There are many types of business models from which you can choose to help your business become successful. After all, taking the time to select one and meticulously create a business plan is critical to achieving what you want.
That’s why it's essential to understand what they are, the different models, how they operate, and how you can use them to ensure your long-term success.
What Is A Business Model?
A business model serves as a blueprint for how your company plans to turn a business idea into profit. It defines what your product or service is, how you will market it, and your expenses.
There are many business models, and they're constantly changing—meaning new ones appear constantly.
These models are not prêt-à-porter templates that you can pick off a shelf. Instead, they will take some personalization and customization so it fits what you're trying to accomplish.
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The Components Of Business Models
No matter what your selection of business model is, it will all have key components, which include:
- Key partners: Every company needs partners to succeed. Who will yours be?
- Key activities: What are the main things that your company will do?
- Key resources: What will you rely upon to help you build your products/services and other key activities?
- Value proposition: What will attract customers to your offerings and set you apart from the competition?
- Customer relationships: How will you build relationships with customers and nurture them, so they become loyal?
- Channels: How will you market your products/services, and where will you sell them?
- Customer segments: What is your target audience, and what will the different segments be?
- Cost structure: What are your variable and fixed expenses, and how will they affect what you charge for your products/services?
- Revenue streams: What are all the ways that your business will generate income?
Pros And Cons
The advantages include helping you:
The disadvantages include that they can:
- See and plan for the future
- Allocate resources
- Position yourself best to obtain financing
- Get the team on the same page
- Be inaccurate to your goals and set you on the wrong path
- Take up a lot of time
- Lack accountability
- Restrict the company's freedom
The Importance Of Having A Business Model
Without a business model, it can be challenging for a company to find sustained success.
They'll lack a blueprint that they can refer back to consistently as the company grows or outside factors force changes.
Whether you run a large business or a small one, choosing a business model and creating one for your company will allow you to map your success from Point A to Point Z.
By mapping your journey, you'll be able to set realistic objectives.
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45 Different Types Of Business Models With Examples
Below, we break down 40 of the main models, subdivided into categories to help you choose the right ones.
Traditional Types Of Business Models
This is one of the oldest models in the world. It involves companies that take raw materials and make them into a specific product.
A great example of a company that uses this successful business model is LG Electronics.
Also called "distribution-based business model."
Distributors take manufactured products to market. Many companies make their products but rely on distribution companies to take them from the warehouse to various retailers.
An example is Cheney Brothers.
Retailers are the final stop on the supply chain. They display products for sale, and consumers can purchase directly from them. Then, retailers buy the products that sit on their shelves from distributors.
Target is an excellent example of the retailer model.
Restaurants use the franchise model a lot, but it's not exclusive to them.
Franchises involve selling a basic recipe for starting and then running a specific business to other people who will run it almost independently. In addition, the company provides marketing, product, and training support to individual owners.
A great example of a franchise business model is McDonald's.
This is a business model where the company will interact with its consumers face-to-face in a store, shop or office that the company either rents or owns.
For example, mom-and-pop stores follow the brick-and-mortar business model. Larger retailers, such as Best Buy, use this model in conjunction with eCommerce.
A leasing business model is basically renting products to people for a set amount of time. When the lease term ends, the consumer must return the product to the company.
All auto companies offer some form of leasing as part of their business model.
Popular types of business models
Razor And Blades
It involves selling one durable product (the razor holder) at a low cost to increase volume sales on a disposable component for the high-margin product (the razor blades).
The name of this business model is a very tongue-in-cheek explanation of the concept.
Gillette is the most well-known example of this.
Reverse Razor And Blades
This is the exact opposite business model as the razor blade model. Companies offer a high-margin product, promoting sales of a lower-margin companion.
The consumer's initial purchase is the big one, rather than the other way around.
Apple is an example of this: the high-margin product could be the iPhone, and the music and apps are the lower-margin ones.
