You have a lot of choices to make when starting a business. Outside of the product you choose to sell or your marketing strategy, one of your biggest decisions is what business model to pursue.
Ahead, get a high-level breakdown of the eight major business model choices so you can make the best decisions right from the beginning.
It’s important to understand each of these methods in order to make the right choice for your small business. There are pros and cons to each business model and, depending on your product, market, and cost structure, one may be more suitable for you and your business than the others.
Table of Contents
What is a business model?
A business model is a company’s core framework for operating profitably and providing value for customers. Features of an effective business model explain the customer value proposition and pricing strategy. The model identifies the products and services a company offers, its target market, and future expenses.
Why are business models important?
Business models are essential for both new and established businesses. They help companies understand their customers, keep employees motivated, attract investment, and provide a sustainable competitive advantage by identifying growth opportunities.
Think of your business model as a live asset for your company. It’s healthy to update it regularly to stay on top of upcoming trends and obstacles. If you’re planning to raise capital or partner with someone, active business model innovation shows stakeholders you can adapt and meet changing market demands.
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Common business model types for ecommerce
There are four main ecommerce business model types:
- Business to consumer (B2C)
- Business to business (B2B)
- Consumer to consumer (C2C)
- Consumer to business (C2B)
1. Business to consumer (B2C)
The business-to-consumer (B2C) business model refers to commerce between a business and an individual consumer, like buying a shirt from a brand’s website. B2C business includes ecommerce and brick-and-mortar.
2. Business to business (B2B)
Business to business (B2B) refers to any commerce between two businesses. Wholesale transactions typically fall under this category. You can include business-to-business offerings as either an ecommerce business or a brick-and-mortar. For instance, a coffee brand can sell its beans to shoppers on its website (B2C), but also sell in bulk to coffee shops (B2B).
Sell wholesale and direct to consumers with Shopify
Only Shopify comes with built-in features that help you sell B2B and DTC from a single store or platform. Tailor the shopping experience for each buyer with customized product and pricing publishing, quantity rules, payment terms, and more—no third-party apps or coding required.Explore B2B on Shopify
3. Consumer to consumer (C2C)
The consumer-to-consumer (C2C), or peer-to-peer, business model is when a consumer sells a product or service to another consumer. Selling a used laptop on Facebook Marketplace falls under this category. Individual sellers often begin selling on online marketplaces then start an online store to build a brand and capture more profits.
4. Consumer to business (C2B)
The rise in the creator economy led to a spike in consumer-to-business (C2B) companies. This business model refers to when a consumer sells their own products or services to a business or organization. If you want to become an influencer or a photographer selling photos online, this is the type of business model you’d use.
14 business model examples
Business models can take a variety of forms and involve different manufacturing and shipping methods. Let’s look at some unique business models you can use to start your business.
Dropshipping attracts people who prefer to keep startup costs as low as possible and are less concerned about margins. It is also a great business model for someone who doesn’t want to hold and manage inventory. Dropshipping involves B2C commerce (when a consumer buys a product from your store) as well as B2B commerce (the amount you pay for the dropshipper to provide the product and fulfillment services on your behalf).
Pros of dropshipping
- Low cost to start. Because you’re never carrying inventory, you have no inventory costs—which generally are the most substantial expense for a new ecommerce business.
- Low risk. Since you don’t actually purchase your inventory upfront, you aren’t taking the risk of holding items you can’t sell.
- Streamline sales. Dropshipping suppliers will take on the tasks of picking, packing, and shipping your product for you. This option provides convenience and efficiency, so you can manage your business from anywhere in the world.
Cons of dropshipping
- High competition. Because dropshipping has such low barriers to entry, a lot of people are doing it. Competition is stiff, and it’s hard to set yourself apart from the crowd.
- Low margins. Low margins make it difficult to compete with paid advertising space, which means you’ll have to rely more on building content, service, etc. You also have to sell at significant volume to make a decent profit.
- Inventory syncing (back orders). Because you’re relying on someone else’s inventory, there may be times when you place a shipment request to the wholesaler but the product is sold out. These delays can reflect badly on your business.
