How profitable will your small business be?
You’ll know by your business model. This is the approach you’ll take in generating revenue.
If your model is a good fit for your product and audience, it can result in steady or growing revenues. However, if it’s a mismatch, it could break your business.
This is why finding the right business model is crucial. In the following guide, you’ll learn about the most common models and how to find one that’s right for you. Hopefully, you’ll end up with a handful of options to consider, and eventually pick the one that can give your small business some profitability and sustainability,
Let’s get started.
What Is a Business Model?
Your business model is essentially the “form” of your business. It clearly defines how you’ll make money, how you’ll get customers, and how you’ll sustain your business. When you’re clear about your model, you'll have an idea whether an opportunity is profitable or not.
Before you go through some examples of what your model might look like, here are some things you should consider:
The types of products or services you’ll be selling. There are some products or services that won’t work well under a specific model. For example, if you’re planning on selling high end jewelry, it might be too costly to offer a cheap product for free, hoping that this will generate interest for customers to buy higher priced items.
Your main revenue streams. These could be through sales, memberships, advertisements, and other sources of income that'll be discussed later. List the types of revenue streams you’re considering for your business and keep those in mind as you search for a model that fits.
Your vendors and providers. Your model might also depend on where you source your products, labor, materials, and the other resources that make your business work. If your vendors allow for wholesale discount rates, this will allow you to give away or reduce the price on your products. If they don’t you need to look for a model that doesn’t depend on discounts and freebies.
How you’ll distribute your product or service. Your intended distribution method will also affect your model. For example, if you plan to sell digital-only products such as eBooks or games, then you wouldn’t need to use the models used exclusively for consultants or agencies.
Once you’ve listed these things down, go through the list of business models below and see which ones fit.
Business Model Examples: 15 Options to Choose From
The following list of models can give you a head start in figuring out which model to follow for your business. Note that these aren’t the only possible models out there, but they're among the most common. Also, feel free to try combining more than one if you think that’s right for your business. Here's a list of business models:
1. Direct Sales
Let’s start with one of the oldest and simplest models: Direct sales. In this model, you get to sell your product or service directly to the customer, but outside of a store. This means that as the sale is taking place, your customer might be at home, at work, or in any other place that isn’t a retail area.
The main advantage of direct sales is that you can interact one-on-one with the customer. This means that you can control and coordinate the entire sales process. You also get to develop strong relationships with your customers, since you sell to them directly. However, since sales occur on a per customer basis it’s not as scalable as other models that sell in bulk or through retail stores.
Many online sales fall under direct sales. This is because buying from a website is often a direct transaction between a business and a customer, without a middleman or intermediary. One business model example is that of eBook sales. Nathan Barry, a software designer, has sold over hundreds of thousands of dollars' worth of his own eBooks using this model.
Barry was also able to use direct sales in selling ConvertKit, his email marketing software. In fact, Barry recommends direct sales to new startup founders to increase their chances of success. In a question and answer forum, he said
“Get out and sell your first 50 customers 1-on-1. What you'll learn from that is pretty incredible! [D]irect sales is the fastest way to get traction.”
2. Razor and Blade
The razor and blade model works by selling one main item, and a paired consumable item with higher margins—just like razors and disposable blades. A company can sell an affordable razor, and the consumer would need to regularly replenish that razor with blades. Other examples of this model include printers and ink, and video consoles and games.
Keurig coffee makers are also a good example of the razor and blade model. They offer their single-serve coffee makers, but they also offer “K-Cup Pods” of coffee, cocoa, or tea. Although you buy their main product once, you also buy the pods to use with their main product.
The main benefit of this model is that you get recurring sales based on the sale of your main item. The problem of this model, however, is the competition. If your competitors undercut you on the pricing of your main product or on the consumables, then your customers might go to them instead.
Basically, a subscription business is when customers pay a recurring fee to access a service. Some common subscription model businesses are magazines, newspapers, streaming services, and software as a service (SaaS).
A key advantage of a subscription business is that it gives your business a level of predictability. By charging customers a specific amount in regular intervals (monthly, quarterly, etc.) it can be simpler to guess how much you’ll make in the next billing cycle just based on how many existing customers you have.
But for a subscription business to work, you need to make sure that you consistently produce value. If your subscription business is to provide SaaS, you can do this by maintaining the quality of your software and keeping it updated. If you provide subscriptions to an online magazine, then you should be regularly releasing content that your customers will find compelling.
Birchbox, a subscription service for skincare products, provides new grooming products each month to their customers. To ensure that their customers stay subscribed, Birchbox lets a customer set personal preferences based on the types of products they want to receive, and they vary the products they send out each month.
