model with a freemium model (see description later in this list). Examples are Twitter, Facebook, and Google.

  • Affiliate model: An affiliate is simply someone who helps sell a product in return for commission; for example, Amazon uses an affiliate model (and also employs the direct sales model).

  • Auction model: Auction models are where the price of the good isn’t fixed, each individual assesses the value of the good independently, and final value is determined via competitive bids. Examples include eBay, auction houses, and Priceline.

  • Bait and hook model: The bait and hook model generates disproportionate amounts of the revenue on components, refills, and additional contracts. Examples of this model are ink cartridges for printers and service contracts for cellphones.

  • Direct sales model: Of all the models, this one is the most straightforward as it’s simply the direct route to the market. Online services such as Amazon and Dell disrupted this model when they went directly to customers and around distributors, but this model, also known as the brick and mortar model, is still valid for many industries. Examples of the direct sales model are Zappos.com and many B2B businesses.

  • Distributor/retail model: Companies that buy and sell physical, financial, and intellectual assets use the distributor/retail model. Examples include Wal-Mart and Charles Schwab.

  • Franchise model: Opening a franchise is essentially buying a working business model in a particular industry. Franchise model examples include McDonald’s and Subway.

  • Freemium model: This model offers a scaled-down version of the product or service for free with the intent of moving the customer to the premium version. The freemium model is typically used in service-based businesses. Examples are software as a service (SaaS) or mobile phone apps.

  • Manufacturer: The manufacturer model is a standard business model where an organization creates and sells physical, financial, and intellectual assets. Toyota is an example of this model.

  • Pay-as-you-go model: With this model, actual usage is metered and customers pay on the basis of what they consume. An example of this model is pre-paid cards for cellphones.

  • Subscription model: With the subscription, or recurring revenue, model, the aim is to secure the customer on a long-term contract so they’re consuming your product or service well into the future. Newspapers have been struggling with transitioning from a model that’s mostly advertising to one that’s subscription-based. Examples include utility companies, publishers, and online applications.

Highly successfully businesses have shaken up their industries through disruptive business models and combined two of the models in the preceding list or leveraged one model into another industry. Think about how Netflix disrupted the movie rental industry by introducing a direct sales model instead of a traditional distributor/retail model. Consider your industry: Is it on the verge of being disrupted, or are you in the position to be the disruptor?

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