A dropshipping success story
Subtle Asian Treats is a top dropshipping business on Shopify selling plushies and cases for AirPods and iPhones. It was founded by Tze Hing Chan, a young Malaysian entrepreneur, to jump on the bubble tea trend happening in Asia.
The brand attracted thousands of bubble tea fans from the area by giving people a unique selection of products at a fair price. It’s also done a great job of building awareness on social media to share user-generated content (UGC) and appeal to customers with any budget through product diversification.
- How to Start a Dropshipping Business: A Complete Playbook
- The Best Dropshipping Products to Sell (And Ideas to Market Them)
- How Does Amazon Dropshipping Work? A No-Nonsense Guide
Physical retail is when you sell your products in-person directly to consumers in a B2C business model. This could be in a traditional brick-and-mortar store or through temporary retail activations like pop-up shops, markets, and events.
Some retail may also function as a B2B business model. Wholesale transactions qualify as such, as well as selling any products to businesses. If you sell office furniture, for example, your retail store is likely both B2C and B2B.
Pros of retail
- Make strong customer connections. You get the chance to interact with customers face-to-face, offering unique opportunities to create and nurture relationships.
- Boost sales. Online-only merchants have to reach customers digitally. Physical retail gives you the chance to reach in-store shoppers while also driving online sales to your website. Plus, people get deeper engagement with your products in-store versus looking at pictures online.
- No shipping hassles. When you sell in person, you don’t have to worry about fulfilling orders and all that comes with it—the costs, admin time, and potential for costly returns.
Cons of retail
- High overhead. Opening a physical retail store has tons of upfront costs, not to mention ongoing operating expenses.
- Inflexibility. While an online store offers you the option to make tweaks and adjustments with just a few clicks, such overhauls to your physical retail space require more effort.
- More things to manage. Running an online business is busy enough without the added stress of managing a physical storefront. When you have a retail shop, you’ll need to stay on top of more things than if you were online-only.
A retail success story
Blendily is a thriving nature-based skin care brand with an online store. Founder and chief botanic alchemist Ivy Chuang started the brand from humble beginnings in 2012, shortly after the birth of her daughter. Two years later, she sold her first products at a pop-up shop out of a garden shed. And 2018 marked the first physical Blendily shop.
Now, the brand has expanded online and with two physical shops, one in Seattle and one in Portland. Customers can purchase products online or visit the shops to test them in-person. Visitors can also attend various events and workshops to learn more about the products and the plant-based lifestyle Ivy loves to share.
- How to Open a Retail Store: Your Starter Guide
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- Shop-in-Shop: How to Capture Existing Foot Traffic with a Pop-In Shop
3. Manufacturing or making
Manufacturing your product is good for those people with a unique idea or a variation of a currently existing idea for a B2C or B2B business model. It’s also suitable for those who’ve already validated the market for their product. You can look at manufacturing through two lenses:
- Private label. A private label product is created by a manufacturer and sold under the business’s name. The business controls everything, including what goes in the product, how it’s packaged, and what the labels look like. Private label manufacturing is best for brands that want to create unique products.
- White label. A white label product is created by one manufacturer and sold to various retailers under their own brand names. They’re generic products that you can sell to wider customer segments.
Manufacturing can also include makers—entrepreneurs who sell handmade products. This is when you really take production into your own hands. It allows for precise control over quality and your brand but comes at the cost of limitations, time, and scalability.
This option is for the do-it-yourselfer—someone who has their own unique ideas, can physically produce the goods themselves, and has the resources to do so. The most important thing to note here though is not all products can be made by hand. Your product choices are limited to your skills and available resources.
Pros of manufacturing or making your own products
- Lowest cost per unit. Manufacturing often garners the lowest cost per unit, giving you the greatest margins on your product.
- More control. You can build your own brand, set your own prices, and control the quality of your final result without any constraints.
- Agility. Making your own products can give you the greatest level of agility for your business. You can adjust quality, features, and even the entire product on the fly.
