Learn Effective Business Models

Learn Effective Business Models

Many people today go to great
lengths to study business and to acquaint themselves
with the principles and methods that will result
in a great business. They devote a lot of time
and energy in this pursuit and after they complete
their diploma or degree, they leave their various
institutions of study feeling well equipped
for the business world. This is no longer the case
however, especially in a world that is so fast
changing that if you blink, you could literally miss the next
industrial or technical revolution! Learning is no longer a static
experience, an expedition to be undertaken within specific
parameters, for a specific period. Instead, it has evolved into a process,
one that literally never ends! Business models follow this
convention rather closely. Instead of being rigid, static
documents, they need to be fluid, and easily adaptable to the
changing business environment. You may need to have separate models
for your micro and your macro business environments, and while these documents
might be different in design, and in the various
elements of their makeup, they serve one very
specific goal: PROFIT! Various elements go into a
good quality business model. These elements are easily understood,
although sometimes not obvious. They will give you insight
into the most effective business models around today
and tell you why these work. There will be indicators as to
the elements of these models that make them the success
stories that they are today, judging by the phenomenal
success of the companies from which these
business models come. The movement of products and the
processes by which these products, or services-are moved, is essentially
how business make their money. It is the details of these processes
that should make up your business model. There are many other factors too that
make up a winning model, but as said, this book is not about how you develop
a business model, but rather, how you can apply the various
elements of some of the best business models in practice today
to create your own unique model! Before we get into the details
of these various models, and how you can apply them in the creation
of your hybrid business model, let us give you a quick recap on
what makes up a good business model. This will not be a detailed discussion
of these principles, but rather a quick review of the components
that go into successful models. Let us now delve very lightly
into these elements, go into the details of some of
the more successful models, so that you can get your
head in the game of business and get your
business model into such a state of synergy that it
fits perfectly with the models that are appropriate
to your industry! What Makes Up a Good Business Model Good business models are incredibly
innovative, especially today. Every company, well almost
every company, is undergoing modifications to its business
model at any given time. This is the true nature of business models. They must be like water: fluid, then
icy, and where necessary, like steam! In the modern world,
especially the new modern business world, you will
encounter change constantly. If you are just entering this environment,
be sure that you will meet with various levels of resistance from players who have
been in the game longer than you have. Companies that have been
around for longer can offer their products at
lower rates now, with their extensive reserves
and with the ability to pool their existing,
large client bases. Profits are continually
being redistributed, industries are being
reshaped, and companies are always looking for
newer and more effective ways to create value
for their customers. They do this by competing
through their business models, and working
these against other players in the industry, as opposed to trying
to create innovative models in isolation. This has created hybrid models,
ones that work with each other, instead of against one another
in the modern business context! But what exactly constitutes a
good business model, though? Business models should describe
exactly how your business operates! It should detail the processes
involved in creating value for your customers, and turning this
value creation into profit. How your organization operates, the
means by which you compensate other businesses as well as your employees, the
various contracts you have in place, the setup of your facilities,
as well as your marketing and sales strategies should all be
included in your business model! In short, a good business model should
describe the managerial decisions and choices, and systematically lay out
the consequences of these choices. All managerial choices have consequences. For example pricing, which is a managerial
choice, affects your sales volumes, your company’s scale
economies, as well as you bargaining power, all of
which are consequences! These consequences affect how your
company creates and captures value, and as a result, should make up your
definition of a good business model, and be strategic components of your
model once you set about creating it! Now that you know what goes into a
good business model, let us look at some highly effective models
that cover a variety of industries. We will go online first, because
this type of business has literally turned the business
environment on its back. Let us look at how you can get it
right online, the first time, so that your business can grow to
surpass even your own expectations. You will learn how you can see
