Which Business Model Is Best? Depends on the Industry

A company's business model is an important representation of how a company does business. Despite the size of the business or the industry in which a business operates, a business model details how an organization creates and delivers products or services, specific business processes, infrastructure, customer acquisition strategies, and the intended customer base. Business models come in a variety of forms. Direct sales, franchise, freemium, and subscription models are among the common kinds.

Direct Sales

Under a direct sales business model, sales of products or services generate revenue through a network of salespeople, who sell directly to customers. Typically, no fixed retail location exists under a direct sales business model. Instead, individual salespeople are connected with a large parent company and given the tools to become individual entrepreneurs.

Direct sales take place through presentations or demonstrations of the product or service in a one-on-one setting or during a hosted party at a prospect's home or business. Business owners in direct sales earn a portion of their sales, while the company providing the product retains the remaining revenue. Companies such as Avon, Arbonne, and Herbalife are examples of the direct sales business model.

Franchise Model

Under a franchise business model, business owners purchase another organization's business strategy. Instead of creating a new product and the distribution chain to deliver that product to consumers, the franchisee purchases an ownership stake in a business model that has already been successfully developed. The company offering its proprietary product or service, its business processes and its brand is known as the franchisor, and it benefits from a reduction in capital output used to build new locations.

Franchise owners earn a portion of the revenue generated by their locations, and the franchisor collects licensing fees in addition to a percentage of sales revenue from the franchisee. Popular companies that depend on the franchise business model for growth include McDonald's and Subway.

Freemium Model

For companies that offer personal or business services via the internet, the freemium business model is common. Under a freemium model, a business gives away a service at no cost to the consumer as a way to establish the foundation for future transactions. By offering basic-level services for free, companies build relationships with customers, eventually offering them advanced services, add-ons, or an ad-free user experience for an extra cost. The freemium model tends to work well for Internet-based businesses with small customer acquisition costs, but high lifetime value. Spotify and Skype both operate under a freemium business model.

Subscription Model

Businesses that operate in an industry with high customer acquisition costs may opt for a subscription or recurring revenue business model. The objective of a subscription business model is to retain customers under a long-term contract and secure recurring revenue from the repeat purchase of a product or service.

Online subscription business models usually require the customer to sign up for automatic payment plans. They may charge a cancellation fee for a contract that ends before the preset time frame. Credit monitoring organizations, such as Experian and Equifax, use a subscription business model, as do utility and phone companies.

The Bottom Line

There are as many types of business models as there are types of business. Direct sales, franchising, advertising-based, and brick-and-mortar stores are all examples of traditional business models. There are hybrids as well, such as businesses that combine internet retail with brick-and-mortar stores, or sporting organizations like the NBA.

But not every industry lends itself to all types of business models. Moreover, within these broad categories, each business plan is unique. Consider the shaving industry. Gillette is happy to sell its Mach3 razor handle at cost or lower in order to get steady customers for its more profitable razor blades. The business model rests on giving away the handle to get those blade sales. This twist on the broader freemium business model is now known as the razor-razorblade model; but it can also apply to companies in any business that sells a product at a deep discount in order to supply a dependent good at a considerably higher price. The bottom line is pick the business model that makes the most sense for the products or services that you offer.