in

20 Business Models and the Pros and Cons of Each

20 Business Models and the Pros and Cons of Each

Let’s say you came up with this fantastic idea on how to homeschool your special needs children who just can’t seem to learn in the typical way other kids learn. You purchased all your supplies and subscribed to a service, and your kids thrived under your guidance. Things were so good that you started sharing your new ideas with your homeschool coop, and suddenly other moms wanted you to set up their classroom program just like yours. And they offered to pay you!

A lot of new businesses begin just like this. A regular person sees a need, finds a way to meet it, and then realizes others out there could benefit from their expertise. So they decide to form a business out of their idea. But how does one start?

That’s where the business model comes into play. A business model will help you define your target market, narrow down your product, discern what expenses you will incur, and formulate your profit margin.

As a newbie to the business world, you may not realize how important it is to have a structured framework for how your business will run. Below are 20 business models to choose from to help you get started.

20 Business Models to Adopt for Your Business

1. Subscription Business Model

Subscription Business Model

Many businesses use the subscription model as their business plan. All of the TV plans, such as Disney+ and Hulu, offer subscriptions where you pay monthly or yearly to stream their content on your television.

By the same token, a traditional brick-and-mortar building can also operate under the subscription model. Having a newspaper delivered to your home is one example. There are also many small business entrepreneurs who offer home-cooked meal subscriptions that are delivered to your door daily or weekly.

Pros:

  • Customer return is high.
  • Subscriptions are convenient and predictable to the consumer.
  • Having a customer database makes it easy to seek referrals.
  • Because this is not just a one-time purchase, there is plenty of business-customer interaction in order to build a stable customer-vendor relationship.

Cons:

  • Though customers subscribe, they generally lose interest over time.
  • Minor glitches and technical issues can have a lasting effect if they happen often, and people will often just unsubscribe to your service.

2. Freemium Business Model

Most people are familiar with the freemium model. You probably use something like it every day.

With a freemium business, the proprietor will offer a portion of some type of app or service, such as Grammarly, which is an online editing assistant, for free. But they will withhold certain features that a consumer will eventually discover that they need to complete the task they want to do. In order to access additional services, they will need to subscribe and make monthly or yearly payments for the premium content.

Games are like this as well. They offer only part of the game, and once kids are hooked, they want access to better parts of the game that are unavailable unless you pay.

Pros:

  • By offering some things for free, it gives your business a competitive edge over others.
  • Allowing people to test your product through a free version is a perfect marketing plan.
  • It allows you to obtain essential data from customers using the free plan that you can generate leads with in the future.

Cons:

  • The conversion rate is low. Only a small percentage will convert to the premium version.
  • Without another source of income, it could be a costly model to operate as there can be a low return on investment.

3. Bundling Business Model

Bundling Business Model

With the bundling model, companies go into business together, offering to sell two or more products combined as a single unit, typically at a greater price than if the consumer purchased each item separately.

Microsoft Office 365 is an example of the bundling model. A person can spend a lot more money purchasing PowerPoint, Excel, Word, and Outlook separately, or they can buy the entire bundle, which also includes OneNote, for a lower price than if purchased individually.

Pros:

  • By bundling products, it allows you to boost your average order value.
  • It lowers your marketing costs because you’re marketing focus is promoting the entire package rather than increasing the sale of each individual product.
  • It enables you to combine high-selling items with low-moving products, thus, balancing the selling rate and avoiding overstock of less desired items.

Cons:

  • How customers perceive the bundle can affect sales. If a customer perceives your bundled products negatively, it can hurt your targeted sales goals.

4. Razor Blade Business Model

The razor blade model is commonly used with things such as printers as well as razor blades. With this type of business model, proprietors offer an inexpensive item such as a printer, but then the customers will need to continually purchase accessories that are at a premium price to use the initial item. With this type of business model, the proprietor has a continuous cash flow because there will always be a continual need in order to utilize the product purchased.

Pros:

  • Generates recurring sales and builds customer loyalty.
  • Offers a steady income.
  • Gives you the opportunity to expand your market share.