profits quickly, or at least faster than you would have if you
did not have an insider view of how the top online
companies have created effective, winning
business models today! Getting It Right Online Okay, be warned, this is going to be
the longest chapter, primarily because of the internet boom that we have seen
since the inception of this space, but also because of the
wide variety of businesses that you can start-and
succeed at-online! The websites of various airlines
have begun to significantly outperform regular online
travel agencies, for example. This is because they do not have to add
to their booking fees to make a profit. However, one travel site in particular,
has come up with a highly unconventional travel-planning offer,
one that has helped to ensure this company has
continued success. This company is Priceline! As part of their business model, Priceline
introduced the name-your-own-price concept! This distinguished this
travel site early on. Simply put, venders will bid to
match the prices that you as the customer set, not just for air
tickets, but for hotel stays as well. This practice is so unique, that it has
intrigued companies in other industries. Even though Priceline offers traditional
planning as well, having the name-your-price program as part of their
business model has really set them apart! The names of bookings offered under
this program are not disclosed by name. In the case of airfares, the
itineraries are not disclosed. This is a measure set
in place to protect the supplier against the
detrimental repercussions of having to change their
regular prices because of their link to the
lower discounted quotes. Priceline too have protected
themselves, by focusing on the high-end overseas travel
market and hotel bookings, so that too much emphasis is
not placed on those products that are specific to the
volatile airfare market! Users are attracted to the
lower airfares, and are hooked into purchasing hotel bookings
with higher profit margins! There is no need to add profits
to their booking fees. Customized hotel options added
to their travel bundles have ensured the continued
success of Priceline! This business model does have
a few downsides, however. The customer has to take a gamble with
information that could be important. For example, who will
your service provider be? What will your itinerary be? When will you travel exactly? None of this information is
available under the name-your-price option, not until you have booked
your trip, which is non-refundable! If you are comfortable with these
assumptions, however, then you can enjoy unbeatable prices, as well as
a rather straightforward agreement. Business travelers do not have the luxury
to book travel with so many unknown variables, from unknown flights to not
even being sure who their carrier will be. If, however, your travel regularly,
you can enjoy great deals, and take incredible advantage of the deals
that are on offer through this model! Priceline pioneered the reverse-auction. Other industries and sites, however
have frowned upon this brokerage model of travel deals, and they work
to an opposite standard completely! They list deals and prices from the internet,
and customers are therefore assured of the lowest price for specific
products and packages that they choose. Some sites search for all travels on
the web, and then list options for the visitor to compare, depending on the
trip specifications that you choose. If, for example, you do not
like a carrier or seating option offered, then you
will be able to compare similar packages best
suited to your needs and preferences, according to
your individual tastes. The other option you have, to
affect your unique business model, is to provide
installable browser add-ons. Invisible Hand is one such tool. Some search engines also
automatically show the lowest prices for most products from the
minute you start your search. Some suppliers pay an incentive
so that they top the lists, with little regard for the
competitiveness of their prices. It is however easy for you
to compare these results to know for sure if you are
getting the best deal. The Priceline business model
has truly worked for them. Regardless of how you may
view their offers, or their systems, this is something
that you cannot deny. As an online business, they have really
gone the opposite direction to the status quo, and this has had a massive impact
on their bottom line, in a positive way! eBay also has an impressive business model. They have brought the concept of
aggression into the mainstream. With price comparisons as a major
part of their online auctions, they have solidified their place
in the buy-it-now sales market. Other companies have also applied this
business model with great success. One such success story is Amazon! Jeff Bezos, the founder of
Amazon, proved quintessentially that slow and steady
really does win the race. After much effort, time and
consideration, his business model took off, and exploded onto
the information superhighway! He challenged traditional bookstores
by starting an internet company with a wider selection of books
than these stores could carry. Jeff Bezos housed his large
inventory in warehouses that he bought, offering its buyers
direct-to-customer service. Yes, he and his investors
had to wait to see profits, but this has proven to
be well worth the wait. As part of his model, he allowed criticism
from readers of the products offered, using reader reviews, and therefore
building a rather faithful user community. Interest was earned on the
immediate payments made by customers, before even