Cons of manufacturing or making your own products
- Minimum order quantities. The startup costs for initial orders can be quite high. Depending on the costs of your product and the manufacturer, your inventory investment can be thousands or tens of thousands of dollars.
- The perils of outsourcing. Trusting external parties puts you at risk to a lot of challenges outside of your control. Nothing will bring your business to a halt like being scammed by an overseas manufacturer.
- Upfront investment. Both routes require time and money to get up and running. Manufacturing can be a long process of prototyping, sampling, refining, and production. And the primary costs associated with making your own products include the purchasing of raw materials, the storage of inventory, and labor.
- Time-consuming. Depending on your product choice, making your own products can be a time-consuming process, leaving you less time to focus on actually building your business.
A maker success story
Old World Kitchen began as a family-owned business selling products door-to-door in its local area. It went through a period of growth, where Etsy was the best move for getting the business online.
The brand, which specializes in handcrafted kitchen utensils, wanted to expand further, but to do that, it needed full control over pricing, branding, and quality control—things Etsy couldn’t offer.
After moving from Etsy to Shopify, it saw a sharp increase in online conversions. It was also able to partner with relevant brands and increase its prices, all while staying true to selling goods made by hand.
- How I Build and Sell Handmade Products in My Spare Time
- How to Find a Manufacturer or Supplier for Your Product Idea
- The Business of DIY: 21 Things To Make and Sell Wholesale
Purchasing products wholesale is a good option if you want to get up and running quickly or if you want to sell a variety of products and brands. Wholesaling provides a wide range of opportunities, as there are many products available for wholesale. The purchase of the goods is a B2B transaction, while you can then sell them to consumers in a B2C business model.
Pros of wholesale
- Selling established products. Buying wholesale is typically lower risk. You’re dealing with brands that are already validated on the market, so you don’t run the risk of wasting time and money developing a product no one wants.
- Brand familiarity. Selling already established brands can help position your business by creating an aura effect around your own brand.
Cons of wholesale
- Product differentiation. Selling already established products can work for you as well as against you. Because the products are available from multiple retailers, you'll need to fight extra hard to differentiate yourself and convince potential customers to purchase from you.
- Price control. Selling other brands means to some extent you have to play by their rules. Some brands will enforce price controls to prevent you from discounting their products.
- Inventory management. When purchasing wholesale you will likely have to purchase a minimum order of each product. The minimum order will depend on the product and manufacturer, however, you will have to stock and hold inventory as well as manage that inventory for re-order.
- Dealing with supply partners. If you’re carrying an array of products, dealing with multiple supply partners can become difficult to manage. Requirements may vary from supplier to supplier.
The wholesale business model might be considered a safe middle ground between manufacturing and dropshipping. Although each case is unique, it’s typical to see a 50% margin on wholesale goods resold at retail pricing.
A wholesale success story
Pernell Cezar Jr. and Rod Johnson founded BLK & Bold with the goal of helping local communities through selling coffee. The company pledges 5% of all profits to programs that assist youth programs, improve workforce development, and eliminate youth homelessness.
BLK & Bold leverages wholesale and direct-to-consumer channels to drive sales. The majority of its wholesale partners include coffee shops, restaurants, offices and coworking spaces, and hospitality providers such as boutique hotels, Airbnbs, and classic bed and breakfasts.
- How to Create a Wholesale Channel and Sell to Other Retailers
- Bean to Bar to Business: The Story Behind Soul Chocolate
- Hit the Shelves: 6 Steps to Getting Your Products Into Retail Stores
5. Print on demand
Print on demand is a way to sell made-to-order products that feature your designs. This is common for B2C businesses, but it also works for B2B—client gifts, conference swag bags, etc. For print on demand, you simply make the design and when a customer orders a product with that design, a third-party printing service creates, packs, and ships the order.
Similar to dropshipping, this model reduces the cost of entry into selling online. You don’t have to pay for a product until you make the sale, so there’s little upfront investment. Plus, everything from printing to packing to shipping is handled by your printing partner.