Cons:

  • There’s a high risk that customers won’t use your blades and will acquire them elsewhere.
  • It only works for monopolies. There can be no alternatives or complements.

5. Brick & Mortar Retail Business Model

Brick & Mortar Retail Business Model

Brick and Mortar refers to finding a physical building to sell your product.

Pros:

  • There is a physical presence. People love to deal with another person when they shop as opposed to over the phone or online.
  • It is easy to draw people in because you will be found by a lot of people walking by.

Cons:

  • High start-up costs.
  • Initial working hours can be long.
  • Business is restricted to the local area.

6. Service Business Model

Workers who utilize the service model have some sort of service to offer people, like house cleaning, childcare, and dog walking.

Other services that are more distinguished could be a personal assistant, ghostwriting a novel, or an interior decorator. Anything that you need to go to someone’s physical residence or place of business to perform your job.

Pros:

  • Most services have no inventory.
  • You’re the expert in your field.

Cons:

  • It’s hard to place a value on your business since you have little to no assets.
  • During hard times consumers typically cut back on services.

7. Content Business Model

Content Business Model

As a freelance writer, the business model I adhere to is the content model. Someone following this model provides information such as researched articles, email, social media posts, video production, editing for YouTube channels, and a host of other services their client needs.

Pros:

  • Allowing users to generate content about your product builds trust and inspires other potential buyers to try your product.
  • It broadens your online visibility.

Cons:

  • Because not everyone will like your content, you could get negative content that could lead to a loss of sales.

8. Fractionalization Business Model

Fractionalization focuses on selling only a fraction of a product. Customers are allowed to buy part of a product or service instead of purchasing the entire thing, thereby freeing them to only buy what will meet their needs.

For example, at the mall, there are pizza restaurants where a person can purchase a whole pizza with certain toppings, or they can pick a slice of pizza from pre-made pizza, allowing them to get just the amount they need.

Pros:

  • It helps win customers by allowing them to buy just a fraction of your product.
  • Because it is customer-centered, it allows you to serve according to their needs, helping your business become competitive and sustainable.

Cons:

  • The sectors where it will work can be limited as some products and services cannot be divided.

9. P2P (Peer to Peer) Business Model

P2P (Peer to Peer) Business Model

Someone who adheres to the peer-to-peer model is connecting two individuals for some type of service. For a while, I took care of people’s animals while they went away or were at work, and I used a company called Care.com. This company connects people like me looking for a caretaking position with people like pet owners and parents looking for someone to take care of their loved ones.

Other businesses utilizing peer-to-peer models are Uber, Airbnb, and Lyft.

Pros:

  • Reduces overhead costs. Producers connect directly with buyers and avoid the costs of marketing, insurance, distribution, and transportation.
  • Increases specialization by allowing individuals to do what they do best.
  • User data is available to access where individuals can study their customer’s needs.

Cons:

  • There is no guarantee of product or service quality. Users rely on ratings and reviews to make their decision.

10. B2B (Business to Business) Business Model

Another model similar to peer-to-peer is the business to business, only this time, it is two businesses that are in connection with each other. If this is the model best for you, then you will be supplying or supporting another’s business goals by providing something of value they need to run their business.

For example, you may build furniture and sell it wholesale. The people who purchase from you stock their retail stores with the product you made and sell it at a higher price.

I have a friend who raises chickens. She has so many chickens that she raises organically and ethically that the local health food stores in our area purchase eggs from her and then sell them in their retail store to consumers looking for organic foods that come from ethically raised farm animals.

Pros:

  • Engagement is generally long-term.
  • It’s easy to predict what your income will be.
  • The selling cycle is short since you are selling to specific customers who know what they want and need to pass on their inventory to the consumer.

Cons:

  • Your bank of customers is limited since you are selling to businesses only.
  • Dealing with businesses is complex, and the decision process can take a long time.

