Definition and Examples of a Business Model
A business model is an outline that breaks down the ways that a company makes its profit. It identifies the target market, the market’s need, and how the business will serve its customers. The plan also includes the costs incurred from expenses like producing and marketing the product. There are multiple types of business models, each tailored to fit the unique needs of various businesses.
An example of a business model is one in which the concepts are split into two categories—business ideas and business resources. Under the business idea category lies products and services, target audience, competition, differentiation, advertising, and sales. Business resources, meanwhile, are what’s needed to make the idea work and can be divided into ownership, staffing, facilities, financial model, funding, and balance sheet.1
A business is unlikely to be successful unless all facets of the business model provided in the example above allow it to be competitive in its marketplace.
Types of Business Models
Here are a few commonly used business models that you’re probably familiar with.
Manufacturer
This type of business model is when a company makes a product from raw materials or assembles prefabricated items to create new merchandise. The business can sell the items directly to consumers itself, which is a business-to-consumer (B2C) model, or it can use a business-to-business (B2B) model in which it sells to other businesses.
An example of a B2C manufacturer would be a shoe company that sells its products directly to customers. A B2B manufacturer would be a business that sews dresses and only sells its products wholesale to other businesses, which then sell the dresses to the general public.
Distributor
The distributor business model is when a company purchases inventory from a manufacturer and sells it to either a retailer or directly to the public. A common challenge that distributors face is picking the right price point that allows them to make a profit on the sale, but still offers competitive pricing. An example of a distributor would be a company that buys soft drinks from a manufacturer and sells those beverages to restaurants at a higher price.
There are many different types of business models and multiple models can be combined to create a new approach.
Retailer
Retail business models are those used by companies that buy inventory from a manufacturer or distributor and sell those products to the public. Retailers can range from a single mom-and-pop shop to huge chain stores—they often have brick-and-mortar locations, an online store, or both.
An example of a retailer would be a hat store that buys the products from a distributor. A limited selection of the hat store’s products is available at its brick-and-mortar storefront, but its full inventory can be purchased online.
Franchise
The franchise business model can be applied to other business models, like the ones we just discussed. The franchisee takes on the business model of the franchise and with it, the latter’s pre-established processes and protocols. Examples of popular franchises include McDonald’s, KFC and Burger King.
When developing your business model, identify your target customer and how you’ll reach them. You’ll also want to familiarize yourself with what you’re selling (costs, margins, features, benefits, etc.) and what your competitive advantage is.
Key Takeaways