Print on demand is a great business model for creatives. You can sell products like:
- Duffle bags
- Yoga leggings
- Face masks
- Watch bands
- Canvas prints and posters
- Throw pillows
On demand products typically yield thinner profit margins, depending on your pricing strategy and customer acquisition costs. But it’s a good low-risk business model for those new to ecommerce or who want to test different revenue streams for their existing business.
Pros of print on demand
- Create products quickly. Once you create the design, you can make the product and sell it in your online store in minutes.
- Automated shipping. Shipping and fulfillment is handled by your supplier. After you make the sale, you’re only responsible for providing great customer service.
- Lower cost upfront. Since you don’t hold any inventory, it’s easy to add and remove products, test new business ideas, and create products for niche markets.
Cons of print on demand
- Less control over shipping. Shipping costs can get complicated, as they often vary for different products. Your options also may be limited if you want to create a standout unboxing experience.
- Limited customization. What you can customize depends on the vendor and the product. You’ll have to determine base costs, printing techniques, and available sizes when deciding which products to customize.
A print on demand success story
Fanjoy is an online marketplace selling curated print on demand products from a variety of artists and creators. CEO Chris Vaccarino started the company in 2014 after realizing the opportunity through his experiences selling merch on the road with his brother’s band.
Now, it’s a thriving marketplace that connects creators with tools they need to be successful entrepreneurs—and customers ready to buy their designs. It has shipped more than 3 million packages.
- Print on Demand: Sell Custom Products, Grow Revenue
- 21 Best Selling Print on Demand Products
- 10 Best Print on Demand Companies and Sites
6. Digital products
A digital product is a nonphysical asset or media type that can be sold and distributed online, repeatedly, without restocking inventory. These products often come in the form of downloadable, streamable, or transferrable digital files, such as MP3s, PDFs, videos, plug-ins, and templates.
The upfront costs of creating a digital product can be high, but the variable costs of selling them is comparatively low. Once you create an asset, it’s incredibly cheap to deliver to customers.
Pros of digital products
- Lower overhead costs.You don’t hold any inventory or run up any shipping charges.
- Scalability. Orders can be delivered instantly, letting you be hands-off with fulfillment. As the business grows, you can easily convert tasks into automation to free up time.
- Extensive product offerings. There are various routes you can take: a freemium model where you provide products for free with upgradable features, monthly paid subscriptions for access to exclusive content, or licenses to use your digital products. You can build a business solely around digital products or incorporate them into your existing business.
Cons of digital products
- High competition. People can probably find free alternatives to your digital products. You’ll have to consider the niche you target, provide superior products, and know how to build your brand in order to succeed. It's helpful to do a SWOT analysis of your competition to find an edge.
- Piracy and theft. You’re at risk of people stealing and reusing your products as their own.
- Selling restrictions. For example, you can only sell physical products through Facebook and Instagram according to their commerce policy.
A digital products success story
Online store Pixie Faire has tons of products for sale, but don’t expect any of them to arrive in a package. Instead, this Shopify merchant has gone all-in on digital products, selling downloadable patterns for doll clothes.
Cinnamon Miles co-founded Liberty Jane Clothing in 2009, selling downloadable patterns. This soon grew into a thriving online marketplace with designs from several contributors, inspiring the name change to Pixie Faire in 2013. Since then, it has sold more than five million digital downloads.
- The Most Profitable Digital Product Ideas in 2021 (And How to Sell Them)
- How One Couple is Making $600,000 Per Year Selling Digital Products
7. Direct to consumer
The direct-to-consumer (D2C or DTC) business model means you sell products directly to consumers, without wholesalers or third-party retailers like Amazon. It’s essentially a fancy name for B2C businesses.
Think about some of the biggest trending brands: Warby Parker, Barkbox, Bonobos, Casper. What do they all have in common? A DTC business model. Even brands like Apple and Tesla are leveraging mobile commerce as a main channel for DTC sales.
These brands eliminate the hassle of researching and choosing from hundreds of competing brands, making the entire shopping experience easier for customers.
