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| Business Models: Definition + 16 Explained Business Models. |
Business Models: Definition + 16 Explained Business Models.
Freelancers and companies need suitable business models to be successful and generate long-term income. This applies to small businesses as well as large corporations.Before starting your own company, you should consider: Which business models fit your idea and can be well implemented. There are a variety of options available, from traditional to digital business models. We present 16 business models in detail...
What are Business Models?
In general, business models are defined as the main functions, actions, and interactions of a company to create products or values and thus generate profits.In short: a business model is what a company uses to make money. However, there is no universally accepted definition in scientific discussion.
As a decisive factor, business models contribute to value creation. How an idea is implemented, marketed, and delivered to the customer often determines success or failure. Choosing the wrong model can lead to failure, while another business model with the same idea might bring a breakthrough.
Difference from a Company's Strategy
In common usage, business models and company strategy are often confused or equated. More precisely, the company strategy is the plan and approach to differentiate itself from direct competitors, attract customers, and establish a market presence. This can happen, for example, by focusing heavily on customer relationships and satisfaction.However, business models remain unaffected by this, even though there may be overlaps. Two companies can have identical business models but entirely different strategies.
In our comprehensive overview, we have listed 16 business models and explain how they work. We differentiate between traditional and digital business models. However, this distinction is not always literal, as many traditional models can also be applied to digital products. The mentioned examples can also partially be assigned to several of the business models listed.
Traditional Business Models
1. Direct Selling:
Many companies use intermediaries to market their products or services and make them accessible to customers. Direct selling eliminates this additional step. No wholesalers or retailers are involved; instead, the company sells directly to the end consumer.The advantages include higher profit margins for the company and lower costs for consumers. Prices are generally lower because fewer parties want to earn from the sale. On the other hand, there are higher expenses for running one's online shop and marketing to attract the target audience to the product.
Examples of direct selling: Tupperware, Vorwerk, and own online shops.
2. Cross Selling:
Once a customer is acquired, companies benefit most when they buy additional products as well. Cross-selling aims precisely at this. During the shopping process, consumers are shown and suggested additional products that might be of interest to them. There is often a direct connection to the initial purchase, but cross-selling is also possible without a direct link to the original product.The goal is to increase revenue by encouraging customers to take as much as possible with them when they make a purchase, especially items they might otherwise buy elsewhere.
Examples of cross-selling: are Tchibo (many offers besides coffee), and gas stations (selling food and magazines alongside fuel sales).
3. Subscription:
In many areas, the focus is not on one-time purchases but on customer subscriptions. Instead of a one-time payment, a fixed amount is regularly debited, usually monthly, for the service. The duration of such a subscription varies depending on the product and contract. For customers, the advantage is not having to constantly worry about new contracts, renewals, or repeat purchases.Companies benefit from better revenue predictability and long-term customer retention. Such subscriptions have long been known through magazines but are now becoming standard in the software sector and with streaming services.
Examples of subscriptions: are Netflix, DisneyPlus, antivirus software, and Dollar Shave Club.
4. Franchising:
In franchising, the franchisor grants the franchisee the right to use a brand or products according to established standards. The contract between the two parties precisely outlines the fees involved, the goals to be achieved, and the requirements to be met.This business model is particularly common in the gastronomy and fast-food chain sectors. Franchisors benefit from lower risk and the ability to expand their brand, even internationally. Franchisees can get started more quickly, leveraging the franchisor's experience and brand recognition, making it easier to enter the market if they have the necessary financial resources.
Examples of franchising: are McDonald's, Burger King, Subway, and Pizza Hut.
5. Licensing:
Individuals or companies are granted a license to use a product or intellectual property in exchange for a fee. The created value (e.g., software) is not used by the creator but made available to users for a corresponding payment. Licenses are granted for a specified period and must be renewed to maintain usage rights.Companies secure ongoing revenue through licensing, while customers benefit from a lower licensing fee. Licensing business models can, for example, enable software to be marketed millions of times with annually recurring users.
Examples of licensing: Microsoft, usage of copyrights between author and publisher, apps and software.
6. Add-Ons:
These business models initially attract customers with a very low price, with the larger revenue generated through add-ons. Customers can buy the basic version of a product or service, but those who want something more or better will pay extra. The goal is, of course, to make attractive offers to sell as many add-ons as possible.Some business models are specifically designed so that many customers will need to purchase certain extras. Budget airlines, for example, offer tickets at rock-bottom prices, but those who want to bring luggage, eat, or drink must pay extra. The advantage for consumers is the ability to pay only for what they want. Companies can often generate better revenues than with a single price.
Examples of add-ons are airlines, insurance companies, and car dealerships (special equipment).
7. Solution Provider:
A solution provider does not see itself as just a seller of a single product. It offers comprehensive solutions for its customers: from consulting to purchase, installation, maintenance, or repair. Other companies can also be potential customers, provided with a comprehensive package for collaboration within a project.Customers receive everything they need or want from one source. They do not need to search for and combine different providers to cover all aspects. Companies can charge a higher price for such a complete service and retain customers more intensely and for longer periods.