Product To Service
In this business model, Company A purchases a service from Company B (instead of Company A purchasing the equipment to complete the service on their own).
Consumers ultimately buy the result instead of the equipment that produces the result.
Lyft is an excellent example of this business model.
A company that uses this business model donates one product to a charity for each item that a consumer buys.
Companies use this model to appeal to consumers' social consciousness, encouraging them to purchase because they give back to a good cause.
The company TOMS was one of the pioneers of this business model.
Companies hire consulting businesses to provide expertise in many different fields. The business using the consulting model will hire experts in a wide range of disciplines to service their clients.
McKinsey is one of the biggest consulting companies in the world.
Businesses that provide professional services commonly use the agency-based business model. Under this business model, the agency offers its services to clients on a fee-for-service basis.
The agency typically charges its clients an hourly rate for its services.
Ogilvy & Mather is an example of an advertising, marketing, and public relations agency.
This business model involves creating multiple products but marketing them under separate brand names. Sometimes, the products can be very different from each other, but they are very similar in other cases.
Procter & Gamble—which has brands such as Fabreze, Crest, and Bounty paper towels—is an example of a multi-brand business model.
Business Models By Consumer Type
B2C is basically the retail business model, where companies will sell directly to consumers.
Amazon is an example of a B2C business model.
A B2B sells products or services directly to other businesses. Their customers then use the product/service to either re-sell or benefit from.
Many media organizations use the B2B model, selling advertising to businesses. CBS is a great example.
In this business model, end-users provide services or products to an organization. Soliciting feedback or crowdsourcing ideas generates most of the revenue.
This model helps increase brand awareness for companies, many times on social media platforms such as Twitter.
With this business model, consumers sell to other consumers directly. They may use an intermediary for marketing the products or services for sale.
Craigslist is a perfect example of this business model at work.
In this business model, a company will directly market its services or products to government agencies. They often have specialized products/services and plenty of expertise in the areas.
Senseware provides government agencies with IoT platforms to use.
Companies that serve both ends of a specific business or industry are multi-sided.
One of the best examples today is Indeed. They provide a form for people to find jobs and a place for HR departments to search for candidates for job openings.
Online Business Models
This business model involves selling products strictly online rather than in brick-and-mortar retail stores. Today, many companies will use an eCommerce business model in conjunction with a retail business model.
Walmart is a great example of a company that uses that combination.
Dropshipping is a relatively newer business model.
A company will establish contracts with wholesalers and suppliers so they can sell products on their websites.
Once a consumer purchases a product, the wholesaler will directly dropship the product from the manufacturer directly to the purchaser.
As a result, the business owner doesn’t have to worry about inventory, shipping, or logistics.
Oberlo is an example of the dropshipping business model.
Software As A Service (SaaS)
With this business model, some companies sell licenses for people to use the software they create. Consumers pay a monthly subscription for access to the software and get all the latest updates and extra perks.
It's slowly replacing the model of consumers buying copies of the software as a one-time large purchase.
Microsoft uses SaaS for its Microsoft Office suite of programs.
Marketplace models connect buyers and sellers on a single platform. These companies make money by charging fees to sellers and buyers.
They can be specific to a certain product (like Airbnb with rental housing) or more generic and widespread (like eBay).
Companies that use this business model bring together large numbers of visitors who contribute content. In addition, the crowdsourcing model is often paired with other models, such as advertising, to generate revenue.
The most well-known platform for crowdsourcing is Waze, where users help give traffic updates.
Don't confuse it with crowdfunding.
In this business model, users don't pay for any of the company's products or services. Instead, revenue comes in other forms, such as advertising.
Google is an excellent example of a hidden revenue model. Users don't pay to use their search engine, and the company makes money by selling advertising to businesses and then displaying that advertising to users.
New Types Of Business Models
This relatively new business model involves providing a basic service for free to all people, with the option for people to upgrade to more advanced features (the premium service) for a price.
