Contents of this article
Every business or company has its own plan for making a profit and growing. It builds a model that defines the right products and services to sell, the target market it wants to reach, and the costs it expects to incur. These are the key elements of a company’s business model.
Whether a company has been around for a long time or has only just been founded, building a business plan is essential. In a constantly changing business environment, companies need to update their plans and strategies regularly to adapt to future challenges and business trends.
Why the business model matters
A business model helps a company identify its target customers and build suitable marketing strategies, and supports revenue and cost forecasting for each type of business model and specific customer group.
Investors, for their part, need to assess a company’s business model to pin down what its competitive advantages are. Assessing the business model gives investors an overall picture of the company’s products, business strategy and future prospects. Understanding the business model is also key to getting a better feel for the company’s financial data.
An example of a business model
Suppose Company A rents out and sells software and video games. Its products, then, are software and video games. Last year, the company spent VND 3 billion producing games and software (inventories), which generated revenue of VND 5 billion. Its gross profit was therefore VND 2 billion.
Later, the internet took off, and the company had to consider using the internet in its business to adapt to the market. Instead of running all of its operations (dealing with players, selling or renting software and games, installing systems, etc.) through physical stores, the internet allowed the company to carry out these activities online.
The company’s business model therefore had to change. Using the internet in its business meant the company no longer had to spend so much on storing inventory and distributing products (what used to be done in person could now be done online), which reduced overall costs and increased profit.
Types of business model
In this article, we will discuss 4 common types of business model:
The B2B (Business-to-Business) model
When transactions take place between one business and another, the model is called a B2B business model. Put simply, it is a business model in which one company supplies goods or services to meet the needs of another company.
It offers better market predictability and greater stability. Because B2B sales are made in large volumes, the model leads to lower costs for the business.
In Vietnam, the B2B model can be seen clearly in e-commerce platforms such as Lazada, Tiki, Adayroi and Shopee, while Amazon, Taobao, Alibaba and eBay are well-known B2B models internationally. In this model, a business that wants to sell goods simply registers and lists its product information on the platform, and businesses that want to buy also contact sellers through the platform to complete the transaction.
The B2C (Business-to-Consumer) model
B2C is a business model in which companies sell their services or products directly to consumers – the end users of the company’s products or services.
This is a widely used business model because there is always demand for products and essential goods. B2C mainly refers to online retailers selling products and services to consumers over the internet, which helps eliminate the risk of fluctuating demand and maintain business consistency. Because the business deals with customers directly, information can be shared with them directly and easily.
Unlike other business models such as B2B, where marketing campaigns focus on demonstrating the value of a product or service, companies using the B2C model must run marketing that appeals to customers’ emotions and always treat consumer behaviour as the main driver. The B2C model only works well when a company understands what customers want and motivates them to buy.
The subscription-based model
This business model is very common among app-based businesses and software companies. These businesses usually offer their product as a one-time sign-up, and in return earn monthly or annual revenue.
This type of business model lets companies earn recurring profit by allowing customers to pay in 12 equal instalments instead of requiring one large lump-sum payment. One of the leading examples of this model is Netflix – a subscription-based streaming service that lets its members watch TV shows and films on any internet-connected device.
The on-demand model
This is the newest type of model, created from demand by responding instantly. This type of business model is designed so that every question can be answered with a single click in a few seconds. It offers customers convenience and ease: even before visiting a particular city, they have already booked their hotel or venue.
One example is MakeMyTrip, which lets customers plan their holidays and book in advance.
The advantages of having a good business model
A good business model gives a company a competitive advantage in its industry.
An effective business model also gives the company a good reputation in the market, encouraging investors to keep investing in it.
In addition, an effective business model helps increase business profits, which in turn builds cash reserves and opens up new investment opportunities for the company in future.
The drawbacks of a business model:
Alongside the advantages, building business models also has the following drawbacks:
When a new business model is introduced, the company has to stick to shared goals in order to execute the plan, which means new initiatives and ideas may not be pursued. Building a business model also takes a lot of time, as there are always many factors and aspects to consider, which can spread the company’s resources too thinly and easily lead to waste and inefficiency.
There is also always a chance that the business model does not achieve the purpose the company intended, or heads in a completely wrong direction.
Despite these drawbacks, a business model must still be prepared before starting any new venture.
In summary, a business model is the strategy a company builds to run its business profitably. It covers the company’s products, its target market and its future prospects.
Before investing in any company, reviewing its business model gives investors a true and fair view of the company’s history and future prospects. Understanding business models also helps investors get a better feel for the company’s financial data.
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