The word freemium comes from the words “free” and “premium.” With freemium, you give your target customers a free limited version of your product, but charge them if they want to upgrade to a version with more features. Many SaaS, games, and other digital services run with a freemium model.
For example, email marketing software Mailchimp is free for users who have fewer than 2,000 subscribers. If your organization requires more than that or if you need some of Mailchimp’s more advanced features, you need to start paying a monthly fee.
Freemium businesses are able to attract a lot of initial leads because of the enticing free offer. Still, this comes with a few disadvantages. It'll be challenging to offer people a “taste test” of your product that'll allow them to enjoy its benefits, but at the same time encourage them to upgrade to the paid product. Also, you need to be sure that your free users won't use up majority of the resources and manpower required to run your business—that should go to your paying users if you want to be profitable.
Consulting is basically providing your knowledge and skills to others for a fee. Typically the word “consulting” refers to management consultants or marketing consultants, but consulting can apply to almost any field or industry. For example, life coaches, business coaches, tutors, doctors and any individual who provides expert-level knowledge to a person or organization is a consultant.
One challenge when it comes to consulting is that you need proof of your expertise before you can acquire a steady stream of clients. Consulting can be a difficult model to pursue if you're just starting out in a field. It's more profitable to pursue consulting when you already have experience and contacts in an industry.
If you want to learn more about consulting, review the following guides:
- BusinessHow to Deliver a Kick-Ass Consulting ServiceJoel
- EntrepreneurshipHow to Start a Consulting Business - With High EarningsCeline (CX) Roque
An agency model is similar to consulting in the sense that an agency provides expert-level help to a customer or client. The difference lies in the number of service providers. For a consultant, the help is provided by a single person, while an agency is a group of people. Also, agency work tends to also include more skills and concrete output instead of just knowledge and advice. Because of the size of an agency, it usually means that a diverse skill set will be available to finish a project.
Running an agency can be challenging, especially if you lack highly skilled workers who can provide clients with the services they need. Like a consultancy, you also need a steady stream of clients, which becomes easier the more you build a track record in your field. You also need to price your projects high enough to be able to pay your team as well as make a profit.
For more information on what it takes to run an agency, check out the following resources:
- AgencyHow to Keep Your Creative Agency Growing in the Long RunThursday Bram
- WordPress Themes25 Best Agency WordPress Themes: For Creative Site Designs in 2021Brenda Barron
7. Educational Model
If you've any skills you know you can teach, then an educational model might be right for you. Under this model, you'll charge fees in exchange for transferring your knowledge and skills to your students or clients. You can do this through in-person classes, online courses, or one-and-one teaching.
Entrepreneur Ramit Sethi has built his business by selling courses to help readers reach their financial and business goals. An online educational model like this is highly scalable, as long as there's a high enough demand for what you're teaching.
For the educational model to work, you need to be an expert or have access to experts to be able to teach the material. Second, there must be a demand for the skills you want to teach. Visit this guide to see what some educational sites look like and find website templates that might work for you.
In a peer-to-peer model, you provide a platform that's valuable to two customers that are on the opposite sides of a transaction and operating as a middleman.
Upwork employs a peer-to-peer model, serving as a venue for organizations to find freelancers for hire, and for freelancers to find clients. Within their platform is also a project management interface, that allows clients to delegate work and communicate with freelancers. Freelancers can also take skill tests and publish their results to prove competency and make their profiles more attractive to clients.
For this model to work, you need to provide value for both the buyers and the sellers. You also need to create marketing that attracts these two audiences with very different needs.
In leasing, a seller sells a product to a lessor, then the lessor allows another person, the lessee, to use the product for a time in exchange for a fee. Because the end user (the lessee) is renting the product from the lessor, this model is typically used for expensive items such as vehicles and high-end equipment.
Since you'll be leasing out expensive items, to be profitable under this model you need a lot of startup capital to purchase the items. More importantly, since other people will be using the equipment, these items you buy will rapidly depreciate in value. This means you need to be able to lease them out at a fee that keeps that depreciation in mind. You might have difficulty reselling or re-leasing a used item that's suffered some damage.
Leasing requires a bit more knowledge about the industry you'll be entering, so it might help to look through the information available at the Equipment Leasing and Finance Association and the International Finance and Leasing Association.
10. Selling Attention
When selling attention, you're essentially selling ads based on how many or how well users engage with your product. This could be a magazine, social network, blog, or any other property that gets users to pay attention to its content. Influencers, those with social media accounts with large followers, usually make money through this model since brands pay them a fee for mentioning or recommending their products. A report from Vox found that some influencers can make as much as $100,000 per post or video mentioning a brand.