Pros of direct to consumer
- Own the customer relationship. Selling directly helps you own more relationships and increase customer lifetime value.
- Collect customer data. Selling direct lets you collect first-party data you can use to personalize customer communications and experiences.
- Higher profits. You don’t have to share profits with any third-party distributors.
- Get feedback faster. Since you can communicate with customers directly, you can easily collect feedback to improve your products and customer experience.
Cons of direct to consumer
- Costs of direct distribution. There’s no sharing of shipping or storage costs. DTC businesses need to invest more upfront to get their business operating smoothly.
- No built-in audience. One advantage of working with retailers is that customers can find your products easier. If you’re a new brand, you’ll have to market yourself. You also don’t benefit from the distributor’s experience or salesforce.
While it may take time and money to establish reliable distribution channels, selling direct is a smart business model for building a loyal customer base and improving profitability over time.
A DTC success story
Handcrafted leather shoes and “Made in Italy” go hand in hand. Consumers who wear this type of footwear have traditionally accepted its high price tag—thanks to an industry flooded with distributors, agents, resellers, and retailers.
It wasn’t until Velasca, a Milanese footwear startup, stepped into the scene in 2013, with a goal to disrupt the industry by connecting consumers directly to shoemakers.
Velasca was born out of a casual conversation between co-founders Enrico Casati and Jacopo Sebastio in the back of a taxi. It has since grown into a blossoming DTC brand, selling hundreds of thousands of shoes in over 30 countries.
- Direct-to-Consumer Ecommerce: Data, Benefits, & 12 Enterprise Examples [Shopify Plus]
- Drinking in The Haus: How Funding Helped This Booze Brand Grow 500% During The Pandemic
- How This Direct to Consumer Brand Disrupted The Handcrafted Footwear Industry
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A subscription business model charges customers a recurring fee—usually monthly or yearly—to access a product or service. Subscription models help businesses capitalize on ongoing customer relationships. If they continue to see the value in your offer, they’ll continue to pay your fee.
It doesn’t matter if you’re an ecommerce business or online educator, you can start a subscription business across many industries, including:
- Streaming services
- Monthly subscription boxes
- Membership communities
- Food services
A recurring revenue model can lead to higher revenues and stronger customer relationships. Though a subscription membership, the longer customers use your product or service, the more valuable it becomes to them.
Pros of subscriptions
- Predictable revenue. Monthly recurring revenue helps you forecast sales, plan inventory, and understand how much to reinvest for business growth.
- More cash on hand. Receiving monthly payments upfront means more cash flow (and piece of mind) for your startup.
- Loyal customers. Regular purchases give you deeper insight into customer behavior, so you can continually improve products and keep customers coming back for more.
- Easier cross-selling and upselling opportunities. The more customers use your products, the more trust you build with them. This makes it easier to sell additional products to them, because they already know you provide value.
Cons of subscriptions
- High risk of churn. One drawback of the subscription business model is churn. You have to constantly keep people interested and engaged for them to keep paying you.
- Varied products. Products become dull if they don’t change often. Netflix adds and removes movies every month. Trunk Club promises to invest in your changing styles over time. You need to keep products fresh to maintain a subscription business.
- Small issues, big problems. Most subscription services give their customers the same thing, at the same time, every month. While this seems simple, if there’s one small kink in your system, it can turn into a big problem fast if you don’t plan for it.
A subscription success story
Subscription businesses come in many forms. B2C ecommerce retailers can include a subscription model in their offering, similar to Clevr Blends, a popular online latte brand. The company, founded in California, has grown into a thriving business since its launch in 2016.
The brand offers a subscription option which gives discounts, early access to new products, and a free scoop in every order.
A fee-for-service business is a service-based business model, so the merchant sells its services rather than selling products. This type of business is common across all models, including B2C (like a hair salon), B2B (a corporate cleaning company), C2C (your neighbor’s kid shoveling your driveway), or C2B (that same kid shoveling for an office building).