11. B2C (Business to Consumer) Business Model

B2C (Business to Consumer) Business Model

A business-to-consumer model is similar to the product model in that you offer a product directly to a consumer, but it is strictly online. The transaction is between you as the seller and the consumer. B2C is also known as e-retailing or e-tailing.

There are also categories of a B2C business, such as direct sellers. These companies sell their products directly to the consumer, like Microsoft and Apple. There are also online intermediaries who have created a platform that brings sellers and consumers together. eBay and Etsy are examples of online intermediaries.

Fee-based businesses, community-based businesses, and advertising-based businesses are the final categories of the B2C business model.

Pros:

  • It is easy to scale up your business in a short amount of time.
  • There is no limit as to what you can sell.
  • It is relatively easy to market your products through online platforms and social media.
  • Market trends are predictable.

Cons:

  • The market is competitive and can hinder your success.pros

12. SaaS (Software as a Service) Business Model

Software as a service is when a person or company offers a software program where the consumer is provided the ability to use the program without literally purchasing and installing it on their computer. Things like Adobe Creative Cloud, where the customer can pay for a subscription to use products such as Photoshop and Premiere Pro without literally purchasing the software, is one example.

Microsoft Office 365 is also a subscription-based service that is accessed through the Internet and is not literally stored on your computer. It is launched through a web browser from whatever location you choose. This also is a software as a service model.

Pros:

  • It is easy to scale your business within a brief period of time.
  • Offers a broad customer spectrum. Small, medium and large businesses are looking for SaaS alternatives.
  • Because companies are subscribing to a membership plan, you can predict what your revenue will be for a given period.

Cons:

  • It’s a crowded field with many competitors.
  • With established brands such as Microsoft and Google, it can be a tough market to break into.

13. Pay as You Go (Utility) Business Model

Just as with your utilities such as water, electricity, and gas, this model has the consumer pay each month based on the usage of the product or service. Generally, they will make a one-time purchase for the product or service and then pay based on how often they use the service.

Some mobile telephones work like this where the person purchases a phone, and then they buy minutes based on how many they think they will need. They don’t need to pay for anything else until they run out of minutes and need to purchase more.

This type of business model makes expensive items that were once out of a person’s reach easier to obtain.

Pros:

  • Allows customers to control their usage, thus drawing in more business.
  • Ability to align costs with the rate of consumption, so you have more control of your inventory, which is based on customer demand.
  • No need for renegotiation terms as it is not a subscription.

Cons:

  • Because customers use the product only when needed, it’s hard to predict your income.
  • There’s no guarantee of customer retention due to them not having to make a commitment.

14. Brokerage Business Model

Brokerage Business Model

People who use the brokerage business model form a brokerage business where they connect buyers with sellers and get paid a commission on the final transaction. They are a type of middle man.

Amazon.com is an example of the brokerage business model. Amazon, the broker, connects buyers who are looking for products on the Amazon website with sellers. There are a number of sellers connected with Amazon.com who sell their products through the broker, Amazon.com.

Another example of the brokerage business model is airline and travel websites that find buyers special deals for where they want to go. Travelocity, Expedia, and Priceline are some examples of travel websites that use this business model.

Pros:

  • Many opportunities to work with a lot of businesses.
  • You don’t need much capital to get started.

Cons:

  • As the owner of the business, you are liable for everything that happens.

15. Multisided Platform Business Model

Similar to the brokerage business model, the multisided platform business model is a service that connects two or more participating groups, whereby the initial business following this model acts as the intermediary.

Not unlike the brokerage business model that Amazon.com uses, whereby they connect just two groups, buyers and sellers, the multisided platform provides interactions with several groups. Take, for instance, Facebook.

Facebook connects users, advertisers, content developers, and users or consumers, though users don’t pay for the platform use. Advertisers, however, benefit by using Facebook to reach their own customers who are among the users on Facebook.

Pros:

  • With no intermediaries to pay, there is a reduction in supply cost and a high return on investment.
  • Multisided businesses experience growth because of same-side and cross-side network outcomes.
  • There is no need to produce a product.

