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Examples of Well‐Known Business Models

The following are some examples of business models that are used by various businesses. The list is by no means exhaustive and is designed to give you an idea of the models that exist. You have to keep in mind that business models evolve constantly. In many instances, the names can vary as they are not universally defined.

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1. The Add-On model

In this instance, the core offering has a competitive price. However, there are many extras that drive the final price up which results in the consumer not getting the deal they initially assumed. If you have recently tried to buy an airline ticket or car insurance, you will have spotted that some extras you might be offered can almost reach double figures!

2. The Advertising model

The advertising model became popular with the growth of TV and radio. TV stations earned revenue indirectly from people looking to promote services to the audience they attracted, rather than via consumers paying radio and TV stations to view their TV programmes.

Some Internet businesses derive revenue as a result of being able to offer advertisers access to highly targeted consumer niches, often lacking revenue from selling their goods or services. So, if your website is dealing with a narrowly defined topic, it is also likely to attract a highly defined niche audience. This group could be offered complimentary products or services with a higher chance of success than blanket mass-market advertising.

However, this business model is increasingly difficult to prove that it is your main revenue stream. For a start, the landscape is extremely competitive and advertisers have a lot to choose from. Building brand awareness and translating that into site visits is a very difficult and costly challenge. Successes such as Facebook are very much the exception to the norm.

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If this model is being considered for your start-up, it is worth noting that nowadays most savvy investors ignore ‘vanity metrics’ such as page impressions or visitor numbers and want to understand whether the underlying business proposition is profitable. Examples such as YouTube show how hard it is to monetize free content even when you have a significant number of visitors. In short, this model is not used by many businesses anymore.

3. The Affiliate model

An affiliate is simply someone who helps sell a product in return for a commission. However, they may never actually take ownership of the product, or even handle it. They simply get rewarded for referring customers to a retailer when they make a sale. Again, this business model has been a huge success given the ease with which the Internet facilitates it.

4. The Auction model

The auction model is synonymous with eBay, these days, but of course, auctions have existed for hundreds and hundreds of years. The tulip market in Amsterdam is one of the more famous examples. There are different types of auction, from English to Dutch, Vickrey, Sealed Bid, etc., and they all share certain characteristics: the price of the good is not fixed; each individual assesses the value of the good independently; competitive bids determine the final value. This business model has become very popular in recent years as the Internet has helped to broaden its appeal.

5. The Bait and Hook model

This is essentially the razor blade analogy listed above, where disproportionate amounts of value are captured on components, refills, etc. Anyone who regularly buys ink cartridges for printers will recognize this model where customer lock-in and switching costs result in monopolistic pricing on the component side. The mobile phone business also grew rapidly on the back of this model as handsets were often supplied free of charge when you signed up for a contract. Nowadays some consumers pay hundreds of euros for a smartphone and in many instances, minimum contracts are 18 months.

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6. The Direct Sales model

While direct selling was initially the primary ‘route to market’, production efficiencies coupled with improvements in transportation meant producers could reach a bigger market. This resulted in the pre-eminence of the retail distribution model for many years. However, the internet emerging as a distribution channel meant that producers could intermediate costly resellers and sell directly to customers themselves. The PC manufacturer Dell is a great example of a company that is very focused on the direct sales business model.

7. The Franchise model

Opening a franchise is essentially buying a working business model in a particular industry. You pay royalties for the privilege but get access to a winning recipe, a support network, and an established brand. Two famous franchise businesses are McDonald’s and Subway.

8. The Freemium model

This is where the business gives away something for free in return for your personal details. This way they hope to build up a relationship which will eventually lead to you buying from them in the future. It is typically used in service-based businesses where the lifetime value of the average customer is high and is increasingly popular with Internet services such as Spotify, Skype, or Flickr. Many of these offerings have similar cost structures where the small cost of serving an additional customer tends towards zero. The core free offering then acts as a gateway to the paid service. For example, with Spotify, the free version comes with adverts, the paid does not.

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9. The Internet Bubble model

At one point, ‘unique visitor’ numbers to a site had a large perceived value. Many businesses then offered free Internet services. Businesses were also valued by potential rather than underlying profit and loss metrics. There are still remnants of this till today. In some spectacular examples like Twitter.com, the notional value of the company is considerable even though existing revenue streams are negligible. The actual business model is getting lost in the media hype and proliferating user numbers. It becomes a matter of figuring the business model out at a later stage than up front. Naturally, this is a highly flawed strategy which in many cases does not produce good results.

10. The Low-Cost model

The low-cost model can be summed up in one word: ‘Ryanair’. This is an extremely well-established business model, where the aim is to drive significant volumes of customers (at a low customer acquisition cost) and by charging a very low price.

The model is not simply about trying to extract a whole myriad of extra cash from consumers but also configuring every single aspect of their business model to drive out costs. Examples include buying oil futures to manage oil price fluctuations, having destination tourist boards pay for newspaper advertising or staff paying for their own uniforms and training, etc.

11. The Pay as You Go model

This model meters actual usage and you pay based on what you consume. Some mobile phone contracts operate on this basis. I.e. the user can buy a phone card which gives them credit. These contracts make sure that each call is metered and the credits are reduced as the ‘minutes’ are consumed, in contrast to subscription models where you pay a monthly fee for calls.

12. The Recurring Revenue model/ Subscription model

With the recurring revenue model, the aim is to secure the customer on a long-term contract so that they are consuming your product or service well into the future. Given that the cost of customer acquisition can be high, retaining customers is a primary goal for most businesses. It is also becoming synonymous with ‘subscribing via direct debit’. Most utility providers use this model. Magazine publishers have also been looking to expand this part of their business for some time. They are offering heavy discounts to subscribers who buy all issues directly, rewarding them over individual discrete purchases bought on an ad hoc basis from various third parties.

13. The Somali Pirate Business model

Business models do not simply apply to legitimate businesses as The Somali Pirates’ Business Model by Mark Leon Goldberg illustrates!

Everything previously mentioned shows that there are numerous business models that can be considered and the number is growing. For example, in the gaming industry alone, David Perry, COO of Acclaim Games Inc list 29 business models for games that he is familiar with.

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