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What Is a Business Model? Successful Types of Business Models You Need to Know
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Welcome! In this lecture I want to show you several types of business models, how to use them in business, how they work. If you follow me along you will understand a few advanced concepts about business modeling and how to use it to actually break down existing businesses or actually how to borrow some parts of business models out there to grow your business. So let's get to it. We want to look right now at three key points. So what is a business model, how it works and why it's important. A business model is first of all a framework and a way for us to explain a business.
A business model is not something static, it's something very dynamic, it evolves over time and it's made of many moving parts. The way a business model works is that we have several building blocks of a company and those building blocks come together actually to make the company work in the marketplace and to actually give the company a competitive edge, a competitive advantage which can last over time.
If you are an analyst who is trying to actually break down existing companies or if you are a professional who is trying to understand more of the context of the business world where you are operating or if you're an entrepreneur who is trying to build successful businesses, this is where business models can be actually useful. So a few key takeaways. A business model is made of many moving parts. So again, it's not something static, it's something dynamic, it evolves over time. You need to think of it as something that you can use to understand your business and other businesses around you.
A second point is that a business model, while it's an evolving creature, it's an evolving animal, it's also the opposite of a business plan where a business plan actually you use it to plan ahead or actually to get funding for your business. Usually in business plan it's sketched on a piece of paper, it's a plan made of dozens of pages and most of the time as soon as you start implementing what you have on the plan it will not work in the real world. A business model instead it's a framework for us to actually experiment. So it's really a framework for experimentation.
It's something that helps us continuously improve an existing business or understand how existing businesses actually are evolving. So that's what we need to understand right now. And while it's nice to think that we can sketch a business model on a piece of paper and it will work in the real world, it almost never happens. So in most cases in order for you to make a business model work you're going to need to actually iterate over and over again. We're going to divide business models and classify in a couple of main types.
From here we're going to look at the business model depending on the kind of person that we're dealing with and whether we're dealing with a person or with another business. For the sake of this classification we have actually three main kinds of business model. We have B2B, B2C and B2B2C. Of course we have many variations right now. What matters is really for us to understand how we can break down our business to actually be more effective in the way we actually provide value with the business that we are building. In terms of B2B this simply means that your business is dealing with another business.
It's important to understand that because usually you will structure your company based on the key customer. So if your key customer is another company you will need to have for instance a dedicated sales force or like you know people who are able to understand the complex dynamics within organizations to actually sell directly to those businesses. Of course the more the value of the product that you're going to sell usually the more you're going to need a sales force which is able to understand those complex dynamics. One example of this kind of company is a company like Salesforce which is a software as a service company that provides primarily a software to other businesses.
Then we have the B2C. In a B2C model your company will deal actually with customers, with your ideal customers. One example is Tesla which uses a direct to consumer model where it has its own stores and it sells its own cars online.
In this model you need to understand that you're dealing with customers most of the time so you need to have a different kind of business model, a different kind of organization and structure of this organization where on the one side you want to make your brand very strong so that you can attract a very large number of potential customers and then on the other side you really have this approach where you can sell directly to them. So this is another model where again the way you approach the customer changes if we go from B2B to B2C. That's why this is important to understand and not because we want to add too much complexity or classifications.
This is just because if you're dealing with another organization you need to understand more complex dynamics and that people behave in a certain way. Your key customer is going to behave differently compared to a B2C model. And a third model is a B2B2C. In a B2B2C model a business actually deals with another company, another business to get to a final customer. One example of this is like the example of Coca-Cola. You know that Coca-Cola can be found anywhere in the world whether you go in a desert or if you go on the other side of the world you're going to find Coca-Cola anywhere.
And that's because Coca-Cola is a very strong network of distributors and partners which are usually located on the places where Coca-Cola wants to distribute its products. So when the final consumer, the customer, the final consumer actually knows the brand because actually when you're buying Coca-Cola you have the brand labeled on the final product, Coca-Cola is getting to you through a set of networks and local partners and distributors. So it's very important to understand that in a B2C model a company knows how to master the distribution and partnership side to actually get to the final customers and consumers. So this is one way to classify business models at more general level.
So who is your key customer that you're dealing with? Is it a business? Is it a customer? Is it a consumer? Or is it actually a partner that brings you to the final, to the final customer or consumer? Another key point to understand before we move forward and we look at different sales models that we have here that you can apply back to your business. When we have a complex organization like Amazon, a complex organization like Amazon actually has different kinds of business model within the same company.
One example is Amazon has an e-commerce platform which is primarily a B2C platform even though it uses some also variations of B2B to C because Amazon leverages for instance on affiliations to actually get its products, its actually platform to final customers. Amazon also has AWS which is the cloud part of Amazon which instead is not a B2C but it's B2B. So it's a different kind of model where there is a different kind of customer. There is not the final customer or consumer but there is actually another business which is the one with consuming. So Amazon is selling to other enterprise and other actually also small businesses.
So this kind of configuration of the organization is different from here, this kind of configuration. So where Amazon here might need way more marketing to actually push its platform, here actually Amazon might need more like a sales force that is able to manage larger and more complex transactions. So it's a different model from this one to this one in the same company. If you go to a broader classification we can look at several what I like to call here sales models. Sales models because what we're looking here are not really business models.
