Starting a business can be hard. You not only need to find a problem and figure out how to solve it, but then, critically, you need work out how you are going to turn a profit and make your business a commercial success. There a dozens of ways companies can make money, but without the right business model your business will never be a success.
So what is a business model
In its essence, a business model is a description of how a company makes money – how the company is able to deliver value to its customers and charge them appropriately. As investor Jason Vanclef says, businesses should always be looking to “maximize their cash flow and their future security”, and that means finding the right business model and iterating until the company can be financially efficient as possible.
In general, business models can be divided into three parts:
- Creation – the raw materials, design, manufacturing, labour, and everything else that goes into making a product or service.
- Sales – marketing, distribution, delivery, and payment processing
- Pricing – pricing strategy, payment methods, and one-off vs subscription payments
Put simply, for a company to become successful they need to be able to charge more for their service or product than it costs them to produce. And companies can iterate their model to reduce costs and increase prices until they find the most profitable mix.
Here are some examples of popular business models online:
Advertising has been the driving force of revenues on the internet since the early days, with the first banner ad appearing over a quarter of a century ago back in 1994. The idea is that website publishers or web services create content or services that people want to see or use and then they display advertisements to support the service, with the advertisers picking up the tab for a generally free service – so the advertiser is the customer not the reader/user.
Examples: YouTube, Twitter, Facebook
The subscription model has really taken off over the last few years, with music and video streaming services and most high quality publishers utilising the model today. If you watch Netflix, listen to Spotify, or read The Atlantic or New York Times then you pay a weekly, monthly, or yearly fee and in return you get access to their content – which makes the subscriber the customer, giving them a more direct relationship with the content provider.
Examples: Netflix, Spotify, The Economist, The New York Times
Few large websites rely on optional donations to support them, but there is one big name that has made a huge success of this model – Wikipedia. The online encyclopedia is one of the world’s most visited websites and stays free to use and advertising-free thanks to regular donation drives, where both individuals and businesses donate to keep the information online.
Afiliate websites generate revenues by getting their users to sign up for or buy specific recommended services or products. Sometimes, as on this website, various products and services are reviewed and readers that are interested are encouraged to click a link to buy, and in return the website receives a commission from the shop or service. Sometimes this is a small part of the website’s revenues, as in our case, but sometimes they can be the entire model as with the excellent NY Times-owned website The Wirecutter.
Examples: The Wirecutter, TechFruit
Photograph by Olu Eletu