Select Profitable Business Models

Select Profitable Business Models

I have ways of making money that you know nothing of

—John D. Rockefeller

‘So, how do you sustain a business model in which users don’t pay for your service?’ Senator Hatch asked Mark Zuckerberg when the latter appeared before the US Senate’s Commerce and Judiciary committees to discuss data privacy and Russian disinformation on his social networking sites.

‘Senator, we run ads,’ said Zuckerberg.
In mere four words, Zuckerberg had laid bare the business model of Facebook: how it gains competitive advantage, earns money and makes profits.

A business model defines the way a firm creates, delivers, and captures value. Advertising-Based Revenue Business Model

Facebook offers us a convenient way to connect and communicate with each other. It has 2.32 billion monthly active users worldwide on its platform: if it were a country, it would be the most populated in the world. For FB, we are the product that it sells to advertisers in order to make money. In 2018, FB’s revenue from advertising was $54.4 billion, which is 98 percent of the total revenue. This business model is popularly called the advertising-based revenue business model.

Business Model,

A host of internet companies—Google, Alibaba, and others—use this business model to earn revenue and make a profit. These companies are ranked among the world’s most valuable companies. The advertising-based revenue business model is just one among many. Successful companies have either devised their own unique business models or modified and adopted an existing business model to gain a competitive advantage and earn money.

Let us run through some of the other popular business models so that you can select or switch over to the one (or ones) best suited to your business.

Razor Blade Business Model

Look at Amazon. It sells its Kindle at prices starting in the range of Rs 6000 ($84 as of 22 August 2019). How does it make money by selling it at a bargain-basement price? We want to make money when people use our devices, not when they buy our devices,’ said Jeff Bezos, the founder of the company.

Yes, you heard it right. Amazon does not want to make money when it sells Kindles, but when people buy books on their Kindle for reading. What business model is Amazon following for Kindle? The same as Gillette which sells its razors at relatively low prices, but earns money from its blades. In its honor, this business model has been nicknamed the ‘razor blade business model’.

This business model is also popularly called ‘bait and hook’: the low price of the razor is the ‘bait’, the customer is ‘hooked’, resulting in recurring sales of the blades. There are a host of companies that have adopted this business model. HP, for instance, sells its printer at low prices but earns money when it sells the ink cartridges.

Pay-Per-Use Business Model

Let us shift our discussion to another technology company making waves: Uber. Have you ever wondered how it earns money? After all, it does not own the cabs, nor does it employ the drivers.

It is an on-demand ride service that connects riders (read: us) with drivers and the business model they follow is ‘pay per use’: pay only for the duration the service is used for. They collect a matchmaker fee from the driver.

Freemium Business Model

Look at another technology company, Dropbox. It deploys the ‘freemium business model’ to make profits. The name of this business model was coined by combining ‘free and premium’. As the name implies, basic services are made available for free while premium services are available against payment. From a business perspective, ‘free’ leads to trials because customers do not perceive any risk in it. For this model to be effective, enough access should be provided to the customers so that they can experience the value of the product. Then the paid plan should gradually be introduced.

Profitable Business Model.

Dropbox offers a small GB of storage space free of cost. This allows users to experience how easy it is to back up and share their files using the Dropbox platform. For additional storage space, Dropbox starts charging.

Spotify, the music streaming company, also offers its basic service free, but charges for premium services. Many newspapers offer basic news free. But to get access to premium content, readers have to opt for the subscription fee.

Subscription Business Model

That brings us to the ‘subscription business model’. In this model, the business charges an upfront subscription fee that has to be renewed at regular intervals, most often annually.

Customers find this model appealing because for a small price they get to access a large body of work that is constantly refreshed by the addition of new content. If customers do not like the service, they can cancel the subscription.

This business model gives the company access to the data of the subscribers which it uses to gain a deeper understanding of the subscribers to make personal recommendations. They can also monetize the data by inviting advertisers to serve targeted advertisements to their subscribers.

Companies following this model include magazines, online content streaming companies like Netflix and Apple Music, and more. 

We have always emphasized the importance of having a good website for your company because it can act as your best tool for marketing and sales. A poorly designed website can repulse people from your business and can cause you to lose customers before you even have them. Get in touch with HyperEffects to work on creating, enhancing, and making the website of your company more user-friendly.