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Business models: which one to use for your start-up

With the wide variety of business models available, it might be daunting to decide which one to utilize. Which one will be best suited for the business idea you have? Will you be able to create the revenue you dream of? Before we look at the variety of business models, let us look at the basics of a business model.

What is a business model?

According to Investopedia, a business model is the way in which a company generates revenue and makes a profit from the company’s operations. This profit is usually viewed as the gross profit of the company which is calculated by the cost of goods sold being subtracted from revenue. When you look at business models there are five aspects to look at:

  1. Revenue: This is your strategy to generate revenue. What are you planning to sell and how are you going to convince your clients to purchase your product?
  2. Gross margin: How much profit will you make off each sale? The type of business you run will depend on how much money you make off each sale.
  3. Operations: Where will you run your business from? What image do you need to portray to get the clients you require?
  4. Working capital: Do you know how much cash you need to run your business from day-to-day? How much do you need to spend on stock? If you have a shop, how much do you need to pay on rent?
  5. Financing: How much start-up capital will you need? Depending on your idea you could start a business on as little as R1000.

These aspects can be found in each business model. Here are four business models to consider.

Freemium

This business model works on the premise that a client is offered limited services for free but they can buy a premium package and get all the bells and whistles. The catch with this business model is ensuring that your offering is appealing enough that people will be willing to pay the premium price. The advantage of this is that people enjoy using a product for free without any strings attached and could be encouraged to buy the premium offering if they see the benefits of the product or service.

Direct sales

In this model, people use the infrastructure of an existing company to sell goods and get commission from the sales. This model is useful as many people are looking for ways to supplement their income and this can be done through direct sales. The merchandisers or sellers can also be the clients of the company.

Customized products

With everyone wanting to be unique, customizing a product to suit a specific client’s need is becoming more popular than ever. This business model is most successfully used by those in the fashion industry. An example is of Nike enabling their customers to design their own sneakers. If you are able to offer a personalized product, there are many who are willing to pay a premium for it.

Become a marketplace

By bringing the buyer and seller of a product together and facilitating the transaction, you have a business model which is currently booming. We see this with the advent of Uber and AirBNB. The advantage of this business model is that you have very low to no overheads. The risk of manufacturing and ensuring the sale of inventory also does not rest with you. You will make your money from the percentage you take from a successful transaction.

By adopting one of these business models or a combination thereof, you will be well on your way to making your business idea a reality. Step out of the box and live your successful entrepreneurial life.

Brought to you by the NSBC.