Four typical business models and how can I use them in a real-world
In my previous article, I briefly explained three questions you need to answer before starting a business. In this article, I want to discuss another topic that a PO or PM should look into——business models. It helps you understand where the money from. I will talk about four typical business models and how they bring incomes to your business. And, more importantly, how a PO or PM should utilize them. (It guides you in the right direction of your business.)
In the current business world, there are four typical business models.
No.1 to B & to C Platform
They offer free products to users (to C), but they monetise their products by selling advertisements (to B). For example, Facebook, Tiktok.
No.2 Online exchange(shopping) platform
They mostly refer to those online shopping platforms, and they connect sellers and buyers in their platforms and charge commission from the former most of the time. For example, Wolt, Amazon. However, LinkedIn is an exception. They help buyers buy ‘people’ and charge the buyer. Of course, you can also pay for a membership as a ‘seller’ if you want to reach more ‘buyers’.
No.3 Manufacture-supply-sell all-in-one
This type is quite typical since the Age of Steam. They manufacture their products. They supply their products and build their own sales channel. They sell their products via these channels—for example, Apple (iPhones). In the age of the Internet, those online studying platforms or content-creation companies belong to this one. For example, Coursera, Netflix, 2K, and most of the driving schools:).
No.4 To C & in-app purchases
They are also free to download or use for their users. You will see those text in these companies when you download them from the App Store——in-app purchases. Yes, they make money by making you pay for add-on features, skins, contents—for example, most free games like LOL, CSGO.
Therefore, what we have is the income formulas of these four business models.
As we can see, it is all about three metrics, Volume, Conversion rate and AOV. How a PO or PM utilize these formulas. More specifically, how they can help you direct and optimize your business.
Volume is about users, about traffic. The core is about your capability to gain/create/generate something.
The conversion rate is, as it says, it is a percentage figure. Whenever there is a percentage, then it means there must be a process. The longer the process is, the less the conversion rate it will be. Besides, whenever there is a percentage, it means there must be something that can be optimized.
AOV is about your products, your offerings. It is the lowest price you can charge to a generic person and ask them to be your customers. It is the highest cost for a generic person to become your customers. It is the mutual-recognized value you and your customers agree with. So there are two ways to increase the AOV, deliver something with higher value, and make your customers feel they do receive more value.
A real story
We launched a product that helps SME employers (less than 20 people) manage their employee benefits. It was a purely self-registered product, which means no account managers were involved. Then the Volume to us is how many employers can know this product. We need to buy traffics from different marketing channels which are more easily accessible by HRs, CEOs, such as newspaper, business magazines, google search, etc.… The only key reason is that we need to bring the volume, as we need to make the plate big enough to make a bigger cake.
For our product, there used to be 5 steps to finish onboarding for a client. We then reduce them to three. We moved two processes that can be done afterwards. Each step will bring questions and hesitation for the decision-makers to quit the whole flow. It turned out the conversation rate increases about 20% in total.
So how do we increase the AOV? The answer is we actually didn't deliver more features of functions, but we let our clients know clearly how much money they can save from our product, even though the unit price is slightly higher than bigger clients. We put how much we charge and exactly how much you can save from taxes in a certain amount of benefits. It is, of course, also flexible and adjustable! Before that, none of our competitors did the same, they only put the price list, and that’s it. It turned out that most of the employers thought that their cost would increase due to issuing benefits, but actually, it can save their cost due to the tax deduction they didn’t realize.
At last, I still want to state two points.
Firstly, not every company only has one business model. Their different business units can have multiple business models. Even in a single business, you can also have multiple business models. For example, for Amazon, we regard them mostly as an Online shopping platform. One of their incomes is from the transaction commission. However, you may also notice sometimes they have promoted products. To those merchants, what they are buying is the commercial place. In addition, when you buy a Kindle from Amazon, it becomes a No.3-type company, they manufacture the Kindle, and they sell them via their own channels.
Secondly, I didn’t mention much about how a SaaS company belongs to because it really depends. For example, Atlassian can be regarded as a typical No.3-type company. They have their own products like JIRA and charge their clients by selling the product. However, if you notice, they also create a marketplace where you can buy add-on services. In this particular service, they become No.2 as a trading platform.
To summarize
I introduce four typical business models and how to calculate incomes based on these models. I also tell a real story about how to utilize income formulas to optimize your business.