Business models in many cases can be done by mixing up several of those sales models that we have here but I like to call them sales models because those are the way we need to structure our organization both from a revenue standpoint and an organization also cost standpoint to actually sell our final product. So for instance in order for me as a B2B company to provide my product to other organization I need to have for instance a dedicated sales team that is going to be able to sell and provide that service. Having said that let's go through them by keeping in mind a very basic classification here. We're going to look at asymmetric versus symmetric business models.
In an asymmetric business model pretty much the user in most cases will be different from the customer. So the person that is paying the bills is different from the person who is actually providing getting value from the platform and actually is also the same person that is helping the platform to build up its core asset over the long term and we go through some of the examples here. In a symmetric model instead usually the user is also the same person than the customer so it's a different kind of way for the company to make money.
So on one side you have companies that make money by actually having a different customer paying for a platform that actually provides value to a certain users. In this model here instead we have a different kind where the platform of for instance a business makes money by the same user who uses the platform. So the same user who is using the platform is going to be the platform or actually getting value from the service or product provided by the company is the same that is actually paying the bills.
To go through some of them you see that on one side we have the hidden revenue generation model where in this case this is a sales model where companies like Google and Facebook for instance make money by selling advertising to businesses that actually want to pay money to the company to show on the listings or like in the feed in the case of Facebook of those organizations. So on one side you have users who use the platform who are providing information and data to the platform and then on the other side the platform is actually through its algorithm collecting its data and selling back to the customers that in these cases are advertisers.
You have as example Netflix or for instance the New York Times which makes now most of its money from subscription of services that you can purchase by reading the premium parts of the New York Times. In this model it's a very simple model, it's fairly linear, the company provides service the same user that is actually paying for the services actually also you know the same user is actually getting value for the services is also paying for it. Another example that we have here is the razor and blade.
In a razor and blade here the company uses a different kind of sales model or sales strategy which is I give you the razor for a very cheap price and of course the classic case is Gillette where the company gives the razor at a basic price where the company makes money by selling blades so there is the complementary product actually the product that comes with the main product at cost is where the company is making its margins and one example is of course Xbox where for instance Microsoft might sell the console at cost so the company is not making money on that because actually it's making a lot of money by selling the games part of the console.
Another example is AMC or like in general when we look at movie theaters the company that actually selling tickets might not make much money on the tickets themselves but it might make money on all the products that are getting sold within you know all the complementary products that are getting sold within those spaces and on the other side opposite to this model you have for instance the one for one which one example of the company who invented this model is Tom's shoes for which for each pair of shoes that you buy the company is going to give away one pair.
In this case it's more like a linear model where you have like a symmetric you know model just because the company again is using this model to have more brand awareness and also to grow its business with a lower marketing cost because with this kind of model of course you create more brand awareness people are more willing usually to buy from you so it's another interesting model and then if you look and we go on with the different models that we look and get we have affiliation so in the affiliation model if you think at a company like Amazon or like Duck Duck Go which is a search engine that prioritizes some privacy on privacy actually you know that Amazon makes a lot of its money thanks to a set of affiliates that push products and traffic toward the platform and this model has worked pretty well these sales model has worked pretty well for Amazon over the years.
On the opposite side you have a more like direct sales approach and on this side for instance you have Apple that uses a sort of vertical integrated model where the company of course it's outsourcing manufacturing but then it's doing all the other steps of the chain where of the supply chain where the company is then owning the stores where the funds are getting sold directly to consumers.
Now again when we're talking about large companies like Apple I want to clarify that those are very complex business models and in many cases those companies are using different sales models at the same time for instance we know that Apple is using a direct sales model but at the same time is also using a lot the partnership and distributor model which is similar to Coca-Cola where Apple has a lot of partners that actually are able to sell and push its products.
If we go on if we look at another model this is the ad supported model one example is Spotify so if you go on the platform you might actually get it for free but then when you get it for free the company is pushing ads through the free accounts so the company is actually supporting the free service by providing advertising. And then on the other side for instance you might have a model which is more symmetric which is the freemium and also we're going to look at the open source model.
In a freemium model pretty much the company is creating a sort of funnel where all the free users can get to know the product and service that you have and then it will try to convert some of those free users in paid accounts and usually the same happens in an open source model.
I want to highlight that the key difference here and you know if you look at those two models on one side on the freemium side we have companies like Slack, Zoom or Trello and then on the other side you have you know on the open source side we have companies like Github, WordPress or other companies like you know Fastly but really the key component here is that on the freemium side usually the free product or service is developed in apps. It means that it's the same company which is centrally developing the free version and then it's working its way through this sort of funnel to actually convert the free users in customers.
On an open source model instead there is a development like a community of developers actually is building up the open source is actually helping building up the open source platform and in this case of course this also influences the way the company is going to monetize it because of course if you have an open source model then in order for you to keep engaged the community of developers you also need to make sure that you are careful in the way you monetize the open source and you create like a premium offering which is very different from from or at least it has some features that are you know very clear to the final customer and also that are not going to disappoint your community because of course there are those people that are sustaining the growth on the business in the first place.
