Types of Business Models (and How to Choose One)

No matter whether you’re the business owner of an existing company or are planning to launch your first business, there’s one thing that you won’t be able to succeed without – a business model. 

In short, a business model represents a framework outlining how a company creates, delivers, and captures value.

However, there’s much more to it. Having a detailed understanding of business models is fundamental. This helps you align your business goals with the market and meet your objectives, both in traditional and digital landscapes. 

In the following sections, we take a deep dive into business models, explaining what they mean, what the different types are, and more. 

What Is a Business Model?

We have already briefly outlined the term business model. 

Before we can unfold the peculiarities of individual types of models, it’s key to:

• Explain what the business model concept is.
• Outline the components that shape a business model.
• Explain why all of this matters.

Here’s everything you need to know about the concept

Business Model Concept

In essence, a business model provides a presentation of a business’s operations, revenue streams, and value propositions. 

A business model determines the following: 

• How a company will make money.
• What types of products or services it will offer.
• How it plans to market these goods to attract more customers. 
• What type of costs it needs to prepare for.

Similar to a business plan, the business model is a core part of your business strategy. The essential difference between the two, however, is that a business model describes briefly all that needs to be implemented as part of a business plan. 

Key Elements of a Business Model

There are several elements that need to be addressed to produce an effective and promising business model.

One of the best ways to create a reliable business model is to use tools like Business Model Canvas for strategic planning. This approach will help you stay organised, keep track of all you’ve covered, and quickly make amends or updates where necessary.

The Business Model Canvas features nine core elements, including:

1. The company’s value proposition or what it plans to offer to the market.
2. The target audience or the types of buyers the value proposition will address.
3. The channels that will be used to communicate with and distribute to customers, including supply chain details.
4. The relationships formed with customers.
5. The assets that will be necessary to enable the business model’s implementation.
6. The activities that will be needed to make the business model possible.
7. Key partners and their reasons for taking part in the process.
8. Revenue streams outlining how the business will generate money. 
9. The cost structure or how the business will earn profit from selling products or services.

A detailed business model should include all of the mentioned above elements in order to lay out a detailed description of the business and how it plans to deal with core processes. 

Why Business Models Matter

A company’s business model can be compared to a guiding light – a framework that can serve as the foundation of company growth. 

It will enable business owners and managers to gain insight into their target audience and costs. Most importantly, the model will allow executives to adapt business processes and business operations to meet objectives.

Having a detailed business model can also be an eye-opener for extra sources of income that can be exploited in the future. 

Last but not least, the business model is designed to guide decision-making and ensure alignment with market opportunities and customer needs. 

Types of Business Models

Now that we’ve covered the basics, it’s time to move on to the most exciting part – the different business models owners can choose from.

Note that business model types come in different shapes and forms – each carrying their own individual characteristics. We’ve categorised the existing business models into four main groups – traditional, digital, circular and sustainable, and innovative and niche. 

Traditional Business Models

Let’s start with some of the most common business models – traditional. These include models like retail, manufacturing, and wholesale.

Out of all, the retailer model is considered the most popular one, where the shopper communicates with the retailer to acquire items directly, either in-store or via an online shop. At the same time, the retailer purchases the goods they will sell to the final consumer from wholesalers. 

Although this is one of the most frequently seen traditional models, it’s also one of the most competitive ones. This is why a specific retail business plan can help a company differentiate itself in this sector. 

The manufacturing business model entails manufacturing products from raw materials or ingredients to sell them as finished goods to consumers. This type of business can be of any size, featuring handmade goods production or using an assembly line to mass produce. 

Naturally, manufacturing businesses depend on access to materials and skilled labour for the creation process. In most cases, these companies partner with distributors, wholesalers, and retailers to ensure their products reach customers.

Finally, under the wholesale business model, the company is solely concentrated on distributing products in bulk to retailers. 

Digital Business Models

The second group of business models is dedicated to companies that utilise the opportunities presented by the digital world.

This category can be split into three main pillars: 

• eCommerce businesses;
• Subscription-based businesses;
• Freemium business models.

Just like in the previous category, each one of the online business models can be differentiated, bringing unique pros and cons. 

For example, eCommerce business models concentrate on providing goods or services via online stores built on online selling platforms. These can be clothing sites, food sellers, auto dealers, and more.

Meanwhile, subscription-based models are adopted by companies that sell services or products on a regular basis. Here, businesses are often digital-first and usually rely on regular online payments to provide the service or product to the consumer every month. A popular example is the video-streaming platform Netflix.

