Traditional Types of Business Models

A business model is simply the overarching plan of a company to generate a profit by selling a service or a product. The business model provides an outline of the plans of the company to produce a product or service and to market it. This plan also includes the expenses that will occur with manufacture and marketing of the service or product. Different business models exist, each of which can suit different companies and types of businesses.

The manufacturer business model utilizes raw materials to create a product to sell. This type of business model might also involve the assembly of prefabricated components to make a new product, such as automobile manufacturing. A manufacturing business can sell the products created directly to customers, which is known as the business-to-consumer model. Another option involves outsourcing the sales aspect of the process to another company, which is known as the business-to-business or B2B model. Wholesaling manufacturers typically sell products to retailers, which then sell directly to consumers. An example of this type of company might be a clothing manufacturer that sells merchandise to a retailer, which then sells to consumers.

A company fitting the distributor business model would be a business that buys products directly from a manufacturing company. This business would then resell the products directly to consumers or to a retailer. The distributor often acts as one of the middle points between a manufacturer and the general public. Distributors have the challenge of setting price points that will produce a profit while also utilizing effective promotion strategies that will secure strong sales. Competition can be fierce for distributors, which necessitates continual analysis of the market.

A retailing business purchases products directly from a wholesale or distributing company, then sells the inventory directly to the public. Retailers often utilize a brick-and-mortar location for points of sale. Examples of retailers include grocery stores, clothing stores, and department stores. Retailers might be nationwide chains, or they could be independent shops operated by a single entity. A physical location for a retailer is common but not mandatory. Retailers may choose to offer sales as an online retailer. Online retailing can be done alone or in combination with selling from a physical location. Retailers experience the ongoing challenge of competing against other retailers that offer similar products.

A franchise business model might involve any of the other business models, such as manufacturing, distributing, or retailing. Franchise business are set up according to the unique service or product sold or produced. The business model of the franchise is adopted by the purchaser of the franchise, who is known as the franchisee. Purchasing a franchise has some important benefits for the franchisee, since most business processes and protocols are already established for the business. However, with these established protocols come less flexibility for the franchisee.

Within these four standard business models, business owners can structure their companies to include specific features of one or more models. For example, a company that engages in direct sales to consumers might integrate a process of product demonstrations in the consumer’s home. Companies could also engage in direct online sales without the use of an intermediary company. Retailers that utilize both a physical store location and a website could offer online sales for consumers who could then pick up their items at the brick-and-mortar store. Companies might also hold Internet auctions for sales. Some businesses also utilize a sales approach that offers a free basic service with the option to upgrade to a paid, premium service. Business model structures can vary significantly, and companies might explore a wide array of combinations to find a model that meets with success.