You want to start a company but aren’t sure about a viable business model. How might you create something that people are willing to pay for and could earn you a profit?
Before diving into potential strategies, it’s important to understand what a business is and does. At its heart, a business generates value for its customers. Abusiness modelis a specific method used to create and deliver this value.
What Is Value in Business?
A successful business creates something ofvalue. The world is filled with opportunities to fulfill people’s wants and needs, and your job as an entrepreneur is to find a way to capitalize on these opportunities.
A viable business model is one that allows a business to charge a price for the value it’s creating, such that the business brings in enough money to make it worthwhile and continue operating over time. Whatever the business is offering must also satisfy the customer’s needs and quality expectations.
It’s important to note that value is subjective. What’s valuable to one person may not be to another. Moreover, the concept of value excludes any moral judgments about the intrinsic worth of an offering. For example, while most would agree that human life is more valuable than sports, some professional athletes make far more money than the average brain surgeon.
Nonetheless, the concept of value provides a useful bedrock on which to begin building your business model. In particular, consider what forms of value people are willing to pay for. Here are eight potential business models and the forms of value they deliver—as well as the pros and cons of each—to help you get started.
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8 Types of Business Models to Explore
Aproductis a tangible item of value. To run a successful product-focused business, try to produce the item for as low a cost as possible while maintaining a reasonable level of quality. Once the item is produced, your objective should be to sell as many units as you can for as high a price as people are willing to pay to maximize profit.
Products are all around us. From laptops to books to HBS Online courses (products don’t have to be physical), products are a classic form of value with high upside if you can get them right.
- Pros:Many products can be easily duplicated. Thus, firms can achieve economies of scale after bearing some upfront costs of production.
- Cons:Physical products need to be stored as inventory, which can increase costs. They can also be damaged or lost more easily than, say, a service.
Related: How to Create an Effective Value Proposition
Aserviceinvolves offering assistance to someone else for a fee. To make money from your service, provide a skill to others that they either can’t or don’t want to do themselves. If possible, repeatedly provide this benefit to them at a high quality.
Like products, services are in abundance, especially in the knowledge economy. From hairdressers to construction workers to consultants to teachers, people with lucrative skills can earn good money for their time.
- Pros:If you have a skill in high demand or a skill that very few others have, you can charge a fair price for your time and stand out in your field.
- Cons:If you don’t charge enough for your services, or many people have your skill, your business may not be as lucrative.
3. Shared Assets
Ashared assetis a resource that many people can use. Such resources allow the owner to create or purchase the item once and then charge customers for its use. To run a profitable business around shared assets, you need to balance the tradeoff of serving as many customers as you can without affecting the overall quality of the experience.
For instance, think of a fitness center. A gym typically buys treadmills, ellipticals, free weights, bikes, and other equipment and charges customers monthly membership fees for access to these shared assets. The key is to charge customers enough to maintain and, if needed, replace their assets over time. Finding the right range of customers is the key to making a shared asset model work.
- Pros:This model provides people access to a lot of assets they wouldn’t otherwise have access to. In addition, many people are willing to pay a lot for access to trendy social spaces.
- Cons:Because they don’t own the assets, customers have little incentive to treat your resources well. Make sure you have enough in your budget for quick fixes, if necessary.
Asubscriptionis a type of program in which a user pays a recurring fee for access to certain specified benefits. These benefits often include the recurring provision of products or services. Unlike a shared asset, however, your experience with the product or service isn’t affected by others.
To have a successful subscription-based offering, build a subscriber base by providing reliable value over time while attracting new customers.
The number of subscription services has exploded in recent years. From magazines to streaming services to grocery and wine delivery subscriptions, businesses are turning to the subscription-based model, often with great success.
- Pros:This model provides certainty in the form of predictable revenue streams, making financial forecasting a bit easier. It also benefits from a loyal customer base and customer inertia (for instance, customers may forget to cancel their subscription).
- Cons:To run this model, your business operations must be strong. If you can’t deliver value consistently over time, you may want to consider a different business model.