In this model, recurring payments provide a consistent revenue stream, enabling the business to make accurate financial forecasts.

Finally, there’s a third type of digital business model – the freemium model. This business type is common among software and app developers. It gives free access to a basic service, where the advanced features are available at a cost. Examples include social media platforms, team communication software Slack, and the music platform Spotify. 

The freemium business model is excellent for attracting a lot of new customers to the solution for free and gradually turning them into paying consumers. 

Circular and Sustainable Models

With the rising concerns related to the effect businesses have on the environment, it’s completely natural that an entire category of business models is dedicated to sustainability and circularity.

Businesses that adopt the sustainability model focus on limiting their negative impact on the planet. They aim to boost efficiency, avoid creating waste, and reduce pollution.

Circular business models have captured the attention of a range of niches, from manufacturing to the airline industry. 

Under this model, companies strive to achieve a full circle in their operations. Rather than simply creating, selling, and disposing of materials, this model focuses on reusing and repurposing waste to build new products by creating processes that carve out waste by design. 

Innovative and Niche Models

Last but not least, we have rather new business models. These niches or innovative business models are often adopted by companies that fall under the sharing economy, on-demand services, and hybrid models categories.

For example, sharing economy business types can be represented by companies like Airbnb. Under this model, products, services, or resources are shared by consumers in a collaborative way. This peer-to-peer approach turns assets into services and is strongly supported by the rise of big data. 

On-demand services (like food delivery platforms) are also a newer approach, focused on delivering unmatched convenience to consumers. Here, users are granted instant access to products or services whenever they need them. Some examples include Uber, ridesharing services, and others. 

To be successful under this model, companies will need excellent logistics. At the same time, successful companies in this space are thriving, making this a lucrative model in the UK and around the world. 

The final type of business model innovation that we’ve seen recently is the rise of hybrid models, which combine digital and physical offerings. This model is characterised by unmatched flexibility, enabling companies to operate both offline and online. 

For example, this could be a retail store that allows shoppers to make purchases both at a brick-and-mortar location or online. They’re leveraging the power of physical and digital channels to target consumers where they spend most of their time. 

How to Choose the Right Business Model

By now, you’re probably wondering how to choose the right model out of all of the provided options. The truth is that the best business models for some companies won’t be appropriate for others. 

Organising your company model comes down to a number of factors that must be addressed:

• Market assessment: before choosing a competitive business model, it’s vital to understand the specific needs of your customers and the preferences in your target industry. Think about spending power, shopping behaviour, and other relevant consumer characteristics. Also, think about the size of the market, the opportunities for innovation, and how you can gain a competitive advantage over others. 
• Value proposition: define all that sets your business apart, including your unique offering, cost leadership, and others. Make sure that you tailor the business model in a way that will enable you to extract maximum value. 
• Financial and operational feasibility: when making your choice, think about your revenue streams and what sustainable cost you can maintain. In addition, consider your operational capabilities and scalability options. 

Considering all of these factors will put you in the position of making the right choice when it comes to a feasible business model for your company. 

Revenue Models Within Business Models

One of the most important elements in a business model is your revenue model. Although they are often unique to the operations of a company, revenue models can be categorised in several groups. These are essentially differentiated by the types of revenue streams a firm plans to rely upon. 

Below, we look at some of the most popular options.

Commission-based Revenue Models

One of the most frequently used ways of making money today is via commissions. Under the commission-based revenue model, companies (retailers specifically) add an extra sum to the total cost of a product or service. 

Commission can be different for each business type or case. For example, it could be charged per marketplace or per transaction and can be either a flat rate or a tiered sum. 

This revenue model is rather predictable, yet scalability could become a challenge as the business is attached to a transaction size or volume, creating dependency. 

Subscription Revenue Streams

Earlier, we mentioned the subscription-based model as one of the most popular business models that relates to subscription services.

When it comes to revenue streams, subscriptions are a lucrative opportunity. This revenue model requires ongoing payment and is centred around subscribed customers who pay for products or services on a monthly basis. 

By working with long-term subscriptions, the company can enjoy consistent income and monthly recurring revenue. This model stands out with high customer retention and brand loyalty, but attracting your first subscribers can be a challenge. In addition, you may face obstacles in the face of cancelled subscriptions and high customer turnover. 

