7 Types of Business Model You Need to Learn about Before Building Yours

Updated: Jun 5

A successful business is fruit of complex endeavors --- planning. The business planning process orbits around the key question: how does it generate profit?

To answer that question, a business builder needs to outline how does a business model actual work, by explaining the following:

  • 🛍The product/service to be offered to the market

  • 🎯Target customer and the market potential it represents

  • 💰Revenue streams and their models

  • 🈺Sales strategy (or distribution models), etc...

Each model is unique. It can make profit through a sole revenue stream or a combination of many.

Some existing business models have been proven very successful. Let's walk through their highlights and examples, so that you, as an entrepreneur, can have more clarity while designing yours.

Types of business model

1. 🛒 Retail model

A retail business model, the classic one, follows a direct-to-consumer (DTC) approach, also is called B2C, where the company sells directly to final customers a processed/finished product. A classic example for a retail business model would be a coffee shop, a clothing boutique store or restaurant, etc. Some find a market niche and offer a single category of product to a specific target group of customer (i.e., Allbirds, Elvie, Glossier), others choose to offer a large variety of products to larger target audiences (department stores and supermarkets).

In the last few decades, retail sector has been prospered unprecedentedly, thank to technologies that empowered business world with quicker manufacture and more advanced logistic infrastructure. Many of those brands finally grew into corporate giants, owning thousands brick-and-mortar stores.

The most recent reform in retail sector is that entry threshold to an online retail business is becoming lower for individuals. A new approach, Dropshipping, endorsed by a few leading platforms: Aliexpress, Shopify & Oberlo and Amazon, is removing language, logistical and financial barriers for entrepreneurs to start a retail business online!

⚠️ Note: To enter retail business, brick-and-mortar store is no longer a must, so say bye-bye to huge sum of upfront payment (for rent, utilities or storage). Instead, say hello to digital marketing. Nowadays as an entrepreneur who chooses to start their retail business online must excel in a) storytelling in digital setting; b) reaching target audience with digital solutions.

2. 🔂 Subscription model

A subscription business model generates monthly or yearly recurring revenue by selling to their customers a certain amount of product or offering a type of service.

This approach of profit making has been applied on both traditional and online businesses. Some businesses adopt this approach as their main stream of revenue, whereas others also use this approach, but together with many other revenue streams, to constitute their business model. Netflix, for instance, is an exemplary player of the former, and Amazon represents the latter.

⚠️ Note: entrepreneurs, who use subscription model as their main revenue stream, must have a very strong and relevant offering to the market. As predictable as the income might seem to be, the business always faces the risk of high churn. A customer can simply lose their interest to what you are offering over time.

3. 🧔🏻Razor blades model

This approach has been used to sell products for our daily life, for example, razor and its replacement blades, electronic toothbrush and its replacement brush heads, water/air purificator and its filters printer and its inks. The devices are usually sold with a relatively low margin (sometimes even free), whereas customers purchase their pricy replacement continuously.

⚠️ Note: You may lose market share of the replacement products over “generic brands”, easily. What makes your product irreplaceable: a unique feature, a cutting –edge technology, or an appealing brand story behind?

4. ⏪ 🧔🏻Reverse razor blades model

Instead of selling accessories or add-ons of high margin, you also see companies doing the opposite— customers are offered a high-margin product and then are encouraged to purchase lower-margin accessories, add-ons or services that accompany the initial product.

A classic example of this reverse razor blades model is Apple devices (iPhones, Macs and watches) and Amazon (Kindle)— you purchase a device, then Apple/Amazon tries to convinces you that its accessories, add-ons or services will elevate your user experience to a different level.

⚠️ Note: Not only are the products pricy, this model is usually being supported by a strong eco-system, for example, App Store and Amazon ebooks. It is not an ideal business model for entrepreneurs who intent to start from something small since building up an ecosystem requires large amount of funds and intellectual investment.

