What is a business model - and why should I care?

You may have heard the term ‘business model’ and wondered what this means and how it relates to your business.

“In simple terms,” says FreeAgent’s Chief Accountant, Emily Coltman FCA, “a business model is how a business plans to make its money. It is the essential blueprint for how you will create and deliver value to your customers while securing value for your business as well.”  

Here are some questions to ask when drawing up a business model.

1. What problem is our business trying to solve; what gap is it trying to fill? 

For people to buy from you, you need to give them a reason. Perhaps you want to open a wedding dress shop in a town that doesn’t already have one, because you know that local brides have to travel a long way to buy their dresses. In business jargon, your business’s USP - the ‘unique selling point’ that sets it apart from other wedding dress sellers - will be the convenience of its location.

2. What products and/or services is our business selling?

Think of the range of products and services you want to offer. Will you keep to just a few, or will you aim to offer a broad spectrum of products and services? If your scope is too narrow, will that put off potential customers? If you try to offer too much, will you be able to meet customer demand?

3. Who are our customers?

Are you selling to other businesses, or to individuals? Will the person who buys your product (the customer) be the same as the person who actually uses it (the consumer)? For example, when a farmer buys fodder for their cows, the farmer is the customer, the cows are the consumers. The product must appeal to both; the farmer will not buy that fodder again if the cows refuse to eat it.

4. How will we make sure our prospective customers know about our business?

There is a saying that it’s no good making the world’s best dog food if you advertise it to cat owners. Where are your prospective customers? What social or printed media do they use? Who do they talk to about business matters? You need to be there.

5. What costs will our business incur as it makes its sales?

Make sure you think of as many possible costs as you can. Even the smallest of costs adds up. Don’t neglect costs such as postage, stationery, and travelling. Make use of a simple forecasting tool to draw up your potential cost list.

6. Who are our business’s competitors?

Don’t just think about businesses that do something closely similar to yours when you address this question. If someone doesn’t spend their money with you, who would they be spending it with instead?

For example, let’s say you import silk to make special occasion dresses. Your competitors are not only other dressmakers but also off-the-peg dress retailers. Perhaps the net spreads even wider than that; a potential customer may decide to buy themselves a silk dress from you, or they might decide to wear a dress they already have and instead spend the money on a new piece of jewellery. Think about question 8 here and forestall them!

7. How is our business different from its competitors, and why should our customers buy from us rather than them?

This might be a question of location, price, industry expertise… you name it. Think about, for instance, why you shop at a particular supermarket, or why you get your car serviced by a particular garage. You had your reasons for choosing that - what were they? And how might that apply to your business.

8. Can our business work with others to the benefit of both sets of customers? 

Could you offer bundled product or service offerings with another business that serves the same customers but in a different way? For instance, a house-cleaning company may make a special arrangement with a local florist to have a bouquet made up and delivered to a property they’ve cleaned up for a special occasion such as a party.

You see there is a lot to think about when deciding on a business model and there is no one ‘right business model’ that will work for all businesses. Once you’ve created your business model, you also need to be prepared to adapt it if market conditions change. Think about how businesses had to adapt during the Covid pandemic. Remember Joe Wicks starting his online PE course? Pubs selling takeaways instead of sit-down meals?

Examples of popular business models

Freemium

A business that’s using a freemium business model encourages potential customers to use a free, usually ‘lite’ version of its product or a version that contains adverts. Once the user is keen to keep using the product, the supplier will start to encourage them to pay for a more feature-rich, or advert-free, version.

Many computer games are sold through freemium models.

Subscription

Customers of a subscription-model business will pay a regular fee to keep using a particular product or service on an on-going basis.

This is FreeAgent’s business model.

Affiliate

If you’re using an affiliate business model, you will pay others (affiliates) to recommend your product or service for you.

Many social media influencers earn their money by being affiliates.

Franchise

Under a franchise business model, the franchisor will issue licences to franchisees, who then have to set up and run their business according to the franchisor’s stipulation, and pay on-going fees to the franchisor.

McDonald’s is a franchise business.

Retail

A retail business is either a physical, or an online, shop selling individual goods to either certain or all customers.

Some shops may not allow certain customers, e.g. a tobacconist will not sell to under 16’s.

Wholesale

A wholesale business is either a physical or an online shop selling goods in bulk, mainly to customers who will then sell them on through the retail model.

Cash & Carry warehouses that supply businesses such as pubs and restaurants are wholesalers.

Some businesses will combine more than one model. For instance, Doves Farm supplies flour both to supermarkets (wholesale) and directly from their website to individuals (retail).

You might hear the word ‘model’ in a business context, being used to describe how a business prices its goods and services. This is more specifically called a ‘pricing model’.

Examples of pricing models

1. Per unit of time, e.g. per hour or per day. Many accountants and solicitors charge by the hour.
2. Fixed cost per product or service. A garage may have a fixed price each for an MOT, tyre change, and full service.
3. Cost-plus. Many craft and manufacturing businesses use this pricing model. They work out how much it costs them to make one unit of their product (e.g. one cushion will take x metres of fabric, a zip, y centimetres of thread and a cushion pad), then add to that an amount for their profit and the result is the selling price.
4. Wholesale vs retail pricing. A business that makes both wholesale and retail supplies might offer a bulk discount when it sells to wholesalers.
5. High-volume low-price. This is the kind of pricing model a low-cost airline uses. They want to sell as many seats on a plane as possible to maximise the use of the cabin space.
6. Low-volume high-price. The opposite of this would be a private jet company that wants to attract customers by offering them space and luxury on the plane. They sell fewer seats but each seat costs much more.

As you can see, there is a lot to think about when you’re creating your first business model or when you’re looking at adapting an existing business model to changes in the market. If you’re not sure what to do next, speak to a business adviser or your accountant.