The service industry is actually the fastest-growing sector in the US, according to the Bureau of Labor Statistics. And while this often indicates hourly workers, there’s also plenty of opportunity for aspiring business owners.
Pros of fee-for-service
- Get paid for your time. While product-based businesses don’t always compensate you for your time, the opposite is generally true for fee-for-service arrangements. You can charge hourly to ensure you’re getting paid for all your time spent working.
- Low startup costs. Depending on the business you want to start, offering services comes with low startup and overhead expenses. Even if your dream is to open a dog grooming salon, you can start small by offering dog-walking services and save up to invest in what you need to fully launch your vision.
Cons of fee-for-service
- Limited scalability. Because a service-based business requires your time, it’s difficult to scale on your own. The main ways to increase your income is to raise your rates or subcontract some of the work to lower-wage service providers. However, these both come with their own challenges—clients may not want to pay more and it takes a lot of time to find and manage subcontractors.
- Justifying your time and rate. Many service-based businesses that charge hourly need to justify how much time a job takes to complete. Even if you’re not charging hourly, service-based businesses often face more pushback or negotiation from customers.
A fee-for-service success story
Many ecommerce businesses need photos edited to make their products shine on web pages. However, not everyone has the skills, time, or software needed to make edits like background removal and color changes. Path is a virtual photo editing studio that delivers those services to other businesses, operating on a B2B model.
Path is a team of more than 300 editors and graphic designers who perform basic but necessary photo edits. Rather than charging an hourly rate, Path applies a flat per-photo editing fee, depending on the complexity of the edits. It also offers faster turnaround times at an additional fee.
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A freemium business is when a merchant offers both a free and a paid version(s) of its product or service. This is typically used for B2C or B2B businesses. Oftentimes, software companies and software-as-a-service (SaaS) businesses use this approach.
The freemium business model allows merchants to create relationships with new customers easily, since there’s no cost or commitment to sign up and try it out. The way freemium businesses earn money is by getting these people to use and love their platform so much that they want access to additional features—features they have to pay for.
Pros of freemium
- Easier customer acquisition. Because there’s no risk to try out your product or service, it can be relatively easy to convert new customers. They don’t need to pay for anything, so it’s easier to convince them to sign up.
- More cross-selling and upselling opportunities. Even free users provide lots of insightful data you can use to your advantage when personalizing promotions and recommendations.
Cons of freemium
- Difficulty to convert. Your free users are likely already happy with their experience. It may be more difficult for them to justify the added expense if they can have a similar, though somewhat downgraded, experience for free.
- Higher risk of churn. Subscriptions are susceptible to high churn rates—even more so if you offer a free alternative to your paid options.
A freemium success story
Spotify is one of the most high-profile freemium businesses. The music-streaming service operates on a subscription-based business model. Users can subscribe to its free—or freemium—plan, which exposes them to ads and limited features. However, paid plans eliminate ads and provide additional features such as offline listening, unlimited skips, and playlists.
An affiliate business model is when you earn a commission or referral fee in exchange for driving customers to make a purchase from your affiliate partner. Affiliate marketing is often viewed as a C2C business model, because affiliates are typically regular people who refer the products or services to other consumers. However, C2B may also apply.
There are many ways to use affiliates in a business model. Your brand can also tap into the power of affiliate networks, recruiting a group of brand spokespeople to promote on your behalf.
Pros of affiliate
- Potential for passive income. Whether you’re the affiliate or the brand, this offers a great opportunity for passive promotion and income. As a brand, you have a network of people promoting on your behalf. As an affiliate, you can set up a website with affiliate links, sit back, and watch it grow.
Further reading: What is Passive Income: Income Types and Examples
- Opportunity for collaborations. As an affiliate, you can partner with a whole array of brands. This opens you up to new opportunities and exposes you to things you may not have otherwise been exposed to.
Cons of affiliate
- Small profits. Affiliates often generate a percentage of the income generated from the referrals they send. Many affiliate programs offer a small percentage, so you need lots of referrals to convert if you want any sizable payout.
- Requires a network. The most successful affiliates already have their own audience or network. If you haven’t already established one, you’ll need to invest in doing so.
