A business is an organisation or entity engaged in commercial, industrial, or professional activities. Regardless of the products being offered or service delivered, continuous cash-flow is needed to sustain a business. For this reason, the Small Business Owner must understand that the primary business of a business is business. That is, making money. The Small Business Owner must therefore answer the Big Question: How will the business make money? In other words, what is the business model?
A business model is the underlying principle of how a business is run. It is the design to generate revenue for the business. The business model explains how the business works. It describes who the business sells to, and how it makes a profit. Every business relies on a specific business model for taking its product or service to the market. The model answers two basic questions: Who is the customer, the person who needs the product or service produced or provided by the business? It also answers the question: How do the business generate revenue? Here are nine tried and tested models for generating income that are available to anyone starting a business:
1. Bricks and Clicks: A business has two basic choices. It can adopt the brick or click model, or a combination. The brick model is where the business operates offline, and does business in person, face to face, from a physical location in a building. The click model is where it conducts business through online purchases and transactions, usually though computing devices. This is the model for businesses that operate in the e-commerce space. The trend is for businesses to combine the brick and click model as brick business now strive to establish digital shops, which enable them to trade online and offline.
2. Bait and Hook: The bait and hook model is where a product or service is offered for free or sold to a customer at a low price, which serves as a bait for hooking the customer to buy the same or similar product or service at a higher price. The model creates an impression that the customer is getting a bargain, while making money for the business. A popular example is the replaceable razor which sells cheaply with few blades that become dull after a few shaves. Thereafter, the customer continues to buy blades as refills for the razor head. This model is also common in the book trade where authors give readers one or two chapters of a book in soft copy or e-book format for free, as a bait to hook the customer into buying the complete book.
3. Subscription: This is a model where the customer pays a recurring fee at regular intervals, typically monthly or yearly, for continued use of a product or service. This model strengthens the relationship of the business with its customers while it continues to deliver value. It also aligns customers’ cash flow with access to the product or service, as they can decide to pay as they go or pay up front. This model, originally common with newspaper and book publishing businesses, is now standard fare for such businesses like software, television, telecommunications and electricity services.
4. Premium: A premium model offers a high end product or service to discriminating customers who value quality and brand image. The goal of this model is to achieve a high profit margin on a low sales volume. A business can use this model to enhance the value of its product or service against those of its competitors, by charging prices that are higher than what the market is offering. This creates a perception that the product or service has a higher value. The business also enjoys the advantage of generating higher profit margins from its sales. Whereas premium pricing is usually associated with big brand names, like a Mercedes car and Rolex watch, a small business with a unique and proprietary product or service, can differentiate them with a quality image and a higher price
5. Freemium: This is a hybrid of the words, free and premium. It is the pricing strategy where a basic version of a product or service is offered for free but money is charged for its upgrades that promise additional features. This is a popular model for businesses seeking to enter new markets and need to entice users to their products or services. The offer of a free trial, as distinct from a paid-only model, lowers the entry barrier for the new player, and helps to grow recurring revenue. Publishing and software companies that offer free trials prior to paid services are good examples of the fermium model.
6. Advertising: Making money from advertising deceptively appears to be one of the simplest and easiest ways models, which is why many business seek to use it as a source of revenue. An advertising-supported revenue model is based on the business attracting an audience by creating content or engagement, and then selling access to advertisers. It focuses on the sale of advertising as a major source of revenue. This approach drives the traditional broadcast and print media, and online media, which generally generate revenue from advertising, customer subscriptions or combine both.
Television, radio, newspapers and magazines provide information and entertainment for their viewers, listeners and readers. While they make money from subscribers to their services, they earn most of their income from advertisers seeking the attention and patronage of their audiences. These advertisers pay to place advertising messages within their non-commercial content.
The attraction of the advertising-supported revenue model is that your medium will almost always find companies that want to pay to reach your audience if you are able to provide specific details about their character and size. This explains why newspapers and magazines give away thousands of copies to businesses and institutions in their communities as they drive their circulation, readership and, by extension, advertising revenue.
The downside, however, is that an advertisement-dependent model may be hard to implement because building an audience that is attractive to advertisers is neither easy nor cheap. Furthermore, it hardly lends itself to multiple revenue sources and is among the first to be negatively impacted in a down economy. It can also be severely challenged by the availability of alternative sources for similar or related information or content being provided by the medium. This explains the disruptive effect of the internet where online sources have eliminated the exclusivity once enjoyed by the traditional media, not to mention digital platforms like websites, blogs, etc. that has turned this model on its head.
7. Aggregator: The aggregator business model has entered and disrupted almost every industry. Travel. Taxis. Hotels. Food. Groceries. Name it. The model runs on organising previously unorganised activities, and providing a service under a brand to an identified population. Airbnb for hotels and Uber for taxis are ready examples.
The aggregator assembles information about the providers of goods and services in particular industries, partners with the providers and markets their services under their own brand name, doing so with a uniform quality and prices. The providers of goods or services are not employees of the aggregator, and simply work with the aggregator under contract to continue to own the goods or services that they provide. Under agreement, the aggregator focuses on marketing and creating leads for the providers who, on their part, focus on providing quality products or services to the customers.
This win-win relationship provides a platform where the customer and the goods or services providers are both customers of the aggregator, albeit in differing ways. Meanwhile, the goods or services providers remain members of their original industries, and continue to compete among themselves as before.
The key challenge for the aggregator is finding the money to build the brand and ensuring delivery of a standardised quality for every user by different providers. The aggregator provides the goods or services provider with customers and, in return, charges a commission. Alternatively, the goods or services provider quotes a minimum price at which to operate, leaving room for the aggregator to add a take-up rate before quoting the final price to the consumer.
8. Buy Low, Sell High: If you plan to start a business based on buying products cheaply and reselling them for a profit, you can bet on the buy low, sell high model. Basically, your buying-and-selling business will run on purchasing items cheaply and re-selling them for more than their cost. Your profit will be the difference between what you paid for the product and what you sold it for.
Your mantra will be: Buy low, sell high. No more, no less!
This is about the easiest business an aspiring Small Business Owner can start. It is a low-budget enterprise and requires a minimal investment. There is limited financial risk as the money you spend to get started will go into buying inventory, which you can dispose if you decide to wind up. The profit potential is good as you can mark up your product for a reasonable margin. You can start and operate a buying and selling business without specialised skills. And, in the internet makes it easy to buy and sell as you can easily open an online store.
9. Value-Added Reseller: This is a model where a business produces a product or provides a service, for re-sale by other businesses. The difference is that the re-seller adds value by modifying the original product or service. Such industry-specific additions help the reseller to develop a distribution network for the product or service, and fast-tracts the generation of revenue. Value-added resale programmes are common in technology industries, particularly those in the software business.
While the foregoing does not exhaust the possible models available to a start-up, it provides a range of options, depending on the nature of the business. An aspiring or practising Small Business Owner would benefit from considering each model and deciding if one or more of them can birth their business. The bottom line is to pick a model that delivers the best value and highest revenue for the business.
Do you need help in finding the most viable revenue model for your small business? Contact us at https://smefinance.org/thesmelab.