How TF Do Business Models Work?

For all intents and purposes, a business model is how a business interacts with all functional areas of the organisation to serve its customers — for that, they are compensated for creating value.

For all intents and purposes, a business model is how a business interacts with all functional areas of the organisation to serve its customers — for that, they are compensated for creating value.

 


 

I was speaking to a former colleague about business ideas and business models, he had the idea of solving problems between suppliers and their customers, how to efficiently break down the trust barrier of a new supplier-to-customer relationship. I’m intrigued about ideas, mainly because I’m actually too lazy to execute so I think about processes and unpack how they would work fictionally in my head. Nevertheless, I got to go a bit deeper in what the business model would actually look like, how different would the solution be if it was between the business and their customers (B2C) instead of the business-to-business model (B2B) he was talking about or even solving more complex issues where one business solves a problem for another business and their customers (B2B2C).

This conversation had me thinking the whole day about what a business model is and how does the business model interact with the revenue model; meaning is the business operating the correct revenue model for its business model, but now what does that even mean?

 

So let’s discuss and define what a business model is:

 

According to Google’s dictionary, a business model is

“a plan for the successful operation of a business, identifying sources of revenue, the intended customer base, products, and details of financing”.

 

For all intents and purposes, a business model is how a business interacts with all functional areas of the organisation to serve its customers — for that, they are compensated for creating value.

 

There are three core business models — some confuse revenue models with business models, that’s why you get such articles as 50 types of business models, which are revenue models, not business models. A revenue model is just a framework used to generate income i.e. cash for goods, subscription fees, hourly rates etc. What we need to do is to separate business models and revenues models so that we can match a revenue model with a correct business model.

 

Right, the 3 core business models are:

 

B2C — A business serves ordinary people

B2B — A business serves other businesses

B2B2C — A business serves other businesses’ customers, directly without white labelling the solution.

 

So now that we have our business models, can we match business models to particular revenue models, is there such a thing as business-revenue model fit?

B2C companies, especially consumer social ones have one fundamentally a way of making money; selling ad space on a platform, the Googles, Facebook, Snapchat, Twitters of the world. Consumer social companies might choose different revenue models but they will never become outliers of 100m+ users, they can go viral and charge subscription fees like VSCO but network effects are imperative for scale and by charging a subscription for consumer social apps the company would be limiting virality — just imagine paying a subscription fee for TicTok, so pinning a correct revenue model to the business model is essential.

Not to say that ads are the only way B2C businesses can make their money, of course, businesses differ from verticals and industries. For instance, retail is a predominately B2C business model — how a brand would normally make their money is to charge an amount for the product being sold, but even in that industry different vertical exists the StichFix’es of the world, where you pay a subscription fee for curated fashion that arrives directly at your doorstep. Then again imagine StichFix had a consultancy style revenue model of charging a fee per style consultation, would that scale? I don’t think so. This shows the importance of understanding what revenue models are applicable to business models. Another example is Netflix, which has 180m+ paid subscriptions. Netflix is not a consumer social company it is a media company that charges a subscription fee for infinite* content to consumers, this again shows that different revenue models fit different verticals of the same business model.

 

Now Imagine if a B2B business had an ad-based revenue model; you might think, wait, what about businesses that advertise through Google & Facebook, wouldn’t that make Google & Facebook a B2B company with an ad-based model? yes but no, Google & Facebook don’t exist to help businesses advertise on their platform, they reluctantly do that because it makes them a ton of money but really they exist to make their users happy and engaged, at least thats what they tell themselves. So what revenue model fits this particular business model? well, the correct answer is it depends, what value is derived from the interaction of these businesses? For SaaS companies fee per user is the best revenue model, for non-tech companies such as law firms and consultancies its retainers + hourly rates. What about financial services companies? what are construction companies? again the correct answer would be it depends, there’s no right answer but there’s definitely a wrong one. What I have come to understand for a B2B the revenue model has something to do with charging some sort of recurring and/or non-recurring fee for services rendered.

 

Personally, B2B2C is what interests me, a business that serves other businesses to serve their customers. What would a business like this look like? well in most countries there’s some variation of a financial services business that allows consumers to purchase products on credit at the point of sale using their product on another business’ es platform. That is only one business case for this particular business model and I am still looking for other business cases. The revenue model, in this case, is really interesting for a few reasons 1. incentive alignment; business (a) & business (b)’s incentives should be the same. 2. consumers should need the product as much as both business (a) & business (b) do and 3. monetary value should accrual mostly to business (b) for it to be sustainable, business (a) can benefit from economies of scale and zero marginal cost. So a revenue model for B2B2C would be a hybrid of subscription + non-recurring fee.

But this is all theoretical though. . .

 

By: Ububele Kopo

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