Profit is one of the best ways to find out if a particular business or an established enterprise is sustainable or not. While starting out an initiative, it is easy to register a business in the USA. However, the difficult part arises when you have to set up efficient and effective business models to make sure that you earn money.
Be sure to know what type of business model to use before starting the business. This is a crucial step – you must do this before you even come up with a product or start providing your services to potential customers. Below are several of the most effective business models out there. These strategies are in use today by companies such as Facebook, Amazon, Spotify, and Netflix.
1. Free Product, Revenue obtained from advertisers.
This particular business model is the “Facebook Model”. It is the exact strategy in operation at Facebook. Under this model, services are provided to the customer which is free, and is mostly paid for by the potential advertisers.
The biggest hindrance to this particular type of business model is that you need to have a relatively large customer base in order to seem appealing for the advertisers to provide you with the revenue. In this model, the customers are sometimes the commodities or products and the advertisers are the buyers. Just think of what Facebook does with their customer data.
2. Customers Pay for an Upgrade
This particular model is the ‘freemium’ model of Business. It is one of the most effective business models out there today. Several applications such as Spotify and LinkedIn use this particular model for conducting their business and gaining profit. Under this model, certain basic functions and features of the app are completely free. However, if the customer wants to get more out of the application, they have to pay to access those certain features restricted to the others.
Again, this particular model requires you to have a large and loyal customer base and also your services need to be appealing enough for the masses to convert from free to paid plans.
3. Price Decided on the Addition of Product Cost and Margin
This is a conventional method or a business model which an entrepreneur can potentially and easily adopt in any industry. Under this model, a price of a particular commodity equals costs plus a margin. Costs can include any overhead, operational, and all other expenses.
So in a hypothetical scenario, a product you are selling costs you $200. You want a margin of at least $50. You add them up and set the total price to $250 dollars.
4. Deciding Price on the Average Value to the Customer
Under this particular model of business, you need to assume and quantify the value of your particular commodity or the service offered by you. With this busines structure, companies determine the rate or price depending upon the perception of value by the customer in question.
This model is a customer-focused price determination model. In order to implement this model, a particular business will have to analyze a lot of data. They will then conduct a comparative analysis to determine the best price and set to set an acceptable margin.
5. Low Subscription Prices with Recurring Payments
Under this business model, a particular company offers a long-term subscription plan for 6 months or 1 year. They may also offer a cheaper option as compared to the prices of the subscription plans for a month or two.
This particular model is effective because it ensures a steady flow of revenue for the business. The customer base also doesn’t decline because they commit to the company on a long-term basis. Plus, the customer gets the subscription for a relatively low price. When a customer only sees a couple bucks come out of their account each month, they will not have any sticker shock.
6. Tiered Based Pricing
Another one of the most effective business models out there today is tiered based pricing. The tired based pricing model is another one of the effective business models that you can use. Under this specific business model, the various commodities or services have different prices for different volumes, features, or any other criteria whatsoever. For example, if we take the case study of Netflix where it offers different subscription tiered prices for HD or Full HD or SD screens.
Just like Netflix a lot of businesses focus their pricing based on the idea that every customer would choose their tier according to their needs.
7. Revenue as a Percentage of a Transaction
This model is very popular among E-Commerce Sites. Distributors or any other place and/or person which serves as a platform for people to sell their goods and services also use this model.
What happens under this business model? Look at an eCommerce site for example. Amazon charges a royalty or a transaction fee from their seller each time the seller’s product sells on their site. The same goes for distributors who charge money from the shopkeepers in the USA as royalty.
8. Low Product Price, with certain hidden charges.
This business model is extremely disliked by a lot of customers and is not recommended. This is especially true considering the fact that it can be said that money is being taken from the customers under the guise of misrepresentation.
What happens is that a particular commodity or a service is offered at a comparatively lower price. Later, certain hidden charges or support prices are imposed on the customer to make up for the cheap product price.
9. Low Product Price, With Additional Features for a Separate Price
Under this business model, a particular product is offered in its most basic variation for a cheap price. If you want certain upgrades or any such sort of a thing you will have to pay additionally for that.
Think about a car purchase for instance. You can buy the most basic model of a car cheaper and then pay additional for other features such as a good sound system, wheels, and so on. Or even a used car warranty.
10. Low Base Price, with Extra Charges on Disposables.
Another one of the effective business models is the ‘razorblade’ model. In this model, a particular item is offered to you with a low base price with one catch. In order to use that particular item you’ll have to regularly pay and buy additional products or disposables.
For instance, when you buy a shaver you cannot keep using the same blade over and over again because it would get blunt. You will then have to regularly buy blades to make sure that the product remains efficient. In many cases, the product only works with their specific brand of disposables. This way, you have to keep going back to them.
Effective Business Models – Summary
As you can see, there are many different types of effective business models. Depending on your type of business and your goal, you may find one or more of these effective. You may be able to offer your customers a product or service using a combination of these effective business models.
No matter which model you choose, always be sure to be as transparent as possible with your customers.
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