Every business or companies makes a plan for generating profit. They create a model for identifying products and services to sell, the market they want to target and also take into account anticipated expenses. This is known as business models.
Even if the business is already established or even if it is a new business, plan needs to be made. Businesses need to regularly update their plans and strategy as they need to take into accounts the challenges and trends for the future models.
|Table of Contents|
|Importance of Business Models|
|Example of a Business Model|
|Types of Business Models|
|Advantages of Business Model|
|Disadvantages of Business Model|
Importance of Business Models:
The business model helps to target the customer base for the company. It helps in making marketing strategies, projection of revenues and expenses taking into account the type of Business models and clienteles.
Every investor needs to review the business model in order to get knowledge about the company’s competitive edge. Understanding the business model helps the investors to have a better sense of financial data.
Evaluating the business model helps the investors to get the overall view about the company’s products, its business strategies and future prospects.
Example of a Business Model
For example, let’s take a company A which rents and sells video games. So the company is into the business of video games. Company used to make a profit of 5 million after spending 3 million on their inventories for video games. So, total gross profit margin is 2 million.
The Internet arrived in the market and the company now has to alter its business model by taking into consideration the internet in order to survive in the market. So as a result the cost of holding inventory and distribution cost also gets reduced. Since expenses reduce profit increases.
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Even though with the arrival of internet sales get reduced but the company was able to expand its business as technology helped it to change course.
In the similar way there are various types of business models.
Types of Business Models:
We will discuss here about 4 types of business models:
1. Business -To- Business Models (B2B):
When the dealings or the transactions take place between two companies or the business then this type of business model is known as business to business models.
It has good market predictability and more market stability. Since under B2B sale is made in bulk amount this model leads to lower cost for the businesses.
The best example of this type of business model in India is IndiaMart InterMesh which is a wholesale B2B marketplace. It offers millions of products to its customers which includes consumer electronics, machinery, apparel and many more.
2. Business -To-Consumer Models (B2C):
Business-2-consumer business model is a model that refers to businesses that sell their services or the products directly to the consumer who are the end users of the products or services.
There is an ongoing demand for the products as it provides the essential items. This thus eliminates the risk of fluctuation in demand and helps in maintaining consistency in the business. Since direct contact is there with the customer’s so information is shared with them directly and easily.
Customers are given products at a low price compared to its competitors for the business to run smoothly.
Example of business to consumer model is Avenue Supermart which provides goods directly to its customers.
3. Subscription Based Models:
Any application based businesses or software companies have subscription based business models.They offer their product as a onetime purchase, in return company earns monthly or annual revenues.
This type of business model allows the company to earn regular income by giving the client the opportunity to pay for the cost of the purchase in 12 equal payments rather asking them to pay the wholesome amount at one go.
One of the leading example is Infoedge for this type of business model.
4. On-DEMAND BUSINESS MODEL
It is the most recent form of model which is made out on the need by answering immediately. Under this type of business model is prepared in such a way where all the questions will be answered by just a click of a button in seconds.
It is very much convenient and easy for customers as even before customers have visited the particular city they get their hotels or places booked.
One of the example is make my trip which allows the customers to plan the holidays and make the bookings in advance.
Advantages of Business Models
- A good business models gives the company a competitive edge in the industry.
- A strong business model provides the company good reputation in the market place encouraging the investors to remain invested in the company.
- Making the business model strong leads to an ongoing business profit leading to increase in cash reserve and new investments.
- Proven business model brings a financial stability in the organization.
Business models have disadvantages as well.
Disadvantages of Business Model:
- Once a business model is created, then it restricts to implement new ideas for the product.
- Creating a business model is time consuming as lot of factors needs to be considered.
- There might be a chance that business model may turn out to be inaccurate.
Apart from the disadvantages, business model is mandatory to be prepared before starting of a new project.
Frequently Asked Questions
What is a good business model?
A good business model is the one that provides the company a competitive edge in the industry leading to good business profits.
Why is a business model important?
Business model is important because it provides the investors the knowledge about the competitive edge of the company and provides better insight into working of the company. A strong business model leads to cash generation and future expansion.
How do you create a business model?
Business model is created by identifying the products and services that will be sold in the market to be targeted like B2B, B2C, subscription based model or on demand market.
What are the components of business model?
Business model includes information about company’s products, its target market and its future prospect related to its business type.
- A business model is a company’s strategy for running the business in a profitable manner.
- It includes information about the company’s products, its target markets and also about future prospects.
- Before investing in any company, reviewing the business models helps the investors to have a true and fair knowledge about the company’s past and future prospect.
- Understanding the business models helps the investors to have a better sense of financial data.