Users can remain free for life if they wish with this model and only pay if they want other features the program offers.
Evernote is an example of a freemium business model.
This is a business model used by many online games.
The company that designs the game makes it available free for all people to use instead of charging a fee to purchase or download. They then make money from advertising that runs in-game or from purchases players make in-game, such as for upgrades or special items.
The most famous example of this is the game Fortnite.
The subscription business model is quickly becoming a common business model for companies today because of how lucrative it can become.
It involves charging a regular, ongoing fee to consumers to access products or services.
Knowing you'll retain customers and receive payment each month can help plan production costs.
Magazine subscriptions have been around forever, but now it's moving over to digital businesses like Netflix.
This business model is a classic one but is being used in new ways today by digital companies.
The basis of the business model revolves around providing a free service to consumers and then making money by serving advertising to them (very similar to the hidden revenue business model).
Companies that use the advertising model include newspapers such as The Washington Post and digital video companies such as YouTube.
This business model delivers consumers products/services as they order them, usually immediately after purchase.
For example, consumers purchase an app, and then the company using this business model will fulfill that request almost instantly.
Grubhub is an example of a company that uses a food on-demand model. Another is Pay-per-view television.
This new business model uses a decentralized network to conduct transactions between two peers, which is why it's sometimes referred to as a peer-to-peer business model.
Cryptocurrencies such as Bitcoin use the blockchain-based business model.
Other Business Models
This business model is very controversial and, in many instances, may be illegal. Members recruit other members and promise them some reward for enrolling other people into that scheme.
The principle involves selling no products or providing an investment.
Amway is a company that uses the pyramid business model.
The direct sales business model is a business model in which a company sells products or services through a network of independent contractors, also called "distributors" or "sales representatives."
This type of business model is also sometimes referred to as "multi-level marketing" (MLM), "network marketing," or "party plan."
Herbalife is a company that uses this business model.
Many pyramid schemes hide behind the MLM model.
Nickel And Dime
This business model involves positioning a business as the lowest-price option in a category. They offer only the basic services available in that category, with additional perks requiring consumers to pay an additional charge.
Spirit Airlines is an example of a company that uses this business model.
Companies that use the aggregator business model will collect information and then sell that under a brand name. The companies that use this will provide sources and information for just one industry most of the time.
Zillow is a company that uses the aggregator business model in the real estate industry.
Companies that use this business model interact with the customer at the highest level. The idea is to provide a very personalized experience. In many ways, customers often think of themselves as business partners.
Car dealerships are an example of a high-touch business model in many ways.
In a low-touch business model, the company has fewer direct interactions with customers. The provider can do this by automating processes, using self-service options, or offering additional services.
As a result, low touch businesses typically have lower costs than high touch businesses, requiring fewer employees to provide customer service.
Quickbooks uses a low-touch model.
The affiliate marketing business model involves an online sales technique that allows a product owner to increase sales by allowing others to promote their products for a commission.
The affiliate business model is also called "performance marketing."
For example, Amazon has an affiliate program.
In the fractionalization business model, companies sell products or services in parts rather than whole units. This allows customers to pay for only what they need, when they need it, and use it as they see fit.
The fractionalization model has been around for centuries, but businesses have only recently started to capitalize on it.
Timeshares are the most common examples of this model.
With this business model, a company will sell multiple products together as part of a single sale. It's valuable to the consumer because they can get it for a lower price than buying the products individually.
As a result, companies get a higher sales volume, though profit margins might be lower.
The Adobe Creative Suite is a great example of this.
The auction business model has sellers list a product for sale, and then buyers submit bids for that product. The highest bidder after the auction expires will get the product for that price.
eBay is an excellent example of this model.
The reverse auction business model involves sellers offering the lowest price for their products/services to buyers. The buyers then choose among the lowest prices from the list.
LendingTree is an example of the reverse auction model. Many government contract sites use this model too.
