Download Our Free ‘Start A Business’ Guide

Use our “Impact Entrepreneurship” checklist to start your business and make the world better.

Business Models Explained

This is what we will cover:
 
  • What is a business model?
  • What are the different types of business model?
  • Real life example of the business model for iimagine

What Is A Business Model?

  
So, what is a business model?
 
The simple answer is that your business model is how your business makes money. 
 
You can break a business model down into 3 components:
  • Everything involved with making your product
  • Everything involved with selling your product
  • How the customer pays for it
 
For example, there are some software businesses that sell their product for a one-time fee.
 
This is common in the WordPress world. But most SAAS companies sell their software with a subscription.
 
A lot of mobile apps give away their software for free and monetize with ads.
 
All of these businesses are selling software but their business models are different. 
 

What are the different types of business models?

 

Business Model: Advertising

 
One obvious example of a business that uses an advertising business model is the news media.
 
They create content and insert ads to monetize the content. You see these ads on every blog you read on the internet.
 
You might think that a combination of ad blockers and banner blindness has killed these ads but they continue to grow. 
 
One important contribution that Google has made to the advertising world is its Adsense platform.
 
If the owner of a blog uses Adsense, the ads that you see when you read a blog post are not the same as the ads that everyone will see.
 
They are customized for you.
 
It goes without saying that this significantly increases the chances that you will click on one of them and, even if you don’t, you are less likely to find the ads annoying because they all relate to things that you’re interested in.    
 
Another variation of this business model is the way YouTube, Facebook, and other social media platforms generate revenue.
 
Instead of creating content, they have created a platform for other people to create content and they monetize this user-generated content.
 
Of course, there are other traditional forms of advertising like television, radio, and billboards.
 
As far as I’m concerned, these advertising channels are all stupid and they’re strictly for dinosaurs.
 
There’s literally no justification for any organization, big or small, to use them so I’m not even going to bother talking about them. 
 

Business Model: Affiliate

 
The affiliate business model allows other people to be compensated for bringing you a customer.
 
The most well-known affiliate program is Amazon.
 
Anyone can become an Amazon affiliate for free.
 
If an affiliate writes a blog post with a review of a product they can insert links to the product on Amazon and get paid a percentage of the revenue if they buy the product.
 
The obvious reason that you might want to consider creating an affiliate program is that your affiliates will do all of the heavy lifting involved with convincing them to buy your product and you only have to pay your affiliates if they refer somebody that actually buys your product.
 
This is an extremely efficient and effective way to generate sales but it can take a lot of time to set it up and manage.
 

Business Model: Brokerage

 
Brokerage businesses connect buyers and sellers and help both sides take whatever steps they need to take to close a transaction.
 
They typically charge a fee per transaction. Sometimes they only charge the buyer or the seller and sometimes they charge both.
 

Business Model: Franchise

 
In the case of a franchise, the franchisor has developed a proven business model and they will give you a license to copy them in return for an upfront fee and an ongoing fee that is usually tied to sales.
 

Business Model: Freemium

 
When you use a freemium model, you give away a ‘Lite’ version of your product and make people pay for a premium version of your product.
 
This is one of my favorite business models as both a customer and a business owner. This model allows customers get a free sample and see if it really solves their problem before diving in and spending any money.

Download Our Free ‘Start A Business’ Guide

Use our “Impact Entrepreneurship” checklist to start your business and make the world better.

Business Model: Leasing

 
Leasing is the same as renting.
 
If you use this model, you’re giving people the ability to use your product for an agreed price and an agreed period of time and then return the product to you.
 
A good example of this is in the video production world.
 
There are a lot of different types of production equipment that has been created for different types of product.
 
Ths equipment can cost ten’s of thousands of dollars and it can quickly become obsolete.
 
So it’s common for production companies to avoid buying their own production equipment and rent the equipment they need for a specific product then return it and rent different equipment for the next product.
 

Business Model: Marketplace

 
Marketplaces allow sellers to list an item for sale and they give customers tools to make it easy for them to search for what they want, review their options and connect with sellers.
 
The marketplace business model can generate revenue by charging fees to the buyer or the seller or both.
 
The fees could be for placing listings or promoting listings or they could be transactional.
 

Business Model: Subscription

 
This model gives the customer access to a product or service on an ongoing basis in return for a recurring payment.
 

Business Model: Fee for services

 
This one’s obvious. You provide a service, you get paid.
 

Business Model: Product for service

 
This one’s also obvious. You provide a product, you get paid.
 

Other Considerations

Now, if you might be thinking that the subscription model is the best business model. Yes, it is the best business model for a long list of obvious reasons like:

  • You only have to sell the customer once and get paid, theoretically, indefinitely as compared to selling a fee for service or a product for servcie where you have to continuously make new sales.
  • It’s easier to predict your future revenue so it’s easier to plan your expansion and how to allocate capital.
  • If you’re planning to raise capital or sell the business one day in the future, this business model will usually attract more interest from investors and buyers and it will usually increase your valuation. If you compare two businesses where one uses a subscription model and the other uses a one-time payment model and all else is equal, the business that uses the subscription model will almost always attract more attention from investors and sell for a higher price.
 

Real-life Example

 
The Ideas platform on iimagine uses a combination of a subscription model and a freemium model. If you don’t know what the Ideas platform is, it allows people to generate ideas using a problem-solution framework.
 
The customer will create a listing where they state the problem they want to solve then invite team members or potential customers (or the public) to contribute solutions, vote on solutions, or comment on solutions from other people.
 
Over time, the best ideas will rise to the top.
 
People can create a listing a free listing or a premium listing.
 
That’s the freemium part of the business model.
 
The premium version provides customers with advanced features and more granular control over their listing, how people can participate and how ideas are generated.
 
In the meantime, after a listing has been created it will be live for as long as the user wants it to be live and the user will pay a monthly fee until they remove the listing.
 
This is the subscription part of the business model.
 
Why did I choose this business model? I chose it because of the advantages I mentioned earlier.
 
This is the best business model for my business and the customer.
 

Research Your Business Idea

 

The business model you choose will depend on what your target customer wants and what competitors.
 
 
People need to be clear about why they should buy from you and not your competitor.
 
If you want to design your own business model, check out this guide from Harvard Business Review about How To Design A Business Model.
 
 

Download Our Free ‘Start A Business’ Guide

Use our “Impact Entrepreneurship” checklist to start your business and make the world better.

  • Adam Radly

    Founder
    Founder of IIMAGINE. More than $100M raised. TEDx Talk about passion > 1 Million views. Founder of World Reconciliation Day with Nelson Mandela. Founder of One Direct Democracy.