An affiliate success story
QALO sells silicone engagement rings and wedding bands on its Shopify site. To spread the word in its early days, QALO launched an affiliate program, focusing primarily on online communities. “Creating affiliates through people that have organizations and followings online makes things a lot easier instead of having tangible people on the ground trying to move your product around their gym or whatever it may be,” says co-founder KC Holiday.
These affiliate relationships were critical to the brand’s growth shortly after its 2013 launch, and it still has the affiliate program today.
- Affiliate Marketing on Instagram: 7 Ways To Make Money (2023)
- How To Start Affiliate Marketing With No Money
12. Razor blade (and reverse)
The razor blade business strategy is when you sell an affordable item upfront which then requires additional products and recurring future products to be used in the future. These supplemental purchases are priced with higher margins for the merchant, while the initial product may have been sold at a lower markup.
This model is used by razor blade companies, hence the name. The razor blade may be inexpensive to buy at first, but replacement blades are not so affordable and thus earn these brands more revenue.
The reverse is essentially switching it up: the initial purchase may have been a big investment, but you secure recurring revenue with supplemental products. Though they won’t earn a large margin, it keeps customers coming back and offers you opportunities to continue marketing to them.
Pros of razor blade
- Drives repeat purchases. Due to the nature of this business model, customers almost need to become repeat buyers. This is great for boosting customer loyalty and lifetime value.
- Collect customer data. You have more touchpoints with customers, allowing you to collect more first-party data the more purchases they make. Businesses with their own customer data are empowered by these valuable insights without third-party limitations or restrictions.
Cons of razor blade
- Potential for brand dilution. If you sell an inexpensive product upfront and then charge a lot for the required recurring purchases, customers may start to question the quality of your products—and also the reliability of your brand.
- Susceptible to competition and disruption. Many businesses operating with this model aren’t pricing products because they have to price them that way. They’re pricing strategically to manipulate perceived value and inspire repeat purchases. As a result, this also leaves these businesses open to the threat of competition—it won’t be difficult for competitors to jump in with a more affordable or superior product.
A razor blade success story
Katchy Bug is an excellent example of a reverse razor blade success story. It sells UV light bug catcher fans, which come at an affordable upfront cost. To use the product, customers need to also have sticky pads in the bug catcher to capture the pests. Those sticky pads are disposable and need to be replaced fairly frequently, depending on how many bugs you have. This generates recurring revenue for the merchant.
The brand can also market to those customers when it releases new, upgraded versions of its original bug catcher.
A franchise is a business that uses franchisees to distribute its products and services. Essentially, the franchisor creates the brand and the product, and the franchisees can buy into the franchise and start their own business under the same brand umbrella.
Franchises are B2C business models in the sense that the products and services are often sold directly to consumers, though some franchises operate on a B2B model as well. The relationship between the franchisor and the franchisee also mirrors a B2B business model.
Pros of franchising
- Built-in brand awareness and support. Rather than starting a business, brand, and product from scratch, franchising allows a more approachable way to get into entrepreneurship. You can take advantage of brand awareness and existing resources to get you off the ground.
- Spread the word about your business. If you want to become a franchisor and turn your existing business into a franchise, this offers a great way to expand your geographic footprint without having to physically do so yourself. This also offers you more in-depth local expertise in new markets.
Cons of franchising
- Limited flexibility. When opening a franchise business, you have limited control. You’ll have to adhere to the franchise requirements, including branding, pricing, product displays, customer service, and more.
- Startup costs can be high. It’s not free to become a franchisee. Most franchises require some sort of upfront investment or signup fee. These can be pretty hefty on top of the other startup costs you’re already facing.
A franchise success story
Athletic and outdoor apparel brand Decathlon found success through franchising. The brand refers to its franchise opportunities as “partnerships.” This business model has allowed the retailer to expand since first opening its doors in 1976. Now, its products are in some of the most recognizable big-box stores, like Target and Walmart.