their suppliers were paid! It took a couple of
years for Amazon to see profits, but it has shown
incredible resilience. Their survival of the dot.com
bubble burst has shown this. They increased their
income generating streams by adding CDs,
electronics, and apparel. They acted as a portal for third-party
affiliates, which fueled profits. These parties handled warehousing,
while the company itself took a share. Bezos earned plenty of
critics when he decided to put off profits
in favor of growth. This model however, ultimately
showed dividends, creating a company that saw to customer convenience
first, leading to success! By offering regular and offer-aggregate
sales into its pricing models, Amazon has come up
with a killer combination. You can search for a book,
and receive the prices offered for the same title
by other online retailers. They have even included used
booksellers and private parties, where these sell single new and used titles
at specific, non-auction prices! Amazon offers its customers incentives
for using their fulfillment setup. Included in this are their
shipping discounts, as well as their excellent
customer service. Whether you are looking for new
or used books, their internal price aggregation is an excellent
reason to go with Amazon. They know this, and they have made
it the core of their business model. While this is different to the
Priceline model discussed above, it is also an
incredibly effective one. Woot has also evolved its
business model to suit the changing environment,
with great success. They originally came up with the one
day/one deal concept, which made limited amounts of single products
available at great prices for one day. This idea transformed however, as
other players entered the game. They first diversified to create
mini-sites, which offered Woot deals each day in very specific areas,
such as wine, T-shirts and toys. More recently, they have entered
the social network space. They investigate and survey
the social networking interests of their
customers, and use this information to come up
with innovative ways to give the customer information
of the daily deals. Simple online adventure games are
an example of this strategy! The introduction of tipping point
sites like Living Social, Groupon, and Moolala put the one day/one
deal business model on steroids! Taking this model to a new extreme,
all these sites provide discounts on everything from meals and products, to
services with local vendors and merchants. They use crowd-sourced buzz to
ensure that these deals are worthwhile, for both the
vendors and the site itself. Deals only become active
and purchasable once a set number of people have shown
an interest in them, however. Due to this, this industry has
recently come under fire. This has been from many who compare this
type of setup to the pyramid scheme setup. Researchers and analysts too have
questioned this business model, saying that it is detrimental to the
merchants that it is attracting. Deeply discounted deals
such as these have been known to work as
loss leaders, especially for the local merchants, and especially
if it does not result in repeat business. If existing customers purchase
the deals too, the chances of recuperating this remuneration from
future business are slim to none! Critics have even compared the tendency of
vendors to finance previous deals of this nature by entering future deals within
this model with the recent credit crisis. This is a highly volatile situation, and
while it clearly has great influence, the social online coupon model is one of those
bubbles that seem set to burst at any time. In the infancy of the internet,
many entrepreneurs were rushing to try and find ways to take full
advantage of this emerging tool, and although this was
considered to be a gamble at the time, it is one
that has paid off immensely to the companies
that have applied fluidity and forethought
to their business models! Financial power is the
undisputable leader in terms of markers of
corporate success to date. This can be seen from stores
like Walmart, who have a global hegemony, and
incredible financial power! In opposition to this, the
internet has introduced one of the most fascinating
business models to date. Personal, customizable, one-to-one
transactions are the basis of this model, and sites like Etsy and eBay
have made good use of this model! The internet links people, one willing to
sell a product, and one willing to buy it. Adding up these transactions, like the
aggregating model of Etsy, you get more business that you would with just one
simple, high-volume, high-demand product. The ‘long tail’ is a term that is
often used in the online world. What this basically means,
is that a bestseller that does well for an online
bookseller, on any given day, they make way more money on the
total number of products that they sell, many of them which
will be in far less demand! Sites like Etsy, Threadless,
Kickstarter and Donors Choose are all sites that
operate on this concept. A single, unique piece of
art, in the ‘long tail’, can be worth enough to
make the sites worthwhile, because you know where
your money is going, and you do work with likeminded,
single individuals! We now have the ability
to shop, pay for, ship, and deliver a huge
array of merchandise. As little as ten years
ago, the person-to-person economy of books and art goods
was totally unheard of. The internet has brought this
idea into reality, and this is so influential, that is
affecting other business models, which are seeing the need
