Types of Business Models – Why Are Some of Them Better Than Others?

For your business to survive, it is necessary to offer a solid value proposition to customers. However, gaining a consistent competitive edge merely from an incredible value proposition is becoming increasingly difficult. Differentiating from competitors with services and products is not easy, especially in the long run.

You’ll have to come up with a different approach. Designing business models that are better compared to your competitors’ could be the answer. The aim of this post is to demonstrate how a better business model can assist you in securing a competitive advantage which would not be easy for your competitors to overcome.

Switching Costs

Switching costs is what clients incur when they change a product or brand. You have got to ask yourself a basic yet very crucial question: how costly or difficult is it for your clientele to leave you and hire a competitor, instead? Now the goal for you here is to increase your clientele’s switching costs to make it harder for them to abandon you.

Printer and cartridge manufacturers are some of the best business model examples that closely follow this high switching costs strategy. If you own a printer, you know you can only use ink cartridges of that particular brand. Printer companies lock in their customers this way, since they cannot switch to another brand until they buy another printing device.

Recurring Revenues

When you make a sale through your business, does it represent a completely new attempt, or is it capable of automatically making follow-up revenues and sales? When a customer buys something from your business you may not be sure whether it will lead to follow-up purchases or not.

On the other hand, whenever Amazon sells one of their Kindle devices they have a decent idea that the customer will come back to them for the follow-up procurement of content and ebooks. This particular business model compels you to boost recurring revenues. It allows your business to make multiple follow-up sales through a single sales effort.

Spending vs. Earning

Ask yourself: does your business make money before it spends it? In other words, are you following those types of business models that allow you to generate some revenue before your business incurs costs to produce and deliver products/services to clients?

In the 1990s, Dell introduced an amazing business model. Traditionally, the manufacturers of personal computers would produce products by incurring manufacturing costs, and then try to sell them via retailers. PCs had to wait on shelves for weeks or months, while they kept losing their value.

Dell realized this problem and came up with a potent solution by starting selling their personal computers directly to the customers. This model basically involved assembling personal computers once they are sold.

To make this strategy work smoothly, Dell perfected JIT manufacturing and inventory practices. This enabled them to minimize the waiting time between taking orders and delivering them efficiently and swiftly to the customers. Such examples of business models show that tweaking your existing way of running your organization can reap immense rewards.

Superior Cost Structure

When it comes to business model types, each one of them has a cost associated with it. However, your goal is to figure out whether the cost structure your company has is significantly better or different than those of your rivals.

Nike accomplished this when they introduced FlyKnit technology to manufacture their topnotch running shoes. Prior to the invention of FlyKnit, Nike used to make running shoes by stitching together around thirty to forty pieces in low-priced sweatshops. It was a costly and labor intensive task. FlyKnit is basically a procedure in which advanced software guides cutting edge knitting equipment to weave the whole upper segment of shoe in a single piece. It substantially diminished labor costs.

Before picking up a new strategy to run your company, it is imperative to think on what is the business model you are currently following. Explore its strengths and weaknesses, and then decide whether you want to fine-tune the existing model or go for a completely new one.