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Business Models

Business Model

How a company makes money.

This definition is a bit shorter than most, but really we are talking about how to generate excess cash after expenses are subtracted from revenue.  Identifying the model that your business, or future business, operates under may allow for new insights into how you can improve what you’re doing, or suggest a move to a different model.

The business models that follow aren’t complete business models, they are mostly business model fragments or sub-models.  Business models can be combined to form a new business model.  In fact, most businesses are a combination of the models that follow.

For example, Microsoft is ubiquitous in the PC market, and they have lots of customers.

Microsoft model

Become so ubiquitous that competitors can’t get into market.  Microsoft Windows has no real competition in the PC market.  As a result, Microsoft is also the leader in word processing and spreadsheet software.

Whether or not this is a monopoly model is debatable.  There have always been alternatives to Microsoft. While I certainly won’t call the PC market a niche, if you completely own a niche in the market, chances are you won’t be called a monopoly.

One stop shopping model

Have complete product line, and services, for one stop shopping.  Don’t allow your customers to go to competitors to complete part of their needs.

Short line model

Limited product line to focus resources.  Typically a small business, but may be a large company in a very large market.

Blended product line

Design and manufacture a limited product line in-house and complement it with competitor/third party products.

Service dominance model

Service is local and readily available.  Can charge more for products and services to guarantee customer up time.  Typically a company with a well-developed, highly distributed service network.  Repair parts are located near customers, and service can be performed in a short time to get the customer up and running again.

Lots of customers

No one customer provides a large percentage of revenues.

Small number of customers

Majority of revenue provided by a few customers.

One-time customers

Product is such that people generally buy once and don’t need to buy again.

Repeat customers

Business growth is based on adding repeat customers.  Examples: car dealership, dentist.

Subscription business model

Revenue via ongoing subscription.

Examples: Media subscriptions, insurance, long term service contracts.

Franchise model

Systemize the business, and license it to franchisees.

Network effect model

Success depends on the number of users.  Examples are telephones and social networking websites.

Niche model

Focus on a specific area of the general market for your product or service.

B to C model

Business to consumer model where your customers are the consumers or end users of the product or service.

B to B model

Business to business model where your customers are primarily other businesses that use your product in their products, or use your product in their business operations.

P to P model

Peer to peer model.  Act as an intermediary for the transaction.  Example: Real estate brokers.

Rapid delivery model

The ability to deliver product or service more quickly than competitors can be the basis of a competitive advantage and underlying business model.

Ways to deliver quickly are listed below.

  • Stock inventory to deliver fast. Trade off is cost of carrying inventory or spoilage for inventory with a finite shelf life.  Best for products that aren’t customizable.  For customizable products, store inventory of WIP to reduce time to assemble final product.
  • Use a flexible manufacturing process to deliver product as fast as possible. Flexible manufacturing may not be as efficient as a focused manufacturing operation.
  • Assemble final product as close to the customer as possible. Subassemblies or WIP distributed so that they are closer to customers.