You’ve got a business idea, a potential customer base, and maybe even a clever name for your new project. Now it’s time to choose your business model, which determines what you will sell, how you sell and market it, who you will sell to, and help you predict potential expenses.
There are hundreds of business models to choose from, but most fall into a handful of categories.
B2B and B2C
Business-to-Business (B2B) refers to any business that sells, rents, or leases a product or service to another business, from software to phone services.
Examples of B2B businesses:
- Amazon Business: Marketplace and membership for small and large businesses to buy goods wholesale or at discounted rates
- IBM: Multinational brick and mortar selling computer hardware, software, and services
- HubSpot: Integrated customer relationship management (CRM) platform
Business-to-Consumer (B2C) is a business model that most people interact with day-to-day. These are the companies that market and sell directly to the individual consumers that buy their products and services. Grocery stores, retail stores, social media platforms, and online marketplaces all use this business model.
Many of the business models that will be mentioned below will fall into these two categories. Your business can also be both B2B and B2C, depending on your industry and target market(s).
Product and Service
While B2B and B2C business models are based on who you are selling to (target market), product and service business models are determined by your business offering.
Here are some common product and service business models:
- Fee-for-service: This business model charges a fee for a service or list of services, which could include hourly, monthly, or annual fees, day rates, schedule of flat fees, or commission. Freelance creatives like hairstylists, accountants, and real estate agents often use this model, as do most agencies.
- Product-as-a-Service (PaaS): This model is used by businesses that charge customers a fee to access their physical or online products, such as a subscription fee, or hourly or per-mile fee. Car or bike rental companies often use this model and so do many software (SaaS) and online media platforms, like Netflix, and monthly subscription boxes, such as HelloFresh.
- On-Demand: This model typically requires a combination of online and offline services that can be used whenever a customer needs them. Examples would include food shopping and delivery services, courier services, rideshare and gig worker apps, crowdfunding platforms, and online marketplaces.
Reseller and Manufacturer
These two business model categories together make up a majority of the supply chain, with one type creating the digital or physical product that the other retails. Businesses that fall into them can also either be B2B (wholesalers) or B2C (retailers).
A few business models that fall into these categories:
- Franchising: This business model takes the template of an established business and resells it to individuals who want to open a different location elsewhere. The independent business owner, or franchisee, pays the original owner a percentage of their profits in exchange for the business branding and other intellectual property.
- Distribution: Sitting directly in the middle of the supply chain, distributors buy goods from manufacturers and introduce them to the market, selling them to retailers for a profit.
- Leasing: Like the product-as-a-service model, these businesses purchase products like cars and homes, and lease or rent them out long-term to consumers.
Picking Your Business Model
With all these business models buzzing around in your head, how do you choose the best one for you? Deciding how your business will run and generate revenue should be based on a range of factors.
Narrow down your choices by considering your:
- Product or service: Your business offering and the industry you fall into will have a big say in your business model.
- Target market: Who are your potential customers or clients? Where and how are they likely to buy from you? Pick a business model that speaks directly to your audience.
- Value proposition: Your ideal business model will take advantage of your unique selling points and how you want to stand out from competitors.
- Potential revenue and scalability: Which business models can help you meet revenue goals without eating away your profits with too much overhead? Think about the long-term and how you can replicate and grow.