There is no “best” business model for everyone, though some may present fewer challenges to start-up success, particularly for people who are new to the idea of having their own business. Here, are four basic models, their variations, and some pros and cons of each.
This is any person or company that creates a product and sells it to the public or to distributors (who then sell it to the public). “Create” can also include building or assembling components into a finished product or creating and providing a service. Thus, creators includes builders and manufacturers:
- A bakery creates cakes, breads, etc. from various ingredients and sells to the local public.
- A janitorial service provides the “product” of clean premises; an auto shop “repairs” cars to operate properly.
- A restaurant creates and sells meals, drinks, etc.
- A builder builds houses and sells them to the public.
- Taylor Swift records a new album and sells it directly to her fans via her website.
- Apple invents innovative products like the iPod or iPad and sells them to the public via its stores and website.
Pros: If you identify an audience for your product, listen to that audience and provide what they want, you can develop your business into a trusted brand that may last generations.
Cons: Being a creator doesn’t necessarily mean being innovative. It may mean possessing a degree of skill or knowledge sufficient to produce a product or service someone wants to buy. Also, depending on what you create/build/manufacture, the start-up costs can be considerable.
A broker facilitates a business transaction between two parties:
- A real estate broker is an independent real estate agent who brings together people who want to sell their home and people who want to buy a home. They earn a commission from the sale.
- A stockbroker could be said to be the intermediary between an investor and the market, executing the investor’s orders to buy or sell a stock. Stockbrokers are paid a fee to carry out these transactions.
- eBay is one of the world’s largest brokers, giving sellers and buyers a channel through which to sell, shop, and buy. eBay charges a small fee for each sale.
- Uber is also a broker, bringing together people who need a ride with people who have a car and want to make some extra money. Uber takes 20% of each fare.
Pros: The percentages, commissions or fees can really add up. Uber provides 1,000,000 rides to its users per day. In 2015, the average Uber fair was $13.36, which means Uber made … millions of dollars a week last year. Stockbrokers get paid whether or not the investor makes a profit.
Cons: It isn’t so much that companies like eBay and Uber are international—they started small. But any kind of broker has specialized knowledge, skill, or education. (In the case of Uber or eBay, it was knowledge of web or app development).
An owner makes money by charging people a fee to use what he owns (also referred to as the landlord model):
- Property owners rent the houses, apartments and/or commercial properties they own to families and businesses in exchange for rent.
- Movie theatre owners “rent” their seats to moviegoers and take a percentage of ticket sales. Concert venue owners make money by renting their auditorium/club/arena to a concert promoter who arranges the show.
- Financial institutions lend people money in exchange for interest.
- Enterprise Rent-A-Car rents vehicles for a daily fee.
Pros: The positive cash flow from rents or interest can be substantial, especially if you own a property outright.
Cons: Owning property represents a large investment and not everyone wants to be a landlord. Lending money requires that (a) you have a lot of money to lend and (b) can sustain the potential losses and hassles of people who don’t pay or who don’t pay on time.
A distributor buys products and resells them for a profit. Another word for this model is “seller” and it can be particularly good for people just starting out in business. It has considerable variations and latitude:
- Retail stores buy products from manufacturers at a discount and sell them to the public for more.
- Auto dealerships buy cars and trucks from the manufacturer and sell them to the public.
- Avon salespeople sell Avon products to people and earn a percentage of each sale.
- There are two million sellers on Amazon—people who license products and sell them under their name for a profit.
- Affiliate marketers advertise other companies’ products—everything from digital information products to all manner of physical products, including home furnishings and cars—for a percentage of the sale.
Pros: Affiliate marketing, particularly online, is one of the easiest points of entry for a new business person:
- You don’t have to create a product or come up with new ones.
- Overhead is minimal.
- Start-up costs are low.
- Fulfillment is handled by the creator.
- Payment (commissions typically between 20 and 90%) is up-front.
- Work from anywhere you want: home, Starbucks, a secluded beach with WiFi.
Much of this is also true for the Amazon and Avon-type scenarios.
Cons: Retail sales is notorious for having very low profit margins, which means sales volume has to be very high. Starting even a small brick and mortar retail operation usually involves a considerable upfront investment for property, inventory, promotion, etc.
While there is no one-size-fits-all best business model, within the foregoing four categories, you should find one that best fits your needs and lifestyle.