Another business model example is bloggers. Many bloggers build a large following and make money by hosting ads on their blog. For example, the blog Lifewire publishes a lot of how-to content. Their blog posts contain ads in the header, footer, and sidebar of the article, earning them a bit of income whenever users click on them.
For selling attention to work, you need to build a large following. This can be difficult at first, especially since it requires building a strong, memorable brand.
11. Affiliate marketing
Affiliate marketing is when you sell products and services provided by other businesses and make some money on the referral. For example, blogger Jeff Proctor’s main income stream is affiliate marketing, making over $100,000 in December 2018. He mentions affiliate products in his blog posts and website, and these mentions lead readers to click on the affiliate links and some even buy the products. When this happens, Proctor receives a commission.
Affiliate marketing can succeed if you've got access to a big audience to sell the products to. This could be through a platform you own such as a blog or a popular social media account. You can also purchase pay-per-click ads, essentially buying search engine or social media traffic to redirect to your affiliate website or link. Both these approaches come with some risk. For example, growing an audience large enough to make a stable affiliate income can take some time. Buying ads for your affiliate links, on the other hand, requires some serious calculation for you to determine if your ad spend will be lower than the income you earn from affiliate sales.
Like the name suggests, a marketplace is when you set up a venue for people to buy and sell products and services. They usually profit from commissions on sales made on their platform. For example, online crafts marketplace Etsy receives fees for sellers’ product listings and sales. It may sound a lot like the peer-to-peer model mentioned above, but in a marketplace, the business operating in the middle tries to be as invisible as possible, only operating as a venue for the transaction rather than providing additional services.
The main benefit to having a marketplace is that once it’s set up, you’ll be able to earn revenue from all the transactions made on your site. You don’t have to actually create products or services, just provide the platform. Still, for your commissions to scale, you need to market your platform to get name recognition from both buyers and sellers.
For the pay-as-you-go model, customers don’t pay a flat fee. Instead, they get charged incrementally based on their usage of the product or service. It’s likely that many of your utilities are charged this way, such as your electric bill. But your business doesn’t have to be a large utility to use this model.
Many online games tend to go with the pay-as-you-go model to entice players to keep following through on the game. They start with a free level or chapter and, as users progress through the game, they need to pay for additional levels or items. Pirate101 is an example of a game like this, where players start with a free level and need to pay for additional levels to complete the game.
Pay-as-you-go can work really well for businesses where customers are unsure of their exact needs, have a low budget, or who will have inconsistent use of your products and services. This will allow your business to reach markets that typically won’t buy your product. The pay-as-you-go model can entice them to try a low-commitment paid version of your product, and they pay more as they use it more. The downside is that relying solely on this model can give you unpredictable revenues and that there’s less of a commitment from the consumer, unlike when they purchase a plan with set pricing.
14. Buy One, Give One
A “Buy one, give one” model adds a non-profit element to your business. Basically, when someone buys a unit of your product, another unit is given away for charity.
Modo, an eyewear company, has a “Buy a frame, help a child see” program. For every frame a customer buys, children in need receive vision tests and free prescription eyewear.
The charitable angle of this model gives your brand goodwill in the eyes of consumers, as well as branding opportunities. Your customers and employees will connect with your business on a deeper level, because they feel like they’re contributing to a greater cause, not just fulfilling transactions.
There will be some challenges you need to overcome to make this model work. One of these challenges is sustainability. Businesses need to make sure that their prices are reasonable enough for consumers, and yet they can still afford to give away their products for charity.
We’re all familiar with franchising—most of the restaurants and chain stores we frequent are a result of this model. What franchises do is they create the formula for a profitable business and sell that to other entrepreneurs. It’s like a turnkey business opportunity that you pay an initial investment amount for and a recurring franchising fee.
For example, McDonald’s is one of the most famous franchise businesses out there. Not all McDonald’s stores are owned and run by the corporation, some of them are franchises owned by individuals or other companies. Franchise owners get access to McDonald’s proven business processes, products, and suppliers, and in exchange they pay franchising fees. If this sounds like an attractive model for you, the International Franchise Association has some guides to help you learn more.
The advantage of this model is that if you’re a franchise owner, you don’t need to start your brand from scratch, you've got an existing known brand to start from. However, franchising fees and initial investments tend to be very expensive. This is for entrepreneurs who have a lot of startup capital and don’t want to start a brand from scratch.
Your Business Model: Your Path to Profitability
The above business model examples illustrate that there’s more than one way to make a profit. If one of the above types of business models seems like a good fit, find out how it can be applied to your business. While all business models come with some kind of risk, as long as you’re aware of the risks beforehand and can mitigate them, your chosen model can sustain your business for the rest of its life.
Editorial Note: This content was originally published in 2019. We're sharing it again because our editors have determined that this information is still accurate and relevant.
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