Transaction-Based Revenue

On the other hand, transaction-based revenue models are perhaps one of the most popular and traditional ones. It’s incredibly common intraditional retail and digital eCommerce.

Under this model, the companies earn revenue for each completed transaction. In this sense, revenue is directly linked to the number of customer transactions. This means that businesses that rely on this revenue stream are forced to consistently attract new customers, creating interest in the market. 

At the same time, companies will stay in full control over their pricing strategies with this model. 

Arbitrage revenue model 

Under this revenue model, the company purchases goods or services at a low price in one market and resells them in another market at a higher price. As a result, it capitalises on price differentiations. 

This model is popular in areas like trading, finance, and eCommerce, where exploiting price discrepancies is crucial. 

Examples of Successful Business Models

One of the best ways to understand different business models is to analyse established companies.

Among other successful brands in the UK, Tesco is one example worth diving into. The brand stands out with an exceptional hybrid business model, utilising the advantages of both online and offline spaces.

The chain operates physical stores, including hypermarkets, supermarkets, and convenience stores. Simultaneously, it offers an eCommerce platform that enables shoppers to purchase online.

The business leverages customer data via its Tesco Clubcard loyalty program, enabling it to offer personalised promotions to incentivise purchases and earn revenue. 

Another example is Deliveroo, using its own digital business model relying on commissions for revenue. The company is an on-demand food delivery that connects customers with restaurants and couriers.

This company earns from commissions that it charges partner restaurants on orders, along with delivery fees from customers. In addition, they have a subscription service that allows consumers to benefit from free delivery on some orders.

Adapting Business Models for Future Growth

Making the most out of successful business models naturally requires the skills to adapt them to changing markets and new customer preferences. 

Below, we offer a few tips on how you can adapt your existing business model for future growth. 

Embracing Digital Transformation

One of the best practices for remaining competitive nowadays is embracing digital transformation and adopting new technologies. In some cases, this may require shifting from traditional to online and hybrid models. 

Although this may seem burdensome at first, it can unlock unimaginable potential in the future. For example, using advanced technology solutions for logistics, inventory management, or accounting can save a lot of resources for your company, speed up your operational capacities or offer better data insights. 

Even using social media platforms to market your offerings and communicate with shoppers is a step into digitisation.

Digital tools and platforms are essential today. They can help you save time, energy, and allocate your resources in the best possible way for maximum results. Most importantly, they can give you a competitive advantage and stability in the market. 

Building Sustainability

Another powerful way to secure your success in the future is to consider embracing sustainability practices.

Today, one of the most worrisome concerns is that our planet is suffering the consequences of mass production and industrialisation. 

Implementing circular or sustainable business models can help you meet environmental goals, stay on the right side of the law, and build a positive brand reputation among your target audience.

Innovating to Stay Competitive

Last but not least, innovating is key if you want to remain competitive. It can take many shapes, from your product offering to the way you deliver your products or services to consumers. Innovation essentially is about rethinking your business model and creating a better value proposition for customers or optimizing your processes. 

When seeking ways to innovate, consider:

• Your target audience’s unsatisfied needs or pain points and even new underserved customer groups.
• What your competitors are already doing and if there are any gaps you can fill.
• The specifics of the niche you’re in and where the industry trends are headed. 
• If there are any ways you can improve your products or services.

No matter what niche you’re positioned in, make sure that you have processes in place to identify opportunities that will help you stand out in a crowded market. 

Conclusion

Overall, understanding the diversity when it comes to business models is fundamental if you plan on running a successful company in the long run.

For businesses in the UK, we strongly advise that you carefully evaluate market trends, operational needs, and financial goals in order to make the best choice. Throughout your decision-making process, don’t forget to use reliable tools like Business Model Canvas to map out and adopt effective strategies. 

Frequently Asked Questions

What is the most common business model?

One of the most common business models is the traditional business model. However, with the rise of technology and innovative tools, digital and hybrid business models are also trending.

What are the 9 building blocks of the business model?

The 9 building blocks of a business model are value proposition (what the company offers), target audience (who it serves), channels (how it reaches customers), customer relationships (how it engages customers), key resources (assets needed to operate), key activities (tasks to execute the model), key partners (external collaborators), revenue streams (how it earns money), and cost structure (expenses and profit strategy).

How can you decide on a business model?

To choose the right business model for your company, start with evaluating a range of factors, including the needs and preferences of your target audience, your options for generating revenue, and any costs you’ll need to cover.