What Is a Business Model?
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Hello Future Entrepreneurs!
If you’re starting a business, one of the first big questions you’ll face, and what I’ve asked myself at the beginning of entrepreneurship is: Where do I start? That's where a business model comes in. Simply put, a business model is your game plan for how your company will create value and earn money it’s the blueprint for your business.
Understanding it is like knowing the rules of the game before you play. A strong business model gives you clarity on who your customers are, how you deliver value, and how you get paid. This is why investors, lenders, and future co-workers will want to follow your lead. If you’ve ever wondered why some businesses seem to “just work” while others struggle, the difference often comes down to a clear and scalable business model. There isn’t just one way to run a business, and we're about to explore some of the most popular types of business models to inspire you to take action today!
-Let’s do this.
1. Product Sales Model
The product sales model is simple. You sell a physical or digital product, and customers pay you directly. This could be coffee beans, clothing, tech gadgets, or downloadable software. Success here depends on product quality, pricing, and marketing.
Real Example: Whole Foods operates primarily on this model. They sell a vast range of physical products, such as their high quality fresh produce and groceries. Customers purchase these items at the store or online, and the transaction is a one-time sale. Whole Foods earns revenue directly from these product sales.
Vitamin Analogy: Imagine you run a vitamin company, and you sell bottles of Vitamin C. Someone buys the bottle, they own it, and the company makes money from that one sale.
Why It Matters:
You have full control over your product and brand.
It can be easier to start with a small number of products.
Area of Opportunity and How to Fix It
As the owner of a vitamin company using the product sales model, you need to be aware of this area of opportunity.
Challenge: Inconsistent Cash Flow
The Problem: A product sales model often leads to unpredictable income. Some months might sell high volume, while others are slow. This makes it hard to plan and grow your business. For your vitamin company, you may have a big surge in sales during cold and flu season, but sales could drop dramatically afterward.
The Fix: To stabilize your income, you should create a subscription service. Think about the seasonal patterns in your business and the consistent needs of your customers. By setting up a simple, automated process, you can deliver their favorite vitamins directly to their door every month. This strategy turns a single purchase into a long-term relationship, ensuring you have predictable cash flow throughout the year.
Service-Based Model
Instead of selling products, you offer your skills, time, or expertise in exchange for payment. Common examples include consultants, trainers, freelance graphic designer, artist, and agencies. Your earning potential often depends on the value of your expertise and your ability to scale services.
Real Example: Many marketing agencies operate on this model, charging clients for strategy, content creation, and advertising management.
Vitamin Analogy: This is like a nutritionist who creates a personalized wellness plan for a client, which includes a list of vitamins to take. The client pays for the nutritionist's expertise, not the vitamins themselves.
Why It Matters:
Low startup costs because you're selling a skill you already have.
You can charge more as you become more experienced.
Area of Opportunity and How to Fix It.
As the owner of a vitamin company using the service-based model, you need to be aware of this area of opportunity.
Challenge: Limited Scalability
The Problem: Your time is your product. As a nutritionist, you can only handle so many clients in a day, which limits your income. You can't clone yourself, so your business growth is capped by the number of hours you can work.
The Fix: To scale your business, you can leverage your expertise by creating a Patreon page. Instead of one-on-one sessions, you can offer different tiers of membership with exclusive content for your patrons. A basic tier could get access to weekly health tips, while a higher-priced tier could include an exclusive video series on "Vitamins for a Healthy Gut." This allows you to sell the same valuable information to hundreds of people without spending extra time on each one. You can also use social media platforms like Instagram and TikTok to promote your Patreon and reach a wider audience faster.
Subscription Model
With a subscription model, customers pay a recurring fee. Weekly, monthly, or annually for ongoing access to a product or service. This approach creates predictable revenue and builds long-term customer relationships.
Real Example: Netflix is a classic example, offering unlimited streaming for a monthly fee. Many coffee companies also use this model for monthly coffee bean deliveries.
Vitamin Analogy: Imagine your company sends you customers a monthly box with a 30-day supply of personalized vitamins. The pay a recurring fee to receive the vitamins automatically without having to re-order.
Why It Matters:
Provides a predictable income, which makes planning easier.
Helps build a community and loyal customer base.
Area of Opportunity and How to Fix It.
As the owner of a vitamin company using the subscription model, you need to be aware of this area of opportunity.