Aleaseinvolves obtaining an asset and renting it out for an agreed-upon amount of time in exchange for a fee. You can lease virtually anything, but it’s in your best interest to rent assets that are durable enough to be returned in good condition. This ensures you can lease the good multiple times and, perhaps, eventually sell it.
To profit from leases, the key is to ensure that the revenue you get from leasing the asset before it loses value is greater than the purchase price. This requires you to price the rental of the item strategically and potentially not lease to those who may not return it in good condition. This is why many rentals of high-value items require references, credit checks, or other background information that can predict how someone may return the leased item.
- Pros:You don’t have to have a novel idea to make money using a lease business model. You can purchase assets and rent them to others who wouldn’t buy them for full value and earn a premium.
- Cons:You need to protect yourself from unexpected damage to your assets. One way to do so is through insurance.
Insuranceentails the transfer of risk from a customer to a seller of an insurance policy. In exchange for the insurance company (the seller of the policy) taking on the risk of a specified event occurring, they receive periodic payments ("premiums" in insurance lingo) from the policyholder. If the specified event doesn’t happen, the insurance company keeps the money, but if it does, the company has to pay the policyholder.
In a sense, insurance is the sale of safety—it provides value by protecting people from unlikely, but catastrophic, risks. Policyholders can take insurance out on almost anything: life, health, house, car, boat, and more. To run a successful insurance company, you have to accurately estimate the likelihood of bad events occurring and charge higher premiums than the claims you pay out to your customers.
- Pros:If you calculate risk accurately, you’re guaranteed to make money using the insurance business model.
- Cons:It can be difficult to accurately calculate the likelihood of specific events occurring. Insurance only works because it spreads risk over large numbers of policyholders. Insurance companies can fail if a large portion of policyholders is impacted by a widespread, negative event they didn’t see coming (for example, the Global financial crisis in 2007 and 2008).
Related: 5 Steps to Validate Your Business Idea
Resellingis the purchasing of an asset from one seller and the subsequent sale of that asset to an end buyer at a premium price. Reselling is the process through which most major retailers purchase the products they then sell to buyers. For example, think of farmers supplying fruits and vegetables to a grocery store or manufacturers selling goods to a hardware store.
Companies make money through resale by purchasing large quantities of items (usually at a bulk discount) from wholesalers and selling single items for a higher price to individuals. This price raise is called a markup.
- Pros:Markups can often be high for retail sales, enabling you to earn a profit on the items you resell. For example, a bottle of water might cost 10 cents to produce, whereas a customer may be willing to pay $1.50 or more for the same bottle.
- Cons:You need to be able to gain access to quality products at low costs for the reselling business model to work. You’ll also need the physical space to store inventory to manage sales cycles.
Agentscreate value by marketing an asset, which they don’t own, to an interested buyer. They then earn a fee or a commission for bringing the buyer and seller together. Thus, instead of using their own assets to create value, they team up with others to help promote them to the world.
Running a successful agency requires good connections, excellentnegotiation skills, and a willingness to work with a diverse set of individuals. One example is a sports agent who promotes players to teams and negotiates on their behalf to get the best deal. In return, they typically receive compensation equal to a certain percentage of the contract.
- Pros:You can highly profit from expertise and connections in your industry, be it publishing, acting, advertising, or something else.
- Cons:You only get paid if you seal the deal, so you have to be able to live with some uncertainty.
Setting Your Business Up for Success
These eight types of business models each have pros and cons and deliver value in their own ways. If you’re looking to start a business and need a place to start, one of these could be the best fit for your venture andentrepreneurial skill set.
Interested in honing your entrepreneurial skills? Explore our four-week online courseEntrepreneurship Essentialsand our otherentrepreneurship and innovation coursesto learn the language of the business world.
This post was updated on February 19, 2021, and is a compilation of two posts, previously published on May 26, 2016, and June 2, 2016.