The same applies also for the freemium.
It's very important that you understand how to structure the offering so that you're not going to dilute your existing customer base because the biggest largest risk with the freemium of course is that if you're not able to structure the offering in a way that makes it clear what's the difference between the free version and the paid version then you actually risk to dilute your customer base because they might jump to the free version so it's very important for you to understand that you can use a model like the freemium or like you can go more for an open source which are two different kinds of philosophies so it depends by how you see how you want to build your business but in this case it's very important that you're able to really differentiate between the free offering and the paid offering and make it as clear as possible for your final potential customers.
Now if we keep going here we have another model which is a sponsorship model which is an asymmetric model because again you're not making money directly from your users but you're making money from another customer. In a sponsorship model think of the case of a media publisher like Hacker Noon or the case of influencers on platforms like Instagram.
In this case those influencers in most cases they're not making money directly through the views that they make on the platform but they're making money by finding like other partners companies that are willing to pay to sponsor a piece of content so that's more on the sponsorship side so again you have users or like your followers on one side and then you have companies who are paying for your presence online and then on the other side of this model we have more like the donation model which is the Wikipedia model.
We know it exists and it's a viable business but it's also like a company that exists on top of donations because you know this is the model that Wikipedia has and this is a good example of how you know the same people that are using the platform even though in a small percentage are actually donating and making the business go actually survive in the long term.
Now if we go again on the left side another model that we can look at is the grant or actually think of the case of institution or like non-profit companies or university an example can be for instance Harvard Business School which is a university that although is making money in different ways for instance by selling its digital products by you know selling its programs and there is also a good chunk of revenues of Harvard Business School coming from donations and grants and in this case again this is also a sort of asymmetric model just because the students in this case are not the people who are paying for the final let's say for necessarily for the survival of the business.
In a chain model we have a company like Starbucks which is owning most of its stores and it's controlling the way the product is delivered you know the customer experience as much as possible so it's a completely different model compared to another model like franchising where we have a company like McDonald's who has a heavy franchising model where the company actually doesn't own most of its stores but it tries to keep control on the experience of the customers by giving guidelines to the companies who are franchising the brand and in the turn the company is getting royalties for you know giving help in the operations and you know in the other marketing activities and the supplies of the products.
Instead as we said in a different way Starbucks is using more like a chain model where again the company is owning the stores. Then if we go back and look at the final models here we can look at the partnership and distributor which is very close to the B2B2C model that we looked previously because one example of course is Coca-Cola which again you can find it almost anywhere just because Coca-Cola is a very strong you know network of partners and distributors like for instance battling companies that are actually helping Coca-Cola go and be anywhere and then on the other side we have like a more peer-to-peer or direct to consumer model.
On a peer-to-peer model you have platforms like Airbnb or Craigslist where people interact like there are two parties that interact with each other and the platform is actually working as invisible hand that is enabling these transactions on the platform and as a result actually it's collecting a fee between the transactions that happen on the platform. So really the value of a provider like a peer-to-peer platform like Airbnb or Craigslist is the ability of the platform to be invisible so to provide a value and so as a result getting a commission out of the transactions happening on the platform.
And then again a final model it's really something that we saw before when it comes to B2C it's like direct to consumers where you have a company like Tesla which is directly selling to final customers.
So this was a broad overview of different sales models how you can combine them to actually build your business model what they imply and how you can actually use them for your business but again what we saw here as a key takeaways is that a business model is something which is ever evolving it continuously evolve it's something that you cannot scratch actually you can sketch a piece of paper but then you need to experiment as much as possible it's completely different from a business plan because in a business plan you make a lot of assumptions and then you have to test them after many assumptions that you made but in many cases they will not survive the real world.
A business model instead gives us the chance and a framework for business experimentation where we can borrow several parts of certain businesses out there so we can test them on our own business.
And we saw how again we can classify businesses based on who is the key customer that we're dealing with if it is a business it's going to be a B2B if it is a final customer like a consumer it's going to be B2C and if it is you know the consumer but we get we have access to the consumer to another business we can call it B2B2C and we saw also the several models how we can you know we can classify them between a symmetric so those models that most of the times make money by not charging the users but charging a different customer like we saw the example of Google and Facebook which are really classic examples to understand those sales models and then on the other side we are more like the symmetric where the same user most of the time is also the person who is paying for the service and again a good example here is Netflix or for instance you know the New York Times but just on the subscription basis business because let's remember that the New York Times has also another business which is based on advertising and so it falls more on the asymmetric side.
And when you have a company like Amazon again within the same company you can have different models that are getting used because the company was built over time and over the years so usually when companies start out they start with a very simple business model and as they grow they're able to build on top of those to understand how to combine different pieces together but in most cases if you're starting from scratch with a business you might need just one of those actually sales models that we saw here and when you find the one that works for you they may be good enough to help you scale to a certain size and that was it and I hope you enjoyed this lecture and that you learned the advanced concept business modeling and how to apply them back to your business.
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S K R Y B O T
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