What are the most common business model examples?
The most common business model examples are service, freemium, e-commerce, consulting, and franchise. Business models help establish the underlying assumptions and decisions in relation to an opportunity, as well as determine the business's future returns. A good business model needs to identify the problems that your company can solve, how you'll do it, and how you can profit from it.
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UPDATED: Mar 15, 2022
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- The most common business model examples are subscription, franchise, distributor, service, consulting, SaaS, freemium, and e-commerce
- A good business model should detail the problems that your company plans to solve, the way you will do it, and how you will earn money from it
- Depending on which business model you adopt, the way you advertise and profit can vary
Many entrepreneurs start small, hoping to hit the big time eventually. But sometimes they become so engrossed with the details that they start losing sight of the bigger picture. What many fail to realize is that business models are often the most important part of any business.
A good business model sets the path for a business and has a major impact on how it will turn profits and contribute value. By knowing what to look for when evaluating a business model, you can determine if it is a good match for your business — so that you can quickly focus on what matters (and what doesn’t).
Right below, we’ll examine eight of the most common and successful business model types (and even some low-cost business model examples) and how you can apply them to build a successful business.
Business Model Types (With Examples)
Business owners have access to thousands of business models that can help them launch their businesses. However, it’s important to understand that not all business models are created equal. Not all of them will fit every type of enterprise or corporation.
Take inspiration from these eight business models that are proven to work:
1. Subscription Business Model
Subscription-based business models are built around two words: “recurring revenue.”
Customers usually pay recurring payments for access to a service or product on a monthly basis (or any other specified timeframe). Companies may ship their products directly to customers or charge fees for using their apps. The goal is to retain customers rather than to acquire new customers.
This model is highly flexible and can be used for just about any product, from personal grooming products to digital goods. It’s also possible to apply the subscription model to brick-and-mortar and the like.
Companies using this model: Netflix, Disney+, Hubspot, Masterclass, Webflow, Dollar Shave Club
2. Franchise Business Model
A franchise business model is one in which the company licenses its trademarks and other intellectual property to another company. The other company then uses this intellectual property to sell products or services to its own customers. Franchises are perhaps the most familiar of all the various business models — after all, we see and visit them every day.
To create a franchise, a parent corporation must first create a unique idea, a powerful brand, and a replicable business model. In turn, this incentivizes franchisees to buy this blueprint and reproduce it. For the franchisee’s business to flourish, the franchiser, or original owner, works with them for help with financing, marketing, and other business operations. In return, the franchisee pays a share of profits to the franchisor.
Companies using this model: Starbucks, McDonald’s, 7-Eleven
3. Distributor Business Model
The distributor business model uses one or a few key channels for delivering manufactured goods to market.
With a distribution model, you don’t necessarily have to manufacture your own products — you can efficiently distribute the products of one or more companies. Businesses in this field usually need to build a vast distribution network, work with retailers and wholesalers across the globe, and maintain a massive supply chain.
Companies using this model: Arrow, WPG, DAC Group
4. Service Business Model
Businesses of today operate in a hyper-competitive environment of limited resources, tight profit margins, and rising costs. A service business model is, in response, designed to maximize profits by reducing the cost of doing business and generating new revenues. With a service business model, companies employ a type of organizational strategy that focuses on providing services rather than physical goods. It is highly likely for this model to overlap with other models used by many companies.
A service’s output is clearly identifiable by the customer, and must create value for those who consume it. Business customers are willing to pay more for a service that helps them generate more revenue (either by reducing costs, improving operational efficiency or increasing sales). Meanwhile, consumers will gladly pay for a service that lifts their quality of life.
Service-based businesses are popular among some startups because, unlike product-based businesses, they do not require large upfront investments of capital or equipment. Some traditionally common services are marketing, real estate, logistics, travel, utilities, training, insurance, consulting (which we’ll discuss below) and more. Almost every niche has a need for some type of service. Opportunities abound.
Companies using this model: BBDO, State Farm Group, Expedia
5. Consulting Business Model
Each company has limited resources and expertise. Imagine a scenario where a company is confronted with a challenge or problem that it can’t handle. What happens next?
This is where consulting business models provide a viable solution.
Consulting businesses are built off a service business model. They rely on industry-specific experts who provide advice, guidance, and actionable solutions to businesses experiencing problems they cannot resolve in-house. A consulting service can also offer a step up for businesses that are looking to grow but have hit a plateau.
