Types of Business Models

Conventional Business Models

In practice, most business models consist of these conventional models either individually or combined. Common business models are described in the table below:

In practice, most business models consist of these conventional models either individually or combined. Common business models are described in the table below:

$$ \begin{array}{l|l|l|l|l}
{\textbf{Business} \\ \textbf{Model}} & {\textbf{Types of} \\ \textbf{Customers}} & {\textbf{Products/Services}} & {\textbf{Channel} \\ \textbf{Strategy}} & {\textbf{Pricing} \\ \textbf{Strategy}} \\ \hline
{\text{Natural} \\ \text{resource} \\ \text{producer}} & {\text{Refiners} \\
\text{Distributors}} & {\text{Usable natural} \\ \text{resources and raw} \\ \text{materials} } & {\text{Contracts based} \\ \text{on spot or} \\ \text{forward prices} } & {\text{Spot or forward} \\ \text{market prices in} \\ \text{the contracts} } \\ \hline
\text{Manufacturer} & {\text{Distributors} \\ \text{End-users} \\ \text{(direct sales)} } & { \text{Finished goods} } & { \text{Distributors} \\ \text{Digital of Direct} \\ \text{sales force} } & {\text{Price per product} \\ \text{sold.} \\
\text{Subscription} } \\ \hline
\text{Distributor} & \text{Retailers} & {\text{Transportation and} \\ \text{storage} } & \text{Retailers} & { \text{Spread between} \\ \text{purchase and} \\ \text{sales prices} } \\ \hline
\text{Retailer} & \text{End-users} & {\text{Finished goods.} \\ \text{Customer} \\ \text{experience.} } & {\text{Stores} \\ \text{Digital or direct} \\ \text{sales force} } & { \text{Mark-ups on} \\ \text{products sold.} \\
\text{Member service} \\ \text{fees} } \\ \hline
\text{Broker} & {\text{Buyers and} \\ \text{sellers} } & {\text{Connecting buyers} \\ \text{and sellers.}} & { \text{Salespeople} \\ \text{Digital} } & {\text{Commissions} \\ \text{Listing fees} } \\ \hline
\text{Bank} & {\text{Borrowers} } & {\text{Loans.} \\ \text{Leases.}} & { \text{Digital} \\ \text{Branches, Loan} \\ \text{officers} } & {\text{Loan and lease} \\ \text{interest rate} \\ \text{margin over} \\ \text{interest rate paid} \\ \text{for funding} } \\ \hline
{ \text{Service} \\ \text{producer} } & {\text{Services} \\ \text{Businesses} } & \text{Services.} & {\text{Digital or direct} \\ \text{sales force}} & {\text{Service fees} \\ \text{Mark-ups on} \\ \text{products used or} \\ \text{sold} } \\ \hline
\text{Software} & {\text{Services} \\ \text{Businesses} } & \text{Software.} & {\text{Digital or direct} \\ \text{sales force} } & {\text{Subscription fee} \\ \text{License costs} \\ \text{Maintenance fee} }
\end{array} $$

Business Model Variation

In addition to conventional business models, there are other variations. They mainly consist of combinations of conventional models or industry-specific variations. Some of the variations include:

• Private label or contract manufacturers: A firm manufactures goods and is marketed by others. Example: Manufacturing might be based in one country and marketing done in another
• Value-added sellers: Distribute the products and manage complex elements like installation, personalization, service, or assistance. Example: service-intensive products such as Construction Machinery, enterprise software,
• Licensing Arrangements: A product-producing company uses someone else’s brand and, in return, pays a royalty. Examples: Payment for the right to use the name of a celebrity
• Franchise models: franchisees have a well-defined and exclusive relationship with a franchisor to operate under a specific brand with proprietary products and processes. Common types of franchise models include restaurants, retailers, and auto dealerships.

Innovations of Business Models

The primary emphasis of business model discussions is on innovation. In this vein, the discussions cove on how new business models can introduced or adapted into the existing market.

Business model innovation often goes hand in hand with technological innovation and is typically led by new market entrants rather than established industry players. For instance, consider the airline industry. The business model innovation has been mainly low-cost and ultra-low-cost airlines, with the following innovative features:

• Customer: leisure, mass market
• Product: Point-to-point flights
• Low prices
• No frills, low costs
• Channel: direct, digital sales

Implication of Digital Technology on Business Models

Large-scale business model innovation was around long before the advent of digital technology. However, the rapid and open-ended advance of digital technology has dramatically transformed business operations, evidenced by significant reductions in the costs of communication, information exchange, and financial transactions.

Therefore, some of the implications of the technology on businesses include:

• Location does not matter.
• Outsourcing is easily achievable.
• Marketing is easy and cost-effective to reach certain groups of customers regardless of location.
• Development of powerful network effects that can be easily accessible by many firms.

Network Effects and Platform Business Models

Network effects refer to the increase in the value of a network to its users as more users connect. Network effects lead to the development of different network-based business models. A good example is China’s WeChat messaging and payment platform.

Network effects can also apply to pre-internet businesses. For instance, telephone service, payment systems, and financial infrastructure such as stock exchanges.

Classification of Network Effects

Network effects can be classified into one-sided or multi-sided. One-sided networks consist of only a single homogeneous group using a network. Examples include telephone services and peer-to-peer payment systems, such as Venmo.

On the other hand, multi-sided(two-sided if we only have two types of users in the network) networks consist of more than two or more types of users. An example is credit and debit card networks, whose users consist of the merchant and the cardholder users. Another example includes digital marketplaces.

Network Effect and Crowdsourcing

Network business models frequently leverage crowdsourcing. In crowdsourcing business models, users can contribute directly to the value of a product. Crowdsourcing involves user communities that allow voluntary collaboration among users of a product or users with either low or no regulation.

Examples include social media such as TikTok and Douyin, open-source software, and knowledge aggregation sites such as Wikipedia.

Question

Which of the following is least likely found in a firm’s business model?

1. Target customers.
2. Financial forecasts.
3. Pricing methodology.

The correct answer is B.

Financial forecasts are detailed information usually found in a business plan.

A and C are incorrect. Features of a business model should highlight the following aspects:

• Target customers (or market) of the firm.
• Offering of a firm.
• Pricing of the firm.
• Value proposition of the firm.
• Profitability and unit economics of the firm.