What is the Most Profitable Business Model?
Understanding what the most profitable business model is can be confusing. A business model is the company's core strategy for profit generation. You can use many different business models, but their profitability depends on how well you understand your own business.
What is a business model?
Business models, also known as profit models, serve as frameworks that lay out the different products and services your business offers. The plan tackles how sales will be generated and how much expenses production will incur. The starting point of designing your business model is understanding value propositions.
A value proposition is a detailed description of the goods and services your company plans to offer. It provides insight on why they are desirable to customers and what edge they will have against competitors.
Moreover, business models, especially for new businesses, should cover projected startup costs and sources of financing. It should also include detailed customer demographics – who are your target base customers, what do they like, how much are they willing to pay for the product you intend to sell them?
Business models also call for a marketing strategy, a detailed review of competition, and projection of sales and expenses. In essence, your business model should factor in the costs of funding a business, which many zealous entrepreneurs tend to underestimate.
Lastly, a business model is a great tool to attract future partnerships and investors.
Types of business model
There are a lot of existing business models you can adopt and improve on for your own. Gauge their functionality and compare different models to select what fits your business best.
Here are some commonly used and proven effective business models:
This business model is as straightforward as it gets. It involves creating your products or services and selling them. Despite being straightforward, this business is also quite broad and encompasses a few other business models.
The beauty of this business model lies in its flexibility and lack of restrictions. In theory, you can create whatever product or service you want, promote it through any marketing channels you choose, and sell it through any method you can. You decide whether to sell your products in-person, online, as one-off purchases or as subscriptions.
Its main drawback lies in the effort this business model takes. Time, money, and energy are required to create products, build a brand, develop effective marketing strategies, and sell and deliver your products.
The product/service business model represents what a business should be, as it has a vast potential for generating profit when executed properly.
The reseller or distributor model is another broad business model with many existing variants. Unlike the Product/Service Model, which centres on product creation, the reseller model focuses on representing another company or brand and making a profit out of promoting their offers to your target audience.
Most e-Commerce websites, like Amazon or eBay, and retail shops are prime examples of this model.
Another variant of this business model is affiliate marketing, where marketers generate revenue from commissions for each sale of the product they promote. This has branched out into influencer marketing, where active social media accounts with a significant number of followers are able to command a specific price for posting and mentioning certain brands. It has become a lucrative business model, especially during this time of unlimited screen time.
This is a highly effective business model if you already have a large customer base or audience.
An ad-based model provides a free product or service at its core and relies on ad revenue. Large Youtube channels best illustrate this. Watching Youtube videos is free, but channels with a large fanbase and high watch counts per video generate revenue from ads.
Essentially, profits in this model come from advertising services you provide to other companies or brands. It can be in the form of clicks or views or renting ad space on your website.
The premise of this business model is providing quality products or services that your customers want to pay for monthly instead of a one-off purchase. As long as they keep paying the monthly fee, they get to keep enjoying the product or service you have to offer.
The advantages of this model are recurring revenue and more accessible customer acquisition and retention. Its drawback is that you need a large customer base to pull substantial revenues.
The key to making this business model successful is to ensure that you provide premium products and services that your customers need and enjoy. Netflix, for instance, is winning in this pandemic as a subscription-based model.
Today's technology shaped our need for instant gratification. This behaviour pattern gave birth to the on-demand business model.
Information sharing is now instant, and companies can easily identify needs with high demand. This allows business leaders to offer innovative services to satisfy those needs. Ride-hailing and accommodation services such as Uber and Airbnb are examples of this business model.
This model gives convenience and ease of use, perfect for today’s consumers. It banks on the premise that the service was created because the customers asked for it, virtually removing the risk factor. Also, utilising technology drastically lowers the costs of operating a business.
This business model provides a platform to facilitate interactions between buyers and sellers. Revenue comes from fees for handling transactions and enforcing security and privacy measures.
One of the best-known examples of this model is Paypal.
This business model cleverly draws customers in with a free product and makes exclusive features available only to paid premium users.
Essentially, the core product is free but limited in functionality. Your customer can see and experience the product or service without any risk.
However, to generate revenue, you have to be very persuasive. Convince your customers that the advantages of upgrading to premium features are worth the cost.
The success of this business model lies in finding the perfect balance between providing enough value for free and having an enticing offer to incentivize users to upgrade to premium.
Spotify and Vimeo are excellent examples of this model.
How to select the most profitable business model for your business
Your business model is essential, whether you are a new entrepreneur planning your startup business or a relatively experienced business owner running your company for some time now. Several factors should be considered in designing one.
You start a business with an idea, a potential solution to an existing problem. Companies profit from identifying a need and satisfying it with an offered product or service.
You have to know what problem you want to solve and what product you wish to offer as a solution.
Before you move any further, you have to test whether your idea is viable. Research your target market. Do they think your product or service will satisfy their needs? Is there a high demand for it?
Who are your potential customers? Define the demographics; identify their interests, significant problems, and their goals. What do your potential customers value? The clearer the image you can picture, the better you know who you want to serve, and the better you can serve them.
Once you know your target market, creating a customer persona will help you choose the right marketing strategies and channels. It will help you identify the tone of voice you need to use when getting your message across.
Don't limit yourself to your initial idea. Explore all other options and other products from which you can bring in more money. As time passes, you will be able to gather data from your business that can be used to improve your business model and generate additional revenue streams.
When entering a specific market, you need to know your competitors. Check to see other players in the market and how successful they are. You’ll be surprised to find that your idea has already been implemented and is already bringing in profit for another brand. If this is the case, think of new ways to do it better than them. How can you add more value to the market? What can you do to make yours stand out?
The great thing about having some competition is that your idea has merit. It validates that there is an actual need for it. However, it is best if you try to avoid saturated markets – unless you can find an edge against your competitors.
What is the answer - what is the most profitable business model?
The profitability and success of a business model lie in how well you know your business and how effective you are in executing the business model. Every model can provide you with a very good profit. It’s all in the execution.