Challenge: Retention (Customer Cancellations)
The Problem: Customers may cancel their subscriptions if they don't see the value or if a competitor has a better system, price, or solution to their needs. For your vitamin company, customers might feel they are not receiving the value they are paying for, and will find another option elsewhere.
The Fix: To combat cancellations, focus on adding value beyond the product. Use storytelling to build a strong brand connection so customers resonate with who you are and WHY you do what you do. You can create an exclusive experience by including unique content with each delivery, such as a monthly wellness magazine with your expert tips, or by granting access to a members-only online community. Providing this sense of an "exclusive club" makes the subscription a lifestyle choice rather than just a product, which significantly reduces the likelihood of customers canceling.
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Freemium Model
The freemium model attracts customers by offering a free version of a product or service, with optional paid upgrades for premium features. This approach works well for software, apps, and digital tools.
Real Example: Spotify uses a freemium subscription model. Free streaming with ads, or paid premium for an ad-free, feature-rich experience.
Vitamin Analogy: This is like a wellness app that offers a free version with basic vitamin trackers and health tips, but you have to pay a premium to unlock personalized meal plans and connect with a nutritionist.
Why It Matters:
Attracts a large user base quickly with the "free" offer.
Converts a small percentage of users into paying customers.
Area of Opportunity and How to Fix It.
As the owner of a vitamin company using the freemium model, you need to be aware of this area of opportunity.
Challenge: Low Conversion Rate
The Problem: A lot of people might use your free app, but only a very small percentage of them will upgrade to the paid premium version. It can be hard to convince free users to pay for something they’ve been getting for nothing.
The Fix: You need to create a clear and compelling reason for customers to upgrade by solving a significant problem for them. The premium features must be so much more valuable than the free ones that users feel they can't live without them. For your app, you could offer a free trial of the premium features for a limited time or show highly desirable "locked" features, such as one-on-one video calls with a health coach.
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Marketplace Model
A marketplace model is a business that brings buyers and sellers together. The company itself usually doesn’t own the products, it is the bridge that provides the platform and audience.
Real Example: Facebook Marketplace is a great example of a marketplace that focuses on local communities. It lets millions of individuals and small businesses list items for sale to people in their area. Unlike other platforms, Facebook Marketplace generally doesn't charge a fee for local sales. Instead, it makes money by keeping you on the platform, where you connect with your community and are shown ads, proving that a marketplace doesn't always need to take a cut of every sale to be successful.
Vitamin Analogy: Think of a website that lets independent vitamin manufacturers and supplement stores sell their products in one place. The website doesn't make the vitamins, it just takes a small fee from each sale made on its platform.
Why It Matters:
Can scale quickly without needing to manage your own inventory.
Revenue comes from fees, so you don't have to worry about the costs of product development and other expenses that come with selling physical products..
Area of Opportunity and How to Fix It.
As the owner of a vitamin company using the marketplace model, you need to be aware of this area of opportunity.
Challenge: The "Chicken-and-Egg" Problem
The Problem: You can't get sellers to join your platform without buyers, and you can't attract buyers without a variety of sellers. It's a classic paradox that makes it hard to get the business off the ground.
The Fix: The key is to focus on a value-first strategy to attract one side of the market. You could attract sellers by providing them with powerful, easy-to-use tools. You could offer advanced analytics that help sellers understand what products are popular, or give them simple marketing tools to promote their unique products.
Once you have a high-quality, curated selection of sellers who see the real value in your platform, you can then shift your focus to attracting buyers. The unique and exclusive products on your site, combined with a great user experience, will naturally make your marketplace the go-to destination for customers, proving you can build a successful business without relying on discounts.
Blended Business Models
Some companies successfully combine multiple business models to expand their reach and revenue streams.
Real Example: 787 Coffee sells specialty coffee in physical coffee shops, through our online platform, and community-driven marketing by creating local experiences that make customers feel like they're part of an exclusive club or a local family. This approach builds a loyal community that becomes a powerful engine for word-of-mouth marketing, blending local experiences with their product sales and online presence.
Vitamin Analogy: This is like a vitamin company that sells individual bottles of vitamins (product sales) but also offers a subscription for monthly deliveries (subscription model) and provides free health-tracking tools on an app (freemium).
Why It Matters:
Diversifies your income streams, making your business more stable.
Allows you to reach different types of customers.
Area of Opportunity and How to Fix It.
As the owner of a vitamin company using a blended business model, you need to be aware of this area of opportunity.