to shift and change, in order to incorporate these
qualities into their own! Without person-to-person sales,
businesses would not be as involved in social networking
as they are today, for example. The internet bubble model, the Freemium
model and the advertising model are all business models that are
applicable to internet-based businesses. The internet bubble model is highly flawed. It also very seldom works. Media hype created around the model
leads to the business model being lost, with the idea that you will
figure out the business model later! The Freemium model is one where you as the
customer are given something for free. The catch is that you give the business
your personal details, in the hope that a relationship is established, and
you will buy from them in the future! The Advertising model is
one that became popular with the advent of
television and radio. Revenue was earned
directly from advertisers looking to tap into
your audience. Online TV has also made
successful use of this model! Some internet businesses get
their revenue because of their ability to offer advertisers
targeted consumer niches. Websites with narrowly defined topics
will attract highly defined audiences. You can then offer these niches
complementary products or services, with a higher probability of success as
opposed to mass blanket advertising! This business model is
particularly difficult to justify if it is your main
income stream, however. If you are just starting up though, and
you are considering this model, then you should note that vanity metrics will
be ignored by perceptive investors, who will want to see whether the
underlying proposition will be profitable. We will now discuss
franchising, and look at a model that has worked
well for its company! Franchising Perfection The McDonald brothers had an idea. They wanted to incorporate the restaurant
business with the assembly line. This turned out to be an
incredibly well-suited match, and the fast-food
industry was born. Selling two all-beef patties, a little
special sauce, some lettuce, cheese, a couple of pickles and onions on a bun
does not a great franchise make, however. While quality, speed,
consistency and real estate made for a great business
model, it was not until the brothers partnered
with Ray Kroc that they explored this model to
its fullest potential! Ray Kroc was a salesman, in
every sense of the word. He eventually took over the business completely,
starting the McDonald’s Corporation, which is a company that is dedicated
to the franchising of the restaurant. While franchising was
definitely not a radical idea, Kroc took it in
a slightly different direction, even though
other restaurants had been franchising long before
the advent of Ray Kroc. As a landlord, the McDonald’s
Corporation became the largest restaurant fast-food
chain in the world. This business model was truly inspirational,
and as a model, developed by Kroc, it provided the launching pad for the
fast-food industry that we know today! How did Ray build such a successful model,
and therefore such a successful franchise? Well, he decided right from the onset, to
maintain strict control over his business! He made sure that the high standards
that he set for his restaurants, including his business practices as
well as his standards of cleanliness are upheld in each and every restaurant
the is opened across the country. While this practice turned off many
large investors, and while the cost of leasing land made it difficult
for Kroc to see any real profit, he had another plan: to sublease
his properties to franchisees! This provided the necessary
cash flow for him to put down payments on more land, with a
view to growing his franchises! This set the franchise
business model in real motion. People could buy into a working
business model in almost any industry! As Ray Kroc did, he received royalties in
exchange for access to his winning formula. That is the essence of this business
model, giving you access to proven successes, winning recipes, support
networks, and established brands! Ray Kroc provided the world
with a superb franchise model. Others have followed in his footsteps,
like Subway, Starbucks, and Burger King! They have gone on to establish themselves
internationally, and these brands are instantly recognizable, so much so that you
would think that the same person owns them! This is the key to a successful franchise. Establish your model, and stick to it. Be strict in your application of
this model, and build your brand and establish its identity through close
involvement with your franchisees. You can really build your
franchise brand from the bottom up, even when nobody believes
that you will make it. Every time you think you
cannot, or become overwhelmed by the obstacles, just
remember Ray Kroc! Software And Hardware:
Getting The Balance Right Dell revolutionized the way
computer companies did business. Adopting a process used first by
Toyota in the 1960s, known as JIT or Just-In-Time, they no longer
predicted the right parts to order. By completely eliminating inventory,
well almost, Dell removed what was once thought to be a necessary evil of
computer companies: huge inventory! What this meant, was that computer
companies no longer had to watch the steady growth of pre-ordered parts
on their shelves become outdated. This has always been a real risk for
computer companies in particular, with the rapid developed of new and
innovative parts and products. From having one week’s inventory
available at any given time, they have managed to adjust their
