Types of Business Models
Many times people start a business but they don't know what type of business they are in. It's helpful to ask if you are in one of more of these types of business models because that helps you figure out
A) best practices for your business (i.e. what are the best practices for whatever model you might discover you are in)
B) How to scale your business
C) What might be the holes in your current business model
For instance, let's say you have a weight loss diet plan. You might think you are in the "weight loss" business. But, in fact, you might be in the information product business. Understanding this and understanding the best ways to scale an information product business might be valuable ways to scale your own business.
1. The bottom 1/3 business
Jim Mckelvey, founder of Square, told me about this one. Find a business where you can service the bottom 1/3 of the population.
For instance, many mom-and-pop business could not accept credit cards. They were too small. So Jim (and Jack Dorsey) created Square to make it possible for these businesses to accept credit cards. Now 20,000,000 businesses use Square and Jim (a glass-blower by trade and passion) is now a billionaire.
2. Information Product Business
I describe the basics of this in my previous list about what makes a good newsletter business. A newsletter is a type of information product business.
But basically: there's free information, cheap information, expensive information. Many businesses don't realize they are in the information product business and often skip the "expensive information" part. How these three things factor into your business is the key. Please see my list on newsletter businesses.
3. Platform business
A platform business has three components:
A) people who have an excess of "X"
B) people who want more of "X"
C) A platform in the middle that helps "B" discover "A", arranges the transaction, handles the logistics, handles the customer service.
A) some people have an excess of seats in their car
B) some people, at certain points, want to sit in that extra seat
C) Uber connects them.
Many businesses fit into multiple models but to show how universal this model is, even laundromats are platforms.
A) They have an excess of laundry machines
B) some people want a laundry machine on occasion.
C) A laundromat connects them.
4. Content creation business
A social network is a content creation business.
I don't have a handy definition. I need to work on this one.
But basically, one or more individuals create content.
The content can have multiple formats and appear in multiple places: video, audio, text, image, newsletters, articles, etc. There can also be communities developed around the content.
The content can be monetized by ads or subscription or premium products created by their content creators.
The challenges are creating quality content and having people recommend your content to others.
If they monetize with ads, the ads could be in many formats.
- text, video, special featured placements, testimonials from the content creators, content created just for the advertiser (like a contest or survey).
- if they monetize with subscription it could be: special services offered to subscribers vs non-subscribers. For instance, a blue checkmark. Or more prolific placement. Or more control over privacy. Or ability to monetize content in some way.
If they monetize with premium products it could be how notepd allows people to create premium lists.
5. Individual content creation business
Like someone who is an expert at something might want to monetize what they are expert at.
They use the spoke-and-wheel approach:
The WHEEL is whatever it is they are expert at.
The spokes are the different ways they present their content:
- write articles for LinkedIn, medium, etc.
- write twitter threads
- write books
- make YouTube videos
- do podcasts
- make TikTok videos
- sell newsletters
- write for other publications
- do public speaking
- turn their podcasts into books.
- etc. There can be 100 spokes.
Each spoke should ultimately (soft sell or hard sell) lead to joining a free email list.
Then the business converts into an information product business.
6. Vertical / Horizontal businesses
When I started my first company, Reset, we made websites for mostly entertainment companies.
Horizontal scaling would be:
- expanding beyond the entertainment industry so, for instance, adding a specialty in making websites for banks as well.
- expanding beyond a geographic locale (we mostly made websites for companies in NYC), so opening offices in other cities and doing websites in those cities.
Vertical scaling would be:
- adding services to our clients. So if we made a website for HBO maybe we can also do software development for HBO. Or media buying for HBO. etc.
A laundromat business could scale horizontally by opening more laundromats in different locations. they can expand vertically by selling coffee in every laundromat.
7. A "negative information" business
This is not quite a business model but more of a method for discovering what type of business you are in.
When people start a business they don't really know at first what business they are in (in fact, they are usually dead wrong about what business they are in).
When GrubHub started, they were a website that simply collected all the menus and phone numbers of restaurants that delivered food.
They made money by selling (for $140/month) featured placement on their site to restaurants.
But restaurants were not renewing. How come?
Finding out why someone DOES NOT use your business is how you build your business.
They found out that the restaurants that were dropping out were either going out of business or they weren't generating an extra $140 in profit to match what they were spending on the ad.
The next iteration of grub hub was: route phone calls from people who wanted delivery to the restaurants and charge per order.
But some restaurants were dropping out. Why? This is the key "negative information".
Well, when were the phone calls coming in? Not in the off hours but the busy hours. A phone call could take six minutes to get an order and arrange for its delivery. So that's only 10 orders an hour a restaurant can get.
So they modified their business model. GrubHub would now get the entire order on their site and then fax it to the restaurant.
Great! Then they found that customers (the diners ordering food) would sometimes drop out. Customers don't usually tell you why they leave. They just leave. They "ghost".
So GrubHub decided to find out why people were leaving.
ABout 14% of deliveries were not being delivered correctly. Maybe the delivery was too late, or the order was wrong, or the delivery would never come at all.
So GrubHub modified again: they added a lot of customer service reps and also spent more time with restaurants teaching them best practices for delivery.
But now some restaurants dropped out. Why? (negative information). They were TOO BUSY. And they couldn't hire and manage the delivery drivers.
So GrubHUb modified again: they added their own delivery drivers for these instances.
Some of the above is an example of vertical scaling.
But horizontal scaling also occurred. They started in Chicago and added more and more cities.
8. Service vs Product Business Model
People always say it's better to have a product business than a service business but this is not always true.
An ad agency is a service business. Someone wants to make a TV commercial and hires an ad agency to do the service.
They wouldn't hire a product business. As far as I know there's no business that sells ready-made off the shelf TV commercials.
Sometimes companies hire a service business to do programming . When we built NotePD, we used programmers who were providing a service. There was no off-the-shelf social network we could buy and then just use menu options to configure all the features we wanted.
Service businesses are almost always profitable immediately. This is the great thing about a service business. If you have no customers, you eliminate all employees so reduce costs. And when you get customers again, you hire employees. And you charge more for your services than you pay for your employees.
The downside of this is the saying, "All of your assets walk out the door every night."
A product business is much more scalable. You make a product cheap and sell it for more than it costs. But a product business has higher startup costs. The R&D costs to develop your product and the manufacturing costs (or production costs) to produce your product.
Many times the idea is to start as a service business and transform into a product business.
An example is Oracle. They would say they were a "database company" and they sold databases. But for their first several customers they would go on-site and "install" (i.e. develop) the database. Over time. while they were secretly performing this service for customers (while calling it a product install) they built an actual product.
9. How is knowing this useful?
Let's say you have a business.
Imagine yourself in each of the above categories. Many businesses can have aspects of all of the above business models.
Understanding these models thoroughly can help you figure out different creative ways your business can grow, scale, and outpace your competition.
10. NotePD, can fit into almost all of these categories.
Even service business. Maybe someone approaches us and says, "we want a social network that does, X, Y, and Z."
Because we have a social network with so many features we can probably easily develop that social network. Eventually, that would transform into a product business.
We've also been scaling vertically but not as much horizontally. So thinking in these terms may help us brainstorm how to add horizontally. For instance, maybe we can be an online learning company as well as a social network of ideas.
We can be a platform business (particularly with premium lists, which also makes us an information product business).
I think we are learning as we go. Like all businesses should do all of the time.