How to Identify Your Business Model - dummies

By Steven D. Peterson, Peter E. Jaret, Barbara Findlay Schenck

Your business model is as much a part of defining your business purpose and structure as your mission statement. All too often, people planning a business don’t spend enough time thinking about their bottom line.

A mission, a vision, values, and goals help you focus your business. Of course, the challenge of staying in business can also help keep you focused. If you can’t make a profit, after all, you don’t have a business –– at least for very long. (Nonprofits are an exception, but even they have to find funding sources.)

Identify your business model

To turn a great idea into a successful business, you need to define and develop a workable business model, or a method that your company uses to generate revenue, earn profits, and protect its position in the marketplace.

Hundreds of different business models exist. To begin to think about what kind of model is right for you, take a look at how many highly successful companies have modeled themselves:

  • Auction: Sales are conducted with bidders competing for a product or service. eBay revolutionized sales on the Internet using a form of online auction. Art auction houses make hundreds of millions in a single sale using this model. Now even individual artists have entered into the game, posting their artwork for sale on Internet sites with bidders competing online.

  • Bricks and clicks: This method combines a bricks-and-mortar company presence with online sales.

  • Bricks-and-mortar retail: Stores sell merchandise or services out of a storefront location.

  • Collective: Small businesses band together in a collective to leverage their resources. Examples include dairy and wine cooperatives.

  • Direct sales: This method, also known as Multi-level Marketing, or MLM, markets and sells directly to customers. The most famous and successful examples of direct sales companies include Avon, Amway, Herbalife, and Tupperware.

  • Franchise: A form of chain store in which franchisees operate outlets independently and are paid a fee. The parent company gets the profits. Supercuts, Subway, Anytime Fitness, 7-Eleven, and ServPro are franchises.

  • Freemium: These companies offer basic services or products for free, charging for premium versions of the same service or product. Many apps for tablets and smartphones offer “lite” versions for free and charge for the fully operational app with all its bells and whistles.

  • Low-cost: This model competes by offering the best price on a service or product. Big-box stores like K-Mart and Internet sites like Kayak follow this business model.

  • Online: All marketing and sales are done online. Amazon is the highest profile example, although a growing number of companies operate exclusively on the Internet.

  • Person-to-person: Transactions take place person-to-person. A subcontractor who gets his business by word of mouth thrives on this kind of business model. Internet sites like Craigslist and Etsy put sellers and buyers directly in contact with one another in a way that was never possible before the Internet came along.

  • Subscription: Customers pay a weekly, monthly, or yearly rate for a product or service. Magazine subscriptions are the most familiar example. Small farms have begun to sustain themselves by offering subscriptions that offer customers a weekly produce delivery.

In the real world, however business models aren’t always as straightforward as you may think. Many businesses may make money in unexpected ways, such as the following:

  • The local movie theater gets revenue from ticket sales, but that’s only the beginning. The theater also makes money by projecting billboard-style ads prior to the movie showings and from its concession stand, where it turns a tidy profit selling candy and buckets of popcorn. It also makes money from game arcades that expand the theater experience.

  • Large fitness-center chains make money on enrollment fees and monthly dues, but they also rake in cash by selling fitness-related supplements, exercise clothes, gym bags, and the services of personal trainers.

  • Some companies sell their products at a loss — making their money from the sales of related consumables. Gillette, for example, doesn’t mind selling razors at cost, knowing it will profit from the sale of razor cartridge refills.

  • Online businesses increasingly work to supplement sales revenue with revenue earned through programs such as Google AdSense, which allows information-rich websites with reasonable traffic counts to earn revenue by displaying ads on their web pages. Every time someone clicks on the ad, the website gets a little money.

    Businesses can also make money from their websites by offering affiliated products or premium services, such as expanded content available only with a subscription.

In this early planning stage, while you’re defining your business and describing its purpose, be as clear as possible about how you expect your business to profit. Don’t worry about giving your business model a name. Your job at this stage is to realistic about where your revenues will come from — for the sake of the owners, investors, customers, and employees.

Be creative in tracking down potential sources of revenue. There may be more than you suspect.

Align your vision with your business model

Your vision and values may seem very different from your bottom line business model. But all these components need to be in sync in order to keep your focus sharp and clear. If your business model diverges too far from your vision and values, everyone involved –– from your employees to your customers –– may begin to lose a clear sense of what the company is.

Look back at your values and vision statement and ask yourself three questions to make sure your vision and business model are on the same page.

  • Does your business model support and further the vision of the company?

  • Do the ways you intend to make money reflect your values as a company?

  • Do your values and vision suggest additional ways of reaching customers and boosting your bottom line?