What are business models and why are they so important?

It goes without saying that your company’s business model – i.e., the strategy it will use to turn a profit – is the most important part of your overall business plan.

Encompassing the products and/or services offered and for how much, a well thought-through business model can mean the difference between success and failure when it comes to raising corporate finance.

However, what works for one business doesn’t work for another. You can’t just copy and paste another company’s model and hope it generates revenue for your business.

Your model needs to be tailored to your market, your use (or not) of ecommerce, and your specific business offering.

The changing bedrock of business models

The traditional business model is the platform model.

Used in the days before modern technology, the platform model is the basic in-person marketplace approach, where businesses and customers are gathered in a singular location.

The platform model still remains strong – think of large shopping centres, local high streets, and stationary or travelling markets.

Customers visit with the intention to spend money, and sellers can utilise humans’ natural instinct for social interaction to convert an interested peruser into a paying customer.

However, the platform model has also expanded into the digital realm thanks to advances in technology.

Big tech companies such as Google and Microsoft have utilised global digital networks to reach customers in many different locations and time-zones.

Additionally, the global platform business model enables companies to target small groups of customers internationally that would not be possible with the traditional in-person platform model.

This means more potential consumers reached, more people converted into paying customers, and more profits for your business.

Beyond the platform business model

Advancements in technology have also made a range of different business models more viable to companies.

For example, the subscription model (used by companies such as Netflix and HelloFresh) charges customers a recurrent fee (monthly or annually, for example) to gain access to a service or receive products regularly.

The advantage of this model is that it helps to maintain a healthy cash flow with regular money coming in to the business. You can also offer different levels of subscription, with higher fees giving customers access to enhanced features or consumer benefits (such as no advertisements or better pixel quality on a streaming service).

The freemium model has also grown in popularity for many digital-based businesses.

Used by companies such as Spotify and Finch, the freemium model offers a basic digital platform or service for free, but charges a subscription for access to premium features.

The model works on the basis that customers who use the free version of the product can be more easily converted into paying users of the premium product.

The multi-sided platform business model brings together distinct but interdependent customer bases in a digital space. eBay uses this model to serve both sellers and buyers, while PayPal enables quick online payments between two parties.

Finally, the aggregator model (used by companies such as Uber and Airbnb) utilises the sharing or “peer-to-peer” (P2P) economy to bring together many aggregators to provide a common product or service on a mass scale, under one company label.

For example, Uber drivers own the cars they use as taxis and can choose which area they work in, but they use the Uber app to attract customers. Uber makes money by retaining a portion of the drivers’ earnings.

This model enables businesses to operate with low capital investment whilst still yielding high profit margins.

It also has the advantage of making it easier to scale a business internationally, with potential aggregators and customers in almost every country.

Challenges to be aware of when choosing your business model

A major challenge is that many business models rely on customer/client money to support the business before the goods/services have been supplied.

The growth of ecommerce has increased this risk, particularly if your business model relies on only ordering in goods after you have received payment.

To combat this issue, treat all deposits and advance payments as “client monies” until you have delivered their goods/services.

Ideally, your business model would not require you to be reliant upon these advance monies for funding. However, if it is absolutely necessary to utilise client monies, then you should put your own credit line (bonding) in place up to the level of the advances held.

Review your business model with Butterworth Barlow

The business model you use will depend largely on your sector and service/product offering to customers.

However, if you are willing to be flexible and try new approaches, such as offering services or goods on a subscription basis, you could open the door to higher profits and a more sustainable cash flow long term.

Our dedicated team of accountants are here to offer personalised, proactive support for your business.

We can review your current model and suggest new approaches to help you grow your company and achieve your business goals.

Need help revising your business model? Contact us today to uncover new possibilities for growth.