Unlike traditional businesses, which offer a clearly defined product or service, consulting or agency companies provide specific services. And while easy to execute, this model has a unique scaling factor: the consulting business model succeeds in proportion to the knowledge and expertise of its owners.
Companies using this model: McKinsey Company, Deloitte
6. SaaS Business Model
The SaaS, or Software as a Service, business model revolves around centrally-hosted software residing in the cloud. Customers then purchase this software on a subscription basis, meaning that you get payments every month/year instead of only once. In rare cases, a SAAS vendor may also offer their products in a lifetime package.
Similar to subscription business models, SaaS business models focus heavily on customer retention. This means that it’s doubly important that SAAS businesses cultivate customer relationships by providing excellent after-sales support and putting out constant updates that improve the overall user experience. In addition, as SAAS companies grow, they will have more opportunities to upsell to customers. A SaaS product can offer features that are more valuable to growing businesses, increasing both companies’ revenue streams.
Companies using this model: Salesforce, Microsoft 365, Google Workspace, Xero, Zoom, Bill.com
7. Freemium Business Model
Typically, the most common digital goods business model. Consumers are provided with a free service or product with basic features. However, there are limitations to this product, which causes the user to want more from it and be willing to upgrade for a premium fee.
Freemium models aim to build trust between customers and companies by demonstrating the product’s value before they buy.
Ideally, this model is used for products or services with low marginal costs (additional costs per additional customer) and where marketing and customer information is of greater value than operating costs. Another critical component of this model is converting free customers into paying ones.
Companies using this model: Grammarly, Spotify, Slack, Evernote, Zapier, FreshBooks
8. E-commerce Business Model
These days, you can buy almost anything online.
A business model that sells products on the internet is known as electronic commerce (e-commerce). This could be through a website that the company owns and operates or through an online marketplace such as Amazon or eBay. Almost every product or service is available through e-commerce transactions, including digital files, books, tickets, and even financial services like stock trading.
E-commerce can be disruptive in virtually any industry (which is good if you’re benefiting from it). But to succeed with this model, you need to identify products that are not yet widely available online and adopt e-commerce in a way that allows them to be purchased from anywhere in the world.
The most common e-commerce business models are Drop Shipping, Wholesaling, and White Labeling.
Companies using this model: Amazon, Best Buy, Walmart, eBay
These eight types of business models we’ve looked at are the most common — but there are many other ways to structure your company. If you aren’t sure what business model will work best for you, do some research and talk with others in your field. You can also find plenty of online resources that can help you figure out what makes a successful business model.
Once you have a good understanding of your business model, don’t be afraid to change it up if things aren’t going well. A healthy business is one that’s constantly evolving and growing. Once you have a solid foundation, you can begin to build upon it with additional strategies that will help your company grow.
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How does a business model actually work?
Modern business models describe how an organization creates value. It distils a business’s potential down to its essence. An effective business model answers fundamental questions about what problems your business will solve, how you will solve them, and the growth opportunities available within a given market.
A business model shows how a company plans to solve a market problem, how it can earn money from its solution, and how it can grow its customer base.
In broader terms, a business model is intended to provide flexible assumptions regarding the following six things:
- A company’s product or service offering
- The marketing strategy for selling the product
- The kind of customers the company is targeting
- Who their competitors are
- Values and philosophies of the company
- Strong points and weaknesses of the company
There are so many different types of business that business models have to constantly adapt to accommodate each customer base. When looking through the business model examples we have in this article, it’s important to remember that there is no one-size-fits-all model that works for every enterprise.
How important is having a good business model?
Every successful business in history has started out differently. They were unique, unheard of, or simply better than everyone else. And guess what? The same principles still apply today. The key is to find a product (or service) that customers will find valuable by offering them something they can’t get anywhere else.
This is where a sound business model comes into play.
A business model helps you as an entrepreneur to put aside any bottled-up excitement, take a step back, and determine whether or not your idea has a reasonable chance of success. The stakes are the same no matter what you’re using it for — whether you are starting a new business, expanding into a new market, or changing your marketing strategy.
Business models are important to help establish the fundamental assumptions and decisions about an opportunity and help you determine its future direction (and thus the potential returns of said opportunity).
Businesses rely on design thinking, strategies, and constant change to stay at the forefront of their markets. Today, the most successful companies are those that have reinvented themselves, disrupted the industry, and created tremendous value for their customers. And at the root of it all is a value-driven business model, plus a pinch of innovation.