Definition: What are business models?
Business models are generally used to describe a company’s main functions, actions and interactions in order to create products or value and thereby generate profits. In short: A business model is what a company uses to make money. However, there is no uniformly recognized definition in the scientific discussion.
As a decisive factor , business models contribute to value creation. How an idea is implemented, marketed and brought to the customer often determines its success or failure. Choosing the wrong model can lead to failure – while a different business model could perhaps bring the breakthrough with the same idea.
Difference between a business model and a company’s strategy
Business models and the strategy of a company are often confused or equated in everyday language. More precisely, the corporate strategy is the plan and the procedure to differentiate yourself from the direct competition, to win customers and to assert yourself in the market. This can be done, for example, by focusing heavily on customer relationships and customer satisfaction.
However, business models remain unaffected , even if there may be overlaps. Two companies can have an identical business model but completely different strategies.
In our large overview, we have listed 16 business models and explain how they work. We differentiate between classic and digital business models. However, this separation is not always to be taken literally, since many of the classic models are also possible with digital products. Some of the examples mentioned can also be assigned to several of the business models mentioned.
Classic business models Kenyans can use
1. Direct Selling
Many companies use intermediaries to market their products or services and make them accessible to customers. Direct Selling omits this additional step. There are no wholesalers or retailers involved, but sold directly from the company to the end consumer.
Advantages are a larger profit margin for the company and lower costs for consumers. Prices are usually lower because fewer stations want to earn money from sales. On the other hand, there are higher expenses for your own online shop and marketing to draw the attention of your own target group to the product.
Examples of direct selling: Tupperware, Vorwerk, own online shops
2. Cross Selling
Once a customer has been won, companies benefit the most if they buy additional products at the same time. The so-called cross selling aims exactly at this. Even while shopping, consumers are shown and suggested other products that might be of interest to them. Therefore, there is often a specific reference to the purchase request – but cross-selling is also possible without a direct connection to the original product.
The aim is to increase sales if customers take as much as possible with them when they make a purchase. Especially goods that you might otherwise buy elsewhere.
Examples of cross-selling: Tchibo (many offers in addition to coffee), petrol stations (sale of food and magazines in addition to gas station revenue)
In many areas, the focus is not on one-off purchases, but on subscriptions by customers. Instead of a one-off payment, a fixed amount is debited regularly – usually monthly – for the service. How long such a subscription runs depends on the product and contract. For customers, it has the advantage of not having to constantly worry about new contracts, extensions or additional purchases.
Companies benefit from better sales planning and long-term customer loyalty. Such subscriptions have long been known from magazines, but they are also becoming the standard in the software sector and for streaming services.
Examples of subscription: Netflix, DStv, Showmax, antivirus software
With franchising, the franchisor grants the franchisee the right to use a brand or product according to specified standards. The contract between the two parties regulates exactly which fees are incurred for franchising, which goals have to be achieved and which requirements have to be met.
The business model is particularly widespread in the catering and fast-food chain sectors. Franchisors benefit from a lower risk and the opportunity to expand their own brand – also internationally. Franchisees can get started faster, take advantage of experience and reputation and have an easier start if the financial prerequisites are met.
Examples of franchising: McDonalds, Burger King, Subway, Carrefour in Kenya, KFC
A license is granted to an individual or company to use a product or intellectual property in return for payment of a fee. The value created (e.g. software) is not used itself, but made available to users for a corresponding payment. Licenses run for a fixed period of time and must then be renewed in order to retain usage rights.
Companies secure ongoing income through the licenses, customers benefit from a lower license fee. Business models with licenses, for example, can ideally be used to market millions of software – with users returning every year.
Examples of licenses: Microsoft, use of copyright between author and publisher, apps and software
These business models initially attract with a very low price – the larger turnover is then made by the so-called add-ons. So customers can buy the most basic variant of a product or service, but those who want something more or better pay the extra. The aim is then, of course, to make attractive offers in order to sell as many add-ons as possible.
Some of these business models are specifically designed in such a way that certain extras have to be booked by many customers. Low-cost airlines, for example, offer tickets at rock-bottom prices – but if you want to take a piece of luggage with you, or want to eat or drink something, you have to pay extra. The advantage for consumers is that they can only pay for exactly what they want. In turn, companies can often generate better sales than with an all-inclusive price.
Examples of add-ons: airlines, insurance companies, car dealerships (special equipment)
7. Solution Providers
A solution provider sees itself not just as a seller of a single product. He offers complete solutions for his customers: from advice on purchase to installation, maintenance or repair. Other companies are also possible customers who are offered a comprehensive package for collaboration within a project.
In this way, customers receive everything they need or want from a single source. There is no need to search for and combine different providers to cover all aspects. Companies can charge a higher price for such a complete service and bind customers to their own offer for a particularly long time and intensively.
