Types of Business Models
Every business, be it the family-owned convenience store or multinational conglomerate, is built on an underlying model to apply their trade. It is essential that a business chooses the right model to maintain a sustainable and profitable enterprise. A business model encompasses several aspects of a business such as whether the company will use franchises to sell its products, lease or own the space needed to conduct its operations, enlist the help of retailers or simply sell direct to customers through its own outlets and websites. In this post, we will cover some of the more popular business models.
Direct Sales Model
As the name indicates, a direct sales model is a company that makes the products and sells them directly to consumers through its own retail outlets or through its websites. The middleman, be it a distributor or broker, is eliminated in this model, thereby putting more profit in the company’s pocket (at least theoretically). An example of the direct sales model can be found in the way Dell sells its products.
A franchise model uses the successful brand name of a major enterprise (the franchisor) to provide profits for the franchisee. The franchise model eliminates the need for the major enterprise to invest in outlets to sell its products. The franchisee rides on the brand name of the franchisor, while having some control in the operation of their own franchise (like owning a store but with limitations). The Tim Hortons enterprise is an example of the franchise model.
In a distribution model, the distributor buys products directly from a manufacturer and resells them to retail outlets or end-users. Unlike the franchise model, a distributor may operate under their own name and not necessarily leverage the successful brand name of the manufacturer’s business.
An auto dealer is a good example of a distributor; they purchase vehicles from a manufacturer such as Ford or Toyota and sell them to end-users. Note that the brand name is being leveraged in this case. People who want to buy a Ford Focus (the brand/model) go to a dealer selling that car; very few people go to an auto dealer and then start to think about the best car they can afford among the brand they sell. Nonetheless, in the case of a fertilizer distributor seldom is a brand name associated with the product. The distributor markets fertilizers they offer and retailers and/or farmers pay for the value offered by the fertilizer and not for the manufacturer/miner’s brand name.
A retail model is built by buying goods from a distributor and putting them on sale for end-users. A few years ago, a retailer used to be the most common source of products for the masses. However, with the advent of the Internet, the end-user can purchase many desired products directly from the manufacturers’ website (electronics, clothes, fragrances, sunglasses, etc.), thereby eliminating the middleman in the form of the retailer. Home Depot is an example of a chain retail establishment.
Bricks and Clicks Model
As the name may suggest, this model is a recent development. In this model, a store may take orders on its website (the clicks) and/or through its phone representatives, while still offering the typical physical buying experience at its store (the bricks). The customer can then pick up the product at the store or get it delivered to their home. This model combines the traditional bricks with the modern clicks to provide a no-frills buying experience for the consumer. No crowd to wade through and no lineup at the cash counter; a relevant rectangular-shaped plastic card is all one needs most times! Future Shop uses this relatively-new business model.
Can you think of other business models? Do you run a business and if so, what model do you use? Did you change models?
About the Author: Clark works in Saskatchewan and has been working to build his (DIY) investment portfolio, structured for an early retirement. He loves reading (and using the lessons learned) about personal finance, technology and minimalism. You can read his other articles here.