Monthly Archives: June 2017

Some examples of business models

This is the second of a three-part series. Read Part I and Part III.

The following are some examples of business models that are used by various businesses. The list is by no means exhaustive and is designed to give you a feel for some of the models that exist (business models evolve constantly).

In many instances, the names can vary as they are not typically universally defined.

The Add-On model

In this instance, the core offering is priced competitively but there are numerous extras that drive the final price up so the consumer is not getting the deal they initially assumed. If you have recently tried to buy an airline ticket or car insurance, you will have spotted that the number of extras you are offered can almost reach double figures!

The advertising model became popular with the growth of radio and TV where the TV stations earned revenue indirectly from people looking to promote services to the audience they attracted, rather than via consumers paying radio and TV stations for the consumption of their TV programmes.

Some Internet businesses derive revenue predominantly as a result of being able to offer advertisers access to highly targeted consumer niches (often in the absence of revenue from selling their goods or services).  So if your website is about a narrowly defined topic, it is likely to attract a highly defined niche audience who could be offered complimentary products or services with a higher probability of success than blanket mass market advertising.

However, this business model is increasingly difficult to justify if it is your main revenue stream. For a start, the landscape is extremely competitive and advertisers are spoilt for choice. Building brand awareness and translating that into site visits is a very difficult and costly challenge. Successes such as Facebook are very much the exception to the norm.

If this model is being considered for your startup, it is worth noting that nowadays most savvy investors ignore ‘vanity metrics’ such as Page Impressions/Visitor numbers and want to understand whether the underlying business proposition is profitable. Examples such as YouTube illustrate how hard it can be to monetise free content even when you have significant visitor numbers. In short, this model is in decline for most businesses.

The Affiliate model

An affiliate is simply someone who helps sell a product in return for commission. However they may never actually take ownership of the product (or even handle it). They simply get rewarded for referring customers to a retailer when they make a sale.  Again this business model has been a huge success given the ease with which the Internet facilitates it.

The Auction model

The auction model is synonymous with eBay, these days, but of course auctions have existed for hundreds and hundreds of years.  The tulip market in Amsterdam is one of the more famous examples. There are numerous different types of auction, from English, to Dutch, Vickrey, Sealed Bid, etc., and they all share certain characteristics: the price of the good is not fixed; each individual assesses the value of the good independently; final value is determined via competitive bids. This business model has become very popular in recent years as the Internet has helped to broaden its appeal.

The Bait and Hook model

This is essentially the razor blade analogy listed above, where disproportionate amounts of the value are captured on components, refills and the like. Anyone who regularly buys ink cartridges for printers will recognise this model where customer lock in and switching costs result in monopolistic pricing on the component side. The mobile phone business also grew rapidly on the back of this model as handsets were often supplied free of charge when you signed up for a contract. Nowadays with SMART phones, such is the level of demand for some that consumers have to pay hundreds of pounds for the phone and in many instances minimum contracts are 18 months.