When you’re starting a new business, one of the first and most important decisions you need to make is how your business is going to make money, and there are several different models to choose from.
Successful business growth usually depends on a scalable business model that will increase profits over time, by growing revenue while avoiding cost increases.
Choosing a business model
The model you choose really depends on what kind of business you’re running. With the growth of online business, some businesses will choose a hybrid of ways to sell and distribute their products and services.
Resellers find products or represent brands and generally make profit based on the difference between the price they sell a product for, and the price they must pay to acquire or sell the product. If you run an online store you may not even need to hold inventory, buying and selling as an intermediary. If you are looking at selling online, there are a number of software app’s to help you execute, such as Shopify and Big Commerce. Link them to your dashboard inside MyBusiness Live to get daily insights.
Most will be familiar with the retail model; buying inventory from a wholesaler, adding a margin, then setting up a location and attracting locals to pass by and make a purchase. This model is under threat from online sales, but it’s still viable if implemented correctly. There’s still a place for brick and mortar locations for some businesses, especially if your customer wants to touch and feel your product before buying. Physical locations also give credibility to some businesses and ‘going shopping’ is a long-term social activity that won’t disappear overnight.
The hourly rate
If you are a service or trade you will probably be selling your time, charging customers per hour. It’s ideal for businesses where there is a tangible benefit from the hour you’ve spent. Take note that this business model is often intangible (you can’t put an hour in a box and sell it later), and it’s perishable (once the hour goes past, it’s ‘lost’).
The broker essentially brings buyer and seller together and takes a transaction fee (for example, real estate agents). This category also covers online platforms that bring buyers and sellers together from anywhere in the world much easier. Think Trademe and Amazon.
The internet has facilitated subscription-based businesses where customers are willing to commit to recurring payments in exchange for defined products or services. Classic examples are MYOB and Xero accounting software. Believe it or not, in the past you’d buy a MYOB CD, and install the software on your hard drive. Now you pay a monthly subscription and the data is help in the cloud.
The key to winning over subscribers is to offer a solution with a high perceived value at a low flat rate – like your monthly gym membership or favourite mobile phone app. Most of the app’s offered in MyBusiness Live are by monthly subscription.
The license/royalty model
You could license something you’ve developed to a third party whose responsibility it is to commercialise the innovation and pay you a royalty. Most song writers are paid royalties for their music. If you are the inventor or artistic type, this model can save you having to sell to the end user, which isn’t always easy.
The manufacturing model
An established model is manufacturing products and then selling to intermediaries like wholesalers, distributors, or retailers. In some cases manufacturers are also offering products direct to consumers (though this can conflict with their retail customers). You’ll need good suppliers of raw products and the capital to set up plant, equipment and employees to build scale.
The advertising/freemium model
Online media and gaming sites use this model to provide a certain amount of free services, with either the upgrade option to purchase, or attract an audience and then sell advertising space to businesses that have a message for that audience.
Google gives away many of its products such as Google Search, Maps, Translate and News to attract people to its pay-per-use services. More visitors also enable Google to generate massive advertising revenues.
The contracting model
Your business pitches for contracts where the (often larger company or Government department) wants to outsource many projects rather than employ in-house capability.
Businesses that successfully franchise are those that have robust and efficient systems in place. If you are thinking of buying a franchise, choose one that runs like a well-oiled machine with great systems and streamlined processes.
Extending your business model
Technologies and markets change at an ever-increasing rate, opening up new growth opportunities that may require a shift in your thinking. It’s worthwhile to put the effort in to explore other options to find as many ways as possible to sell.
Sell un-used capacity
Start contract manufacturing for other businesses. This could fill your capacity, increase profitability, and offer leverage to get better buying prices since your volumes have now increased.
Produce your goods under different brands (for instance, a premium brand and a ‘house brand’) and let other distributors sell them to the market.
Hire out your facilities to others.
Go to a new market
A new business model for a coffee shop could be to buy a mobile coffee cart to use at events. They’re now in the mobile event business.
A bakery could charge a small fee to download unique recipes from their website. They’re now in the online licensing business.
Offer pre-paid services
If you provide services, can you introduce fixed-rate service agreements rather than charging fees by the hour? The fixed-rate business model aims for predictable cash flow in advance. Customers paying by direct debit (you pull payments from their bank accounts automatically through your bank) eliminate invoicing costs and debt collection issues.
Make the move online
Can you earn additional revenue by taking your whole business online rather than just treating a website as another distribution channel?
A retailer could give up the high-rent store front altogether in favour of selling online. The new business model doesn’t require inventory – a huge cost saving. Orders are passed onto a wholesaler who takes care of shipping. In effect, a virtual retailer – no inventory, no location.
A training company could move all their training online, charging participants a license fee to access the training lessons. This enables the company to lower its costs and reach a potential worldwide market.
A strong business model should also consider additional ways to make money and to grow, so flexibility is important. For example, many businesses learn that a combination of models is right for them to achieve peak growth. The process for determining a business model is really an exercise in understanding the classic models and determining the best fit for your idea through a process of elimination.
Finally, just because a new business model is taking market share (such as the move to online sales), it doesn’t mean an older model is dead.
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