Cons:

  • There needs to be a considerable investment.

16. Hidden Revenue Business Model

Hidden Revenue Business Model

With the hidden revenue business model, users don’t necessarily pay to use their services, but the company still earns money from various sources. Google is one example. Consumers can use Google for free, and Google earns its revenue from advertisers and businesses who bid on keywords.

Facebook is another business that earns revenue from hidden sources. They offer their platform for free, yet they make money through other sources. There are a lot of sponsored advertisements in the news feed.

Pros:

  • Greater revenue generation since basic use to consumers is free.
  • Greater chance for a sustainable income.
  • The company doesn’t need to rely on customers to make profits, so there is more time to focus on bettering the product.

Cons:

  • Relies heavily on third parties, so the company must keep users happy to keep business going.
  • Difficult to maintain customer privacy since information is likely shared with third parties.

17. Online Education Business Model

There are several businesses that bring customers and sellers onto one platform to learn a skill online. Places like Skillshare, Khan Academy, and Coursera are just a few platforms where people can go to learn a new skill such as videography or how to draw with Procreate, take a writing course such as is offered on Coursera, or study business management on LinkedIn learning.

Some of these platforms offer a yearly subscription where the customer has access for one year to all the classes available, or others, such as Coursera, have a pay-per-class option.

Pros:

  • Enhanced reach and easily accessible.
  • Ability to learn at own pace and high access to course materials.

Cons:

  • It can be costly.
  • Limited social interaction.

18. Affiliate Marketing Business Model

Affiliate Marketing Business Model

I used to be involved in the affiliate marketing business model when I had a blog. Sellers would send me products to review on my blog, and I would weave a story around the use of their product, including a personal review.

In affiliate marketing, companies make money by featuring, reviewing, and recommending another company’s product. The income generated is generally based on the number of people who purchase the product by going through the link in your review.

Pros:

  • There is a huge potential for income with successful sales when the affiliate is getting paid per sale.
  • If the affiliate is being paid for each click, there is income even if the person does not purchase the product.

Cons:

  • With the pay per sale, no income is generated if no one purchases the item.
  • With pay-per-click, the revenue is small, and it’s not worth it unless you have a highly trafficked site.
  • Some merchants will not hire you if you do not have a website with high traffic levels.

19. Instant News Business Model

Having an instant news business can be invaluable in a society where no one wants to wait for news to be verified and released. The instant news business model provides instant news across the world. It focuses on reporting events as they are happening or as close to when they occurred.

Businesses that use this model engage in user-generated content by allowing sources they trust to provide information to their audience as it occurs. They can monetize the traffic through ads on their website or charge users a subscription fee.

One example of a company that uses this model is Twitter. Even though it is a social media platform, Twitter makes it easy for users to share breaking and instant news that can be quickly spread to other users through defining hashtags.

With the hashtag method, a user can sign onto Twitter, put the hashtag to the topic they are interested in in the search bar, and within seconds they will have instant access to all that is happening related to that topic.

Pros:

  • Enhanced connection with your audience.
  • Increased traffic boosts revenue.
  • Easily accessible to customers.

Cons:

  • High fake news content.
  • News reporting is of low quality.

20. Direct Sales Business Model

Direct Sales Business Model

In direct sales, products are sold directly to the customer through one-on-one conversation or through a small gathering such as a Pampered Chef Party.

An example would be how, in the 70s, salespeople used to go door-to-door selling vacuum cleaners. Also, Avon and Mary Kay are examples of the direct sales business model.

Pros:

  • You are basically in business for yourself and can work from home.
  • You earn a commission, bonuses, and residual income for the entire time you work with the customer.
  • It doesn’t take a lot of customers to build a good business and income.
  • Very low or no initial investment.

Cons:

  • Direct sales aren’t for everybody. You really have to like selling.
  • The start-up usually is with your friends and family. People you know.
  • You need to be consistent with bringing new people on board, and it can take a lot of work initially.

Related Articles

Can Lawyers Serve on Juries?

Can Lawyers Serve on Juries?