Examples of solution providers: are Microsoft, Apple, and SAP.
8. Lock-In:
Every company tries to not only attract customers but also achieve long-term customer retention. The lock-in business model focuses precisely on this—not through rewards or discounts. Lock-in keeps consumers tied to their products through exit and switching barriers. If a customer wants to switch to a competitor, it involves costs, greater effort, or other disadvantages.This often deters customers, leading to (forced) loyalty. For companies, this results in a high customer lifetime value—each customer generates significant revenue over a long period.
Examples of lock-in: Apple, razor blades, coffee machines, and coffee pods/capsules.
Digital Business Models:
1. E-Commerce:
Probably the largest business model is e-commerce (online trade or electronic commerce). It encompasses advertising, buying and selling, and customer service through digital channels. A typical feature of e-commerce is the online shop, which almost every company has nowadays. Many customers search and shop online, making it increasingly difficult for local retailers to keep up.Companies can reduce costs through e-commerce. There is no need for expensive rent for a store and lower personnel costs. End consumers enjoy the convenience of shopping anytime and anywhere, regardless of opening hours.
Examples of e-commerce: are Amazon, Zalando, and countless online shops.
2. Dropshipping:
Closely related to e-commerce is dropshipping. In recent years, it has gained significance and has attracted more followers. The principle: in dropshipping, an online retailer sells products without manufacturing or stocking them. When a purchase is made, the order is placed with a wholesaler or producer and sent directly to the buyer.For this business model, you don’t need to manufacture or store anything yourself. This significantly reduces costs. Ultimately, your primary focus is on online marketing to reach as many customers as possible. However, companies have little control over quality and customer satisfaction.
Example of dropshipping: Amazon.
3. Affiliate:
Affiliate business models rely on commissions for sold products or services. A simple example: you run a website where you write technology articles. You can include affiliate links where the described products can be purchased directly. Each time a customer purchases through your link, you receive a predetermined commission.The goal is for both sides to benefit: the affiliate partner earns a share of the revenue, and the company reaches potential customers. However, to use these business models effectively, you need a substantial reach on your homepage or social media profile.
Examples of affiliates: are partner programs, blogs, social media, and Amazon Affiliate.
4. Freemium:
The term combines the words "free" and "premium," describing the core of the business model: customers can use the basic version of a product or service completely free of charge. However, to access the full functionality, ad-free experience, and other perks, they must purchase the premium version.Customers can decide for themselves whether they want to pay for the full range of features. The free offer attracts a large number of potential buyers. From this large customer base, significant revenue is generated through offers and attractive features.
Examples of freemium: are Spotify, Xing, and LinkedIn.
5. Free Models:
Offering completely free services also counts as a business model—and can be very lucrative. There are various ways to make money with a free model. In addition to the free product, paid add-ons can be offered. This is popular with so-called free-to-play games. These can be downloaded and played for free within the game, and countless items can then be purchased.Other free models make money through advertising or by monetizing user data collected during the free use.
Examples of free models: are Google, Instagram, and Facebook.
6. Pay per Use:
In this business model, customers are offered a pricing model directly based on their actual usage. Those who use a service extensively pay accordingly—if a service is not used at all during a period, no costs are incurred. Pay-per-use can thus be seen as a kind of subscription without a fixed price per interval.The advantage for customers is that they only pay for what they use, allowing better control of their costs. Companies typically benefit from a fee, although exact revenues are harder to predict.
Examples of Pay per Use: car rentals, and electricity in private households.
7. Flatrate:
Opposite business models rely on a flat rate. This means customers pay a fixed price but can use a service without any limits. The principle became well known through telephone and internet providers. While it used to be Pay-per-use, now all offer a flat rate for the service. Customers can call and browse as much as they want for a monthly fixed price.Companies can attract customers through transparent costs and easy handling: fixed costs, no restrictions, and no surprises. At the same time, user numbers can be well calculated.
Examples of flat rates: are providers, and Netflix.
8. Marketplace:
A digital marketplace brings supply and demand together. These business models aim to create the largest possible platform with many users. The more potential buyers, the more attractive for sellers—and the more sellers, the more new buyers are attracted.Marketplaces can earn revenue through advertising, commissions, or additional features. For example, sellers may be charged if their products are to be particularly prominently placed.
Examples of marketplaces: are Amazon, eBay, and Etsy.
Developing and Adapting Business Models:
The selection and implementation of suitable business models should be well thought out. After all, you want to be successful with them for years, ideally decades. However, it is also important that business models are developed, adapted, and, if necessary, changed over time. Famous examples show that even large companies can run into trouble if they don't adapt.Netflix and Blockbuster Video have a similar origin as video rental stores, but Blockbuster, with more than 50,000 employees, was worth several billion, while Netflix was just starting. However, with video-on-demand and streaming, only one of them adapted its business model. Today, Netflix has over 200 million paying users, while the former market leader Blockbuster went bankrupt over 10 years ago.
Future business models, in particular, require flexibility and constant development. Those who stand still will be left behind.