5 Common Business Models used by Successful Companies
A business model is a framework that a company uses to define how it will generate revenue and make a profit. There are many different types of business models, and each has its own strengths and weaknesses. The most successful companies are those who have carefully chosen a business model that is well suited to their particular situation.
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The following are five of the most common business models, along with examples of companies that have used them successfully:
1. Subscription model
The subscription model is based on customers paying a recurring fee to access a service or product. This model is often used by companies that provide access to digital content, such as online newspapers or streaming video services.
Some of the most successful examples of this model include Netflix, which has over 130 million paying subscribers, and Spotify, which has over 60 million. It's a high probability that ChatGPT will also be offered via a subscription based model.
2. Freemium model
The freemium model is a variation of the subscription model. In this case, customers can access a basic level of service or product for free, but must pay to access premium features or content.
This model is often used by companies that offer both digital and physical products. A good example of this model is Dropbox or Box, which provides users free limited storage, beyond which they have to pay to get additional storage space.
3. Pay-per-use model
Customers pay for each individual usage of a service or product under the pay-per-use model. Companies that give access to digital material, such as online video or music streaming services, frequently adopt this approach.
iTunes, which allows users to buy individual songs or albums, and Google Play, which allows users to rent or buy movies and TV episodes, are two successful instances of this concept.
4. Advertising (Ad) model
The foundation of the advertising business model is that businesses make money by renting out space for advertisements (Ads). Companies that give access to digital material, such online news websites or social media platforms, primarily implement this business model. In recent times, this Advertising space has become extremely competitive, as the share of wallet or advertising spend is decreasing and the numbers of platforms offering Ad services are increasing.
Google, which derives the great majority of its income from advertising, and Facebook, which derives more than 80% of its income from advertising, are two of the most successful instances of this strategy. Both of the firms have to now contest with TikTok, which in very short time has captured a large share of the market.
5. Physical product model
Companies sell tangible things to clients in the physical product model. Companies that make or sell consumer items, such as apparel or electronics, frequently adopt this approach.
Nike, which earns billions of dollars in income from the sale of its products, and Apple, which sells millions of iPhones each year, are two of the most successful instances of this approach.
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Summary:
Whilst these may be the most common models, it should be pointed that a company can have multiple business models, aligned with market and customer expectations. YouTube for example is a freemium model, but now offers YouTube TV, which is a subscription based model. Similarly, Netflix is a subscription based model, but has recently implemented Ad based model. Uber and AirBnB, utilize a revenue share model, where revenue is shared between their hosts and the platform providers.
In essence, a business model should help a firm understand how to create value and a business strategy should define how to capture value.
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