Challenge: Complexity and Resource Management
The Problem: Managing multiple business models at once can be complicated and demanding. It requires different skills, resources, and marketing strategies for each model, which can be overwhelming for a new entrepreneur. You could struggle to manage the supply chain for product sales, have to handle customer service for subscriptions, and develop the tech for your freemium app all at the same time.
The Fix: Start with one model and master it before adding another. For your vitamin company, you could start with a simple product sales model. Once you have a steady customer base and stable operations, you can introduce a subscription option. Later, once those two are running smoothly, you could explore adding a freemium app to increase brand engagement. This phased approach helps you grow your business sustainably without getting overwhelmed.
The most important strategy for this model to work is delegate, delegate, delegate. This model requires a team that can focus on each new department. Develop a system, empower your team to take ownership, and make sure you supervise and give direction along the way.
Make sh’IT Happen.
So, what’s the right business model for your idea?
The answer is simple… It’s the one that aligns with your purpose. A true leader doesn’t just choose a path, they analyze and walk it mindfully. Before you rush into one of these business models, take time to understand their unique DNA. You now see many opportunities and directions you can take your business, and every model we discussed has proven to be successful when mastered.
The key is not to get distracted and switch from one to another when you don’t see immediate results, that is simply part of the journey. No matter which business model you choose. When you run into obstacles (because you will) don’t get so caught in the problems, but see them as areas of opportunities to strengthen your skills and refine your strategy.
The wisdom of a resilient business lies not in avoiding the storm, but in building a community strong enough to weather it together. Now that you have a playbook and the strategies behind each business model, the rest is up to you. It's time to take the floor, find your purpose, and create your own legacy.
-Thank you for Reading!
Let's get to work. 💯
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3 Easy Steps to Making Money in Business
These three steps are the core of how any business, from a side hustle to a major corporation, actually makes money. They're the difference between hoping you'll be profitable and knowing exactly how to build a sustainable business. So, what do you do with this information?
Step 1: Create, Price, and Market Your Product
First, you need a product or service that people actually want. This product must solve a problem or fill a need. Once you have it, you need to set a price that's high enough to cover your costs and generate a profit. Finally, you have to get the word out. Using a digital marketing strategy—like posting on social media or partnering with influencers—is how you spread awareness and find your customers. If no one knows you exist, you can't make a sale.
Clothing Brand Example: You design eco-friendly hoodies that people want. You price them at $50, which covers your $20 production cost and leaves a profit. You then post photos on Instagram to get your brand in front of the right audience.
Step 2: Make the Sale and Deliver
This is the most critical step: turning a potential customer into a paying one. You need a seamless way for them to buy your product, like an e-commerce website. The money your business earns from these transactions is its revenue. The process doesn’t end there, though. A positive customer experience is key to building a strong brand. By delivering the product on time and delighting your customer—maybe with a personalized note—you create a happy customer who is likely to buy from you again.
Clothing Brand Example: A customer visits your website and purchases a hoodie. You then ship it on time with a thoughtful thank-you note. The positive experience not only generates revenue but also encourages the customer to tell their friends about your brand.
Step 3: Reinvest and Grow
Making a profit is just the beginning. The final step is to use that profit to grow your business. Instead of spending all your earnings, you reinvest a portion of it back into your company. This could mean improving your existing products, expanding your marketing efforts, or creating new product lines. This continuous cycle of reinvestment is how a business scales and becomes more valuable over time.
Clothing Brand Example: You use the profits from your hoodie sales to design a new line of matching sweatpants. This expands your product catalog and increases your average order value, leading to more revenue and continued growth.
Mastering these three moves means you won't just run a business—you’ll understand it inside and out. It's the difference between hoping you're profitable and knowing exactly where you stand.
Want more straight talk and case studies on building a lasting business? Follow along and learn how to build a brand that doesn’t just make money, but makes history.
Let’s simplify the concepts:
Alex started his business from his college dorm room, creating custom, embroidered hats. He started with just one design, which he validated with his friends (Step 1). He priced each hat to make a $15 profit (Step 2) and used Instagram to post photos of people wearing them, which generated his first few sales (Step 3 & 4). After shipping each hat in a hand-stamped, recycled box (Step 5), he used his profits to create a second design and offer a new product line: branded tote bags (Step 6). Today, "Eco Thread Co." is a full-time business that employs several people and ships worldwide. Alex is living proof that following these six steps works.