Types of Business Models for Entrepreneurs and Business Owners
7 Min Read
Starting a business is no easy feat, but it’s easier if you build a solid plan and understand your options for driving revenue and growth. That’s why defining your optimal business model is a necessary first step in entrepreneurship. The option you choose will depend on your goals and offerings, making the path your business takes deeply personal and unique.
If you want to start and run a business, you’re in good company. About 311,600 openings for top executives are projected each year, on average, over the decade. Of the roughly 280,000 jobs held by top executives in 2022, 21% were self-employed workers. The field can be lucrative as well, with a 2023 median pay of $103,840 per year.
None of this success is possible without choosing a viable business model and executing on that model through a well-managed plan. So, how do a business model and business plan differ? Read on to find out.\
Business Model vs. Business Plan: What is the Difference?
While a model and a plan may have similar connotations, a business model and a business plan are not the same thing. Your new business should have both, and each is doing something vital for your company’s success. The major differences between the two are highlighted below.
A business model is a big picture look at the company that outlines:
- How the company delivers value
- How the company is structured
- How it will generate revenue
A business plan, on the other hand, is more specific. It includes:
- Concrete objectives
- Day-to-day strategies
- Financial projections
- Marketing approaches
The two pieces of starting a business build on each other. While a lot of being an entrepreneur is about executing a solid plan, it is impossible to build a successful business plan without first developing a foundation with a clear business model.
Mandatory Components of a Business Model
The business model you choose will be based on how you want to provide value for your customer base. While your business model should outline important decisions such as your key objectives as a company, your target customers, a clear vision and provided solutions, focusing on the value components of the business model will help guide you to a profitable and long-lasting business.
Value, as it relates to business models, is what makes your product or service unique and useful to your customers. It shines through in three elements of your business: your value proposition, your value delivery and your value capture.
Value Proposition
The value proposition is what you’re offering your customer base. How you define and communicate this proposition will help you bring the right customers to your good or service.
According to HubSpot, writing a clear value proposition can help define the core of your competitive advantage because it clearly articulates why someone would want to buy from you instead of a competitor. HubSpot defines a value proposition as “a short statement that communicates why buyers should choose your products or services. It’s more than just a product or service description — it’s the specific solution that your business provides and the promise of value that a customer can expect you to deliver.”
Your value proposition should connect your customers’ problem or need to the service or product you offer, clearly describing what makes your offering valuable. Articulating a value proposition is an essential step when building your business model and plan.
Value Delivery
Value delivery is how you’ll demonstrate and deliver the value that you’re creating for the customer, ensuring that they’re willing to choose your product or service over competitors’ offerings. You must provide customers with services or products that they need and want, exceeding their expectations so that they feel your offering is worth the cost.
It’s crucial that you create a valuable customer experience so that your clients will return and recommend you to others, building your customer base and revenue stream. To achieve this, it’s important that all your employees recognize the value proposition and how you plan to deliver on it. Building the right processes and identifying tools to meet your customers where they’re at is essential. Tying your business plan back to your business model will ensure seamless value delivery.
Value Capture
If everything comes together appropriately, value capture is where your company will make its profit. Value capture is how your business retains some percentage of the revenue achieved in every transaction. While it’s important to provide plenty of value to your customers, you need to make some for yourself so that you can reinvest in the company.
The pricing aspect of your business plan should relate to your business model elements. For example, if part of your value delivery is providing an affordable product, you must plan to make the offering affordably so that you can capture some of the value on each sale. On the flip side, if you plan to market a luxury product, your pricing and production costs can increase.
Three Common Types of Business Models
There are many types of business models that entrepreneurs can explore. Three common types are product, service, and agency business models. These models are defined by the offering the company provides.
Product: The product business model might be right for you if you are selling a tangible item of value. In a product business model, you’ll make revenue by making your product less than the cost to consumers. Some challenges that could arise with a product business model are the costs of storage and product damages.
Service: A service business model is the right choice if you are selling a skill or offering assistance that is not tangible. Some examples include construction workers and artists. While their value proposition is not physical, they deliver value to their client base and reinvest their profit into what they do.
Agency: Agencies consist of “agents” that market an asset that they don’t own to customers. They make their money by earning a fee or commission when the sale goes through. Some examples include real estate agents or talent representatives.
What is a Partnership Business Structure?
A partnership business structure offers you a business model for gaining results that you couldn’t achieve on your own. In a partnership, separate companies collaborate to share and capture value from their combined strengths and resources, leading to more growth than they could achieve on their own.
It’s essential to determine the right partnerships for your business. Be sure to look for companies that have similar ethical principles and the same commitment to quality that your business provides. That said, you need to find a partner that has complementary skills and strengths so that you can build upon what your business does to offer your customer base more than you could on your own.
Not all partnerships make sense, but if you find one that works for your business, you can maximize not only your profit but your impact and reach.
Begin Your Entrepreneurship Journey
New Mexico Highlands University offers a flexible online MBA with a focus in entrepreneurship. Designed with working adults in mind, students will gain insights from one-on-one advising with expert entrepreneurship faculty. The 12 courses consisting of 36 credit hours cover topics relevant to today’s multicultural business world, including nonprofits and government organizations. You’ll explore the intricacies of owning a business, how to manage professional resources and managerial practices.
You’ll graduate prepared for entrepreneurial endeavors in a variety of industries with marketable skills that translate into the modern-day business world, helping you achieve entrepreneurial success on your terms. One opportunity that students can take advantage of is the annual Cowboy Up! Pitch competition in which you can submit business pitches. Finalists take part in a five-week slate of workshops at NMHU to further develop the business plans.
Start your journey with Highlands University today. Reach out for more information.