Companies that connect sellers and buyers on a platform to facilitate transactions use this business model. However, in exchange for doing this, these businesses typically charge a fee to both sides of the transaction.
Real estate agencies are a classic example of companies that use this business model, and modern examples include StubHub.
Pay As Go
With this business model, consumers pay based on how much of a product or service they use. This means the monthly bill for each person is likely to change from month to month.
Utility companies use this model, and cellphone companies use it for things such as text messages.
Product As A Service (PaaS)
Also called "product-to-service business model."
Instead of selling a product, companies that use this business model will sell the service that the product provides. In this way, they offer lower-cost services to people rather than forcing them to purchase rather large pieces of equipment.
An example is FedEx Printing, which offers large-scale printing and photocopying services to consumers. This doesn't force consumers to purchase huge and expensive copy machines to perform a service they may not use often.
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How To Choose A Business Model That'll Be Successful
There are so many business models that it can be challenging to choose the one that would be right for your business. As you can see from the list above, some of them are similar, too.
In fact, you don't even have to limit yourself to just one model.
You could easily adopt multiple ones—such as B2B and manufacturer—and create a successful company. Actually, most companies have more than one model.
Ultimately, you need to choose one that fits with your product, your clients and how you want to do business.
Below is a brief guide to help you decide which type of business model might be right for you.
The Best Types Of Startup Business Models
The best ones include:
Business Models For Micro And Small Businesses
The best models for micro and small businesses include:
Types Of B2C Business Models
The main types are:
- product as a service
Different Types Of B2B Business Models
- intermediary (where the business connects buyers and sellers)
- buyer-centric (where the business's primary focus is the customer’s needs)
- supplier-centric (the company acts as a supplier)
Types Of Business Models For Apps
The most commonly used models for apps for mobile phones are:
Types Of Consulting Business Models
Three relatively newer types are:
- collaborative (it involves working together on multiple occasions)
- continuous (looks to create ongoing income)
- instant (seeks to offer value as fast as possible)
Types Of Retail Business Models
Some examples are:
- consumer delivery
- direct shipping
What are the different types of business models in eCommerce?
There are many different business models in eCommerce. The most common are B2C, B2B, C2B, and C2C.
These types all dictate how the business operates and who it sells to.
Facebook is an example of which type of business model?
Facebook runs on an advertising business model mostly.
The company's social media app is entirely free to use. However, they profit by charging businesses and organizations to purchase advertising.
What type of business model is Avon?
Avon is a company that uses a direct sales model, based on a structure of network marketing.
Representatives sell their products directly to end-users, and the representatives help recruit new salespeople.
What are the two types of disruptive business models?
Two disruptive types are the on-demand model and freemium model.
These are both changing the way companies do business worldwide in multiple industries.
What type of business model is Uber?
Uber uses a multi-sided platform, one of the newer business models.
It connects a demand (the passengers) with an offer (the drivers) to provide users with cheaper and more convenient transportation options while also providing drivers with an additional source of income.
How many types of business models are there?
The number of business models is vast, and new ones seemingly appear every day. Above, we have listed 45 of the most common ones.
What type of business model does Amazon use?
Being such a large corporation, Amazon uses many different models.
- A B2C model for their own products that they sell.
- A revenue model based on the fees and commissions they charge from third-party sellers on their site.
- They use the marketplace model because they allow users and other businesses to sell in their platform
- And they also work on subscription services, advertising, and other models for brands they own, such as Amazon Prime, Amazon Web Services (AWS), and Whole Foods.
What type of business model is eBay?
eBay uses the marketplace and platform models. They make money on the fees it charges buyers and sellers on their core platforms. So, the more transactions conducted on the platform, the more money the company makes.
What are some types of sustainable business models?
Any business model can be sustainable as long as it addresses environmental issues and doesn't waste resources.
Some examples of business models that could be more easily sustainable are:
- Software as a Service (SaaS)