A brokerage is a business model in which the broker connects the customer to the product or service provider, acting as a liaison of sorts between the two. You often see brokerages in B2C and B2B business models, such as real estate or insurance brokerage, but not often in ecommerce.
Pros of brokerage
- Simplify complicated transactions. Brokerages are often used in complicated transactions such as real estate. This is because they often provide additional services that are typically required of such complicated purchases.
- Leverage brand awareness. Some brokerage firms are successful and have brand awareness in their own right. Gaining representation by such a firm also grants you the benefits of being associated with that brand.
Cons of brokerage
- Inflexibility. Much like with franchises, operating under a brokerage firm often requires you to follow the firm’s policies and procedures. This can be frustrating for aspiring entrepreneurs who want to do things their way.
- Fees and commissions. Because brokerages offer services and other advantages, they also take a cut from your profits. This is often paid as a percentage of the transaction value in the form of a commission.
A brokerage success story
The Oppenheim Group is a now-famous real estate brokerage firm with multiple offices and a huge team of real estate agents. Founded in 1889, the firm has earned lots of recognition over the years and it now even has two of its own Netflix shows.
How to create a business model
Your business idea might come first, in which case you’ll need to select a model that suits it. Or maybe you’re tied to a specific business model and need to work backward, finding an opportunity that suits that model.
Some businesses stick to one business model while others use a combination of business models to execute their vision. Regardless of your route, here’s how to get started:
Understand your audience
Knowing who you want to sell to is an important first step of market research. This tells you there’s enough people out there with the willingness to purchase your product, validating market demand.
Beyond understanding the size of your audience, you’ll also want to look at their background and behaviors to understand what motivates their purchase behavior. You can later leverage this information when devising strategies for pricing, product development, marketing, and advertising.
- The Marketing Research Process in 6 Steps
- What Is Market Analysis: 3 Core Elements Every Business Needs
- What Is a Focus Group? Definition and Guide
- Competitive Analysis Can Grow Revenue—Here's How
Identify the problem you’re solving
Once you’ve gotten to know your audience, you should have a good grasp on their wants and needs. Dive deeper to look at the problem you’re solving. For example, you might sell jewelry—in this case, you may solve your customers’ challenge by finding high-quality earrings at a price point they can afford, or bracelets they can wear in the water without getting destroyed.
When you know the problem you’re solving, you can begin to understand the value you offer to people. This will help you devise a value proposition to help you stand out and stay true to your original vision.
- How To Write a Value Proposition in 5 Simple Steps
- What Is a Unique Value Proposition? How To Create a UVP (2023)
Create a business plan
The process of writing a business plan is essentially laying out a blueprint for your business. Your business plan will note what type of business model you’ll use, who your customers will be, where you’ll get funds to launch, the functions of the back end of your operation, and how you plan to promote and grow. A business plan will help you ensure profitability while factoring in expenses, pricing, and other challenges.
When you go through this process, you might realize multiple business models can work for your vision. That’s OK—you don’t have to strictly fall into one category. You can operate with multiple business models under the same business. For example, you may sell clothing in a B2C retail store or on your website, but you might also sell bulk orders to other retail stores with your B2B wholesale business model. Using a variety of business models is sometimes the best way to reach your goals.
- How to Create a Lean Business Plan
- Free Business Plan Template and Examples for Startups (2023)
- The Top 7 Business Plan Examples To Inspire Your Own (2023)
Find your successful business model
Most products will fall into one of these core business models. Depending on your product or niche, you may not have the option of which ecommerce business model you choose.
Much depends on the type of product you plan to sell. Some products will naturally fall under certain categories. However, the model you end up selling under will partially define and shape your entire business plan going forward.
Use the different business models above as a launchpad you can rely on. Then, continue to innovate how you deliver value to your customers. You’ll soon start to see the impact of a good business model, avoid one of many common business mistakes, and kick off your path to entrepreneurship the right way.
Business models FAQ
What are the main types of business models?
- Business to consumer (B2C)
- Business to business (B2B)
- Consumer to business (C2B)
- Consumer to consumer (C2C)