Examples of solution providers: Microsoft, Apple, SAP
8. Lock in
Every company tries not only to win customers, but also to achieve customer loyalty for as long as possible. The Lock-In business model focuses on exactly this – but not through rewards or perks. Lock-in keeps consumers on their own products through exit and switch barriers. If a customer wants to switch to a competitor, this is associated with costs, greater effort or other disadvantages.
This is often a deterrent, which leads to (forced) loyalty . For companies, this results in great customer lifetime value – every customer generates high sales over the long period of time.
Examples of lock-in: Apple, razor blades, coffee machines and coffee pods/capsules
Digital business models in Kenya
Probably the largest business model is e-commerce (in German: online trade or electronic trade). It includes advertising, buying, selling and serving customers through digital channels. The online shop, which almost every company has nowadays, is typical of e-commerce. Many customers search and buy on the Internet – it is becoming increasingly difficult for local retailers to keep up.
Companies can reduce costs through e-commerce. It does not require expensive rent for a shop and also less personnel costs. End consumers are happy about the simple shopping option that works anytime and anywhere, regardless of opening times.
Examples of e-commerce: Amazon, Zalando, countless online shops
Dropshipping is closely related to e-commerce. Especially in the last few years it has gained in importance and is finding more and more followers. The principle: Dropshipping is an online trade in which the seller neither manufactures the product himself nor has it in stock. In the case of a purchase, the order is placed with a wholesaler or producer and sent directly to the buyer from there.
So for this business model you don’t have to manufacture or store anything yourself. This reduces the costs enormously. Ultimately, you are primarily responsible for the online marketing of the shop in order to reach as many customers as possible. However, companies have little control over quality and customer satisfaction.
Dropshipping example: Amazon
Business models that work through affiliates rely on commissions for products or services sold. A simple example: You run a website where you write articles about technology. Now you can install affiliate links, where the products described can be bought directly. Every time a customer makes an order through your link, you earn a predetermined commission.
The aim is for both sides to benefit: the affiliate partner shares in the sales and the company reaches potential customers. Before you can use these business models, however, you need a corresponding reach on the homepage or a social media profile.
Examples of affiliate: partner programs, blogs, social media, Amazon affiliate
The term is composed of the words “free” (free of charge) and “premium” – which already describes the core of the business model: customers can use the basic version of a product or service completely free of charge. For the full range of functions, no advertising and other plus points, however, the paid premium version must be purchased.
Customers can decide for themselves whether they want to pay for the full scope or not. The free offer attracts a large number of potential buyers. A large turnover is then generated from the large customer base through offers and attractive features.
Examples of freemium: Spotify, Xing, LinkedIn
5. Free models
The completely free offer of one’s own services is also one of the business models – and can be very lucrative. There are various ways to earn money with a free model. In addition to the free product, paid add-ons can be offered. This is popular, for example, with so-called free-to-play games. These can be downloaded and played for free – countless things can then be bought in the game itself.
Other free models earn money through advertising or by monetizing user data that is collected during free use.
Examples of free models: Google, Instagram, Facebook
6. Pay per use
Here customers are offered a business model in which the price depends directly on actual use. If you use a service extensively, you pay a correspondingly high amount – if a service is not used at all in a period of time, there are no costs. Pay per use can thus be seen as a kind of subscription, but without there being a fixed price per interval.
The advantage for customers is that they only have to pay for what has actually been used. In this way, you can control your own costs better. Businesses typically benefit from a fee, but exact revenue is difficult to predict.
Examples of pay per use: car rental, electricity in private households
7. Flat rate
Opposite business models rely on a flat rate. This means that customers pay a fixed price, but can use a service without restrictions. The principle became known through telephone and Internet providers. In the past, pay per use often applied here, but now everyone offers a flat rate for the service. For a fixed monthly price, customers can make calls and surf as much as they want.
Companies can convince customers with transparent costs and easy handling: Fixed costs, no restrictions, no surprises. At the same time, the number of users can be used to calculate very well.
Examples of flat rates: Netflix
A digital marketplace brings supply and demand together. Such business models aim to create the largest possible platform with many users. The more potential buyers, the more attractive for sellers – the more sellers, the more new buyers are attracted.
Marketplaces can earn revenue through advertising, commissions or additional features. For example, sellers can be asked to pay if their products are to be placed in a particularly visible manner.
Examples of marketplaces: Amazon, Ebay, Etsy
Develop and adapt business models
The selection and implementation of suitable business models should be well thought out. After all, you want to be successful with it for years and, ideally, decades. However, the following also applies: business models should be developed, adapted and, if necessary, converted over time. Famous examples show that even large companies can get into trouble otherwise.
Netflix and Blockbuster Video have similar origins as video rental stores and movie distributors — but Blockbuster was worth billions with more than 50,000 employees while Netflix was in its infancy. With video-on-demand and streaming, however, only one of the two adapted its business model. Today, Netflix has more than 200 million paying subscribers. However, the former market leader Blockbuster went bankrupt 10 years ago.
Business models of the future in particular require flexibility and constant development. Those who stand still remain on the track.