8 Popular Types of Business Models: How Companies Make Money from Building Products.
Building a product that users would love to use is one aspect of product management, and another aspect is growing the business by ensuring stakeholders achieve the goal of profit generation. The best way to do this is to consider sustainable ways to get consumers to pay for the product/service the company offers — which is where business models come in.
What is a business model?
According to Indeed, a business model outlines how a company plans to increase its revenue or essentially make a profit with its products, services, and customer base.
I believe that before a business model is determined, the product/service being offered must be;
- Valuable.
- Solve the needs of the target users.
- Easily distributed.
- Must have a strong positioning in the market.
A business model is not just a theoretical concept; it’s a practical tool in product management. It helps companies put their strategies in check, generate revenue, and track business growth, empowering the team to steer the business in the right direction.
8 Popular Types of Business Models
Below are eight popular types of business models that every product person should know. Understanding these models is key to business success.
1. Subscription model
This is a common model used by service businesses, media outlets, and content-based platforms. It involves charging users fees as they use the product/service. It can be monthly, bi-annually, or annually. Products like Netflix, DSTV, and Spotify thrive from this can of model. Before considering this model, ensure the product/service is ready to provide users with a great experience and continuous value.
2. Advertising model
With this model, the product or service is often converted to a platform that acts as a digital billboard where advertisers pay to display their offerings to users. It is a common model used on social media platforms like Facebook, Instagram, and Twitter (X).
3. Freemium model
The freemium model combines both free and paid services in a product. Users get to access some features freely and need to pay to unlock all features. A good example of a product with the freemium model is Zoom, a video conferencing platform that offers some free features with limited meeting times and attendants. Users will need to upgrade to a paid plan to extend the meeting time, allow more participants, and record meetings.
4. Transactional model
The transactional model is popular with tech and non-tech-enabled businesses and involves a one-time purchase at a set price. An example is purchasing a movie ticket, handbag, mobile phone, etc. Because this model is about a one-time exchange of goods or services, it relies heavily on customer retention or high customer acquisition channels for steady revenue.
5. Franchise model
The franchise model is about leveraging successful businesses’ brands and operations. In this model, an existing brand (franchisor) gives licensing rights to another business (franchisee) to allow them to operate their business. For example, a soft drinks company can obtain a license from KFC to sell their products at all KFC locations. A popular example is Domino’s Pizza and Cold Stone Creamery franchise. In this model, the franchisee gets to invest less in infrastructure and marketing as they can build on the influence of the franchisor.
6. Marketplace model
A marketplace model connects buyers and sellers on a digital platform. In this model, a business (intermediary) builds the platform and allows two types of users (buyer and seller) to transact. The intermediary makes money from the platform’s sales commissions, advert space, and other monetization options. Examples of products with the marketplace model include Jiji, Upwork, Alibaba, and Facebook.
7. Direct sales
Direct sales is similar to the transactional model, but the business is connected directly to the consumers in this case. There is no distributor, retailer, or intermediary between them. The company handles its marketing by relying on its sales representatives to source customers. Examples include restaurants, barber shops, and spas.
8. The razor and blade business model
This model is about selling a durable product at a low price and then making a profit from its complementary products. It was popularized by Gillette, with the sales of its razors and making profits from the sale of replacement blades. Another example is buying a printer and constantly refilling the ink cartridges (the company makes a continuous profit from the ink cartridges).
Take note
It is possible to mix these models on a product, and it is important to carefully analyze the target users and understand whichever model or models they prefer before moving ahead with anyone.
Thank you for reading!