processes and business model so that they only have
to keep as little as two hours’ worth of inventory
on hand at any given time! The combination of the
Just-In-Time method with Dell’s direct-to-consumer processes
made for a truly hybrid model. With the retail intermediary
eliminated, Dell was ultimately able to sell its products
directly to its customers. The costs of their products
came down dramatically. This resulted in
lower prices for the consumer, as well as
faster overall service! Also, because customers pay upfront
for their order, and Dell waits up to one month to pay for the suppliers
who provide the necessary parts to build the custom personal
computer, they earn interest on these advance
customer payments! This company really raised
expectations in the PC industry. Consumers wanted good, faster service. By streamlining its
processes, and increasing its efficiency, particularly
on the supplier end of things, the Dell business
model paved the way for companies such as Apple,
who quickly followed suit! Microsoft has also had an incredible
impact on the world of personal computers. They developed the operating system for
the IBM PC in 1981, and have exhibited an incredible adaptability the challenges and
developments in this industry ever since. This has kept them at the top of
their game, and the industry, since! They dominated the software
development market early on, by creating user-friendly
operating systems, specifically their Office
Suite, which has applications for both word processing
and spreadsheets. These applications are known
popularly today as Word and Excel! They receive licensing fees
from every company that creates or develops
software that is compatible with their operating system,
the receipt of these royalties raising their
revenue exponentially! They have also successfully
exploited the internet market. A relative newcomer to
this scene, they developed their own web browser, known
as Internet Explorer! This web browser was pitted against
Netscape, a superior browser at the time. They beat the competition however,
by attaching Internet Explorer to their other applications, which
had already proven their success, allowing Microsoft to gain
an incredible stronghold in the information
era, an era that seems to be lasting for an incredibly long time,
and which seems to be growing by the second! Eric Marks wrote an incredible
book called ‘Business Darwinism’. In this book, he explains the success
of Microsoft’s business model. He says that it is ‘strengthened
by their foray into other markets, spreading
their software influence, and outpacing competition
in other arenas including operating systems, web
browsers, and gaming!’ Looking at the Apple business
model, a pioneering interest that they share with companies
like Google is YOU! At first glance, these two companies
appear to work in different ways. Apple is a product and
software manufacturer. Google, on the other hand, is a suite of
online services all offered for free. Both these companies however,
focus on your needs, and are constantly looking for better
ways to deliver value to you! Apple has a highly
developed business model. They have three primary
areas of focus, software engineering, hardware
manufacturing, and retail! While each of these areas reaches
customers in largely different ways, they operate around the
same core, key concepts. They match your needs before you as the
customer can even anticipate these needs. They create products for
your home and business. They create products for
your entertainment. They have in-home as well
as portable hardware. They keep their products priced
just high enough for them to be aspirational, and low enough,
however, to be attainable! Apple has branded itself as
the standard in quality, design, innovation,
usability and aesthetic. They have done this with both their
hardware and their software. Apple has reached every home, at
least in part, creating each product to both sell their brand and also
to create loyalty in your home. Your house might not be fully
Apple-supplied, but the chances are, you will have at least
one iPhone, iPod, or an iPad! Google has achieved online what Apple
has accomplished in the retail world. The majority of Google products, from
their basic search, to Gmail, to Google Docs, to Blogging Software and online
photo collections, are offered free, creating a feeling of comfort
and familiarity that engenders customer relations
across all of its divisions. Revenue is in fact the only
difference between Apple and Google! We give money to Apple. Google on the other hand,
gains money from companies because of the data that
they have about us! Both companies make money off us,
however, Google does this indirectly. Advertisers are put in front of us in
incredibly intelligent ways, and the connection between our consumer data and companies
that Google has created is incredible. Both these companies have excellent
business models, based on the fact that they know us better
than even we know ourselves. They have the ability to
predict our behavior, not only because of how we
have behaved in the past, but also because they have
the ability to anticipate our needs even before
we know what these are. This is the basis of
the success of many companies in the personal
computing industry! Whether your business is hardware or
software, retail or manufacturing, you can see from the above business
models that success is possible. Let us now discuss, in closing, the
business models that affect direct sales companies, and see how you