Your business model gives you insight into how you extract money or time from somebody for the product and understand the expense necessary that actually deliver it and the margins associated with it. You then tie in how you fit in the value chain of your organization and where you fit from a competitive standpoint.What are the values of business model? ›
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Types of Business Models. There are as many types of business models as there are types of business. For instance, direct sales, franchising, advertising-based, and brick-and-mortar stores are all examples of traditional business models.What are the 9 business model practices? ›
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Schwartz and colleagues have theorized and shown empirical support for the existence of 10 basic individual values (Schwartz, 1992; Schwartz and Boehnke, 2004). These are: Conformity, Tradition, Security, Power, Achievement, Hedonism, Stimulation, Self-Direction, Universalism, and Benevolence.What are the 6 common values? ›
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An Ideal business model refers to a company's profit-making strategy. It lists any incurred costs, the goods or services the company aims to sell, and its chosen target customers. Both new and successful businesses need strong business models.
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At its core, an innovative business model uses ideas unique to an industry and incorporates the company's independent values. Companies that implement these strategies may increase sales and their appeal among investors.What are the four dimensions of business model? ›
Strategy, operations, finances, and marketing are the four dimensions of any business.How are the 8 business functions interrelated? ›
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Generally, the six functional areas of business management involve strategy, marketing, finance, human resources, technology and equipment, and operations.What are the eight main functional areas within most businesses? ›
Common functional areas in businesses include sales, marketing, finance and accounting, customer service, human resources, research and development, production, and distribution.What are 8 business characteristics of business? ›
Characteristics of Business
Some of these characteristics include economic activity, buying and selling, continuous process, profit motive, risk and uncertainties, creative and dynamic, customer satisfaction, social activity, and government control.
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No matter how bold or ambitious your plans are to grow your business, the key to your business's success lies in three critical, interdependent components: operational excellence, customer relations/communications and financial management.
In eCommerce, there are five different B2C business models: direct sellers, online intermediaries, advertising-based, community-based, and fee-based. Direct selling is the most common model.What are three values in business model? ›
Three pillars define a business model: the value proposition, the value architecture and the profit equation.What 3 values are most important to a business? ›
There are 3 main types of business values—principles, beliefs and standards of behaviour. Principles are the concepts, such as the following, that you believe are fundamental for your business and its success. Beliefs and attitudes are views that you hold to be true and influence your actions.What are the values of a Business Model Canvas? ›
The Value Proposition in the business model canvas is the unique offer your company provides to the customers. It can be a product or service that solves the customer's problem.What are the 4 components of a business model? ›
Hamel, 2000 “A business model is simply a business concept that has been put into practice. A business concept has four major components: Core Strategy, Strategic Resources, Customer Interface and Value Network”...What are the 4 types of core values? ›
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The Four Values Framework: Fairness, Respect, Care and Honesty | SpringerLink.What is value delivery in business? ›
Value-Delivery involves everything necessary to ensure every paying customer is a happy customer: order processing, inventory management, delivery/fulfillment, troubleshooting, customer support, etc. Without Value-Delivery, you don't have a business.What are the five positive values? ›
6) Positive values are those values that each community sees as having pro-social benefits that include caring, equality, and social justice, integrity, honesty, responsibility , empathy and restraint.What are the 3 key drivers of business value creation? ›
There are three categories of value drivers: growth drivers, efficiency drivers, and financial drivers.
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The Business Model Canvas consists of nine essential parts: Customer Segments, Value Proposition, Revenue Streams, Channels, Customer Relationships, Key Activities, Key Resources, Key Partners, and Cost Structure.What are key resources in a business model? ›
Key resources can be physical, financial, intellectual, or human. Key resources can be owned or leased by the company or acquired from key partners.What is the 4 C's model business? ›
The 4 C's of Marketing are Customer, Cost, Convenience, and Communication. These 4 C's determine whether a company is likely to succeed or fail in the long run. The customer is the heart of any marketing strategy. If the customer doesn't buy your product or service, you're unlikely to turn a profit.