5. 📢 Advertising (Online) An advertising business model means a business relies on sale of advertising to generate revenue. Here we focus on online advertising. Most common online ad forms include:

• Search advertising: the first few results popped up when you search something on Google, Bing, Yahoo, etc. Each search engine has its own rules in terms of ranking.

• Display advertising: mostly shown as a banner on information-based websites. Google has the absolute majority of market share, as its Google Display Network, a collection of over two million websites that reach over 90% of Internet users across the globe.

• Affiliate marketing: content creators embed affiliate product/service ad into their creation, such as blog or video, to promote to their audiences/followers

• Video/audio ads: a video or audio ad is shown pre-roll, mid-roll, or post-roll in a video/audio that is being watched/listened

⚠️ Note: Google tops the list of this genre (name one person in your life who lives without using search engine at all, if you have to say your great grandpa, ok...). However, as you may have noticed, this model is now widely adopted by content creators (blogger) or platforms that has large number of users (or content creators, like Youtuber or TikTokers). These platforms are constantly renovating the ways an ad can be more attractive, interactive and effective.

6. ⛓ Franchise

Having a franchise model business means you can either be a franchisor or franchisee.

To be the former, you are presumedly already having a business model that makes profit; say a coffee shop, a convenient store, or beauty salon. Therefore you have already created a proven formula for running a successful business: calculated initial investment needed; established solid network with suppliers; figured out management process, etc. Then you license this workable business model to a franchisee in exchange of royalty.

The latter usually is chosen by someone who would like to start their own business with clear guidance on how to begin. They acquired franchise because they trust the franchisor’s tested ”know-how” and their support when it comes to any operation problem.

⚠️ Note: As for franchisor, you must make sure your existing model actual work, to be honest and transparent on what you are selling, and be prepared for potential legal dispute. And be aware that once licensing others to operate under your brand name, you loss certain control of your brand.

For individual entrepreneurs who opts for going with a franchise, be aware that what comes along with the “know-how” are high cost and royalty, strict rules on products/services and lack of liberty to choose your location (if one is needed).

7. 👥 Marketplace model (online) An online marketplace, just like an offline market, is a centralised platform for both sellers (of products or services) and buyers to able to trade. Oftentimes, the platform itself does not hold any inventory/property to sell or provide specific service to individual buyer, but only to facilitate the transaction between two ends of users.

Most successful examples of this model are Booking.com, Amazon (part of its model), Uber, Fiverr. What they all have in common is that their founders provided a digital solution to customers whose needs were no longer to be satisfactorily met by what offline market could offer then.

⚠️ Note: Nevertheless, building a platform will inevitably face the challenge of dealing with the “chicken and egg problem”, that is to say, how do you convince both parties to use your platform when there’s little value/offering yet?

Moreover, tech support is crucial to the success of this type of model, no matter for ensuring security of transaction or for a smoother customer journey, entrepreneurs who choose to build a marketplace must be aware of the huge investment in acquiring tech talents.

Which model is the best of all?

There are many other models out there, while we just talked about the basic ones here. For example, some define “Freemium” as a business model, but the reality is that companies, for example, Spotify, gaming app, online and Software-as-a-Service (SaaS) businesses, use freemium approach to attract users first, but later on actually make money by subscription, in-app purchase, advertising or a mixed model.

So which one is the best business model? Well, all of them are the best business models, if the people working behind are doing the things right.

Plus, smart entrepreneurs always find creative ways to diversify their revenue stream, launch new vertical, mix and match different business models to build a unique business model structure.

How can Faicliq help you to build your unique business model? ⬇️

We all know the importance of planning before building up a business. Faicliq business forecasting tool walks you through all aspects an entrepreneur needs to consider in the planning stage ➡️ check it out.

Becoming a subscribed user, you will get full access to our financial tool, with which you can test your idea with numbers, simulate different financial scenarios and figure out what combination of revenue types will define your financial plan and best suit your unique business model.