can avoid selling yourself short. Don’t worry, this is another short chapter! Selling Yourself (or rather your product
or service) Without Selling Your Soul Sam Walton was a man who knew
a good idea when he saw one. He also knew just how to
apply it in such a way that it would create the
most significant impact. These two factors have
made Walmart, which he founded, into the largest
retailer in the world! Supermarkets proved one thing,
as early as the 1930s: that you can cut costs, deliver low
prices, and turn a profit! This was a revolutionary business model
at the time, and retailers soon brought this way of thinking and conducting
business over into general stores as well. Stores saved money on presentation. They cut back on the frills and fluff, and
provided you with the bare necessities. They also cut back on
personnel, which meant that the service you
received was less personal. However, cutting costs in these areas meant
that prices could be competitively lower, and that you saw more customer traffic,
even though your setup was a little bare! Sam Walton perfected this business model. He saw the good profit that general stores
were turning, and instead of focusing on densely populated areas, he decided
to build his stores in rural areas. He focused specifically
on towns that had a population of between
5000 and 25 000, knowing that customers would prefer
shopping at his stores, as opposed to driving
to the nearest city. Walton had a significant advantage
over any competitor that came after him, simply because he was the first
to enter these small markets. Such as the power wielded by Walmart
today, that the survival of some companies depends on their ability
to land a deal with this retailer. That is how you use an applied business
model to your advantage, and exploit and monopolize on areas that
conventional wisdom would advise you strongly
against entering! Other successful business models,
if applied correctly, are discussed in brief below, and you can use
them to your benefit, immensely! The Recurring Revenue Model
or the Subscription Model With this model, you secure long-term
contract customers, where your customer consumes your products or
services into the distant future. The cost of acquiring
customers can be exponential. It is therefore imperative
that your business retains these customers
once you have hooked them. Utilities providers and even magazine
publishers make use of this model. How can you apply it to your business? The Pay-As-You-Go Model This model measures actual usage,
charging customers for what they consume! Mobile phone operators use this model. They sell phone cards or
vouchers that give you credit, allowing you to make calls,
text, or access the internet. Credit is measured in minutes, and these
are reduced as you consume this credit. This is the direct opposite of the
recurring revenue or subscription model! The Low-Cost Model This is among the most well established
business models in the world. You drive significant
customer volumes at a very low acquisition cost,
charging very low prices. You earn revenue from various
ancillary sources, including bankcard charges, lottery ticket sales,
advertising on seats, flight insurance, priority seating, selling train
tickets, and preferred car hire rates. This model does not focus
on the extraction of extra cash from your customers
via a host of methods. It is about configuring your business
model in every aspect, to drive cost out! A simple example of this
is to have your staff pay for their own
training and uniforms. A more complex example is,
when you buy oil futures to manage future fluctuations
in the oil price! The Affiliate Model Simply put, this model is based on someone
selling your product for commission. This ‘someone’, however,
never owns the product. They might never handle it. You simply reward them for customer
referrals that result in sales. Given the ease of facilitation
allowed by the internet, this has been a hugely
successful business model! The Direct Sales Model The internet has emerged as a wonderful
tool for direct selling to customers. Dell is a perfect example of the direct
sales business model, and you can benefit greatly by removing costly
resellers from your business equation! This is an incredibly attractive
business model, no doubt! The Auction Model EBay has become synonymous
with this business model. Auctions have been
around for a long time, with numerous examples
of different auctions. The Sealed Bid Auction,
Vickrey, English Auctions, and Dutch
Auctions are some examples. An example of another auction is
the tulip market in Amsterdam. All these auctions share some
very specific characteristics. The goods price is not fixed. The individuals assess the value
of the goods independently. Competitive bids determine the
final value of the goods. The internet has made this
business model very appealing! The Bait-And-Hook Model If you buy ink cartridges regularly, you
will recognize this model immediately. You buy an ink cartridge
for your printer, and then you make regular
purchases of refills. Another example of this business model
is where you buy razor blades, and then you continue to purchase the
blades that keep your razor functional. Mobile phone providers
have experienced exponential success on
the back of this model. For example, you pay a lot of
money for a smartphone or you purchase a contract with a
minimum duration of 18 months! You can make successful application of
any of these models to your business!

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