28 May 14 Business Model Types: Understanding and Choosing Where Your Business Fits
According to Weill and his co-authors, the four business activity typologies and the four asset typologies can be integrated into a chart that categorizes fourteen different possible business models.
Note: Both Creator/Human Assets and Distributor/Human Assets categories are omitted from this model. This is because both categories are illegal and immoral. A Creator/Human Assets business model is where a person or business enslaves another human being and sells that person to a buyer. A Distributor/Human Assets business model is where a person or business buys and sells slaves. Both business models were practiced in the past, but are now considered highly illegal and morally repugnant in virtually all nations and cultures around of the world. In contrast, the two other “Human asset” categories are legal and widespread. People can rent out their time, effort and labor to others in a voluntary exchange (Contractor) or be a Broker between Contractors and prospective employers (temp agencies or headhunters).
The fourteen possible business model archetypes are examined below in detail.
1. Manufacturer – Creator of Physical Assets (products)
Creator makes physical assets and sells directly to the consumer
Description: The business goal of this type of Manufacturer is to create physical products and sell them directly to customers. These manufacturers can sell their products directly to consumers through either a live salesperson, via ecommerce, or through a Broker. The keys to this business model are that 1) Manufacturers own the asset (product) until the end user purchases it from them and 2) the Manufacturers either own or control their participation in the sales channels they use to reach buyers.
Examples: Oakley, Nike, Dell, Apple, Nintendo
Advantages: Increased margins, brand building, and building personal relationships with customers. Apple is an example of a large, global company that sells its products directly to consumers through its Apple Stores.
Key Challenges: Creating products that fill a customer need and effectively distributing those products to consumers. This means the business must focus on two big and often divergent missions (production and consumer marketing).
Creator makes physical assets and sells to Distributors or Retailers
Description: The business goal of this type of Manufacturer is to create physical products and sell them to wholesale or retail intermediaries who then sell those products to consumers.
Examples: Intel, Kimberly Clark, Sony, Chiquita, Johnson & Johnson
Advantages: These Manufacturers have the ability to focus on creating and producing products efficiently. The Manufacturer can gain wide commercial exposure through multiple sales channels. The Manufacturer can also transfer the asset’s property rights to others quickly and move large volumes of product per sale. This strategy is often good for mass produced hit products or commodities.
Key Challenges: Manufacturer must accept lower margins. Manufacturer has less control over its brand and customer relationships.
2. Inventor – Creator of Intangible Assets (Virtual or IP Products)
Creator sells directly to a customer
Description: The business goal of this type of Creator is to create an intangible good and sell it to others. The sale of the Intangible Asset can be conducted directly by the Inventor or through Distributors or Brokers. The key aspect of this business model is the Inventor sells the absolute rights of ownership to the Intangible Asset to another (this is not a limited license or rental). This type of transaction sometimes happens when a company in financial distress (or bankruptcy) sells the intellectual property it created to stay or become solvent.
Examples: This business model is virtually non-existent for a public company.
Advantages: Potential for high margins.
Key Challenges: Considerable business risk in terms of time, effort and money; often very difficult to find buyers; difficult to scale.
Description: An Entrepreneur is either a company or individual that creates and sells companies. The individuals who create and sell companies are either “serial entrepreneurs” or active early-stage investors. Entities that create and sell companies are incubators, venture capital firms and innovative companies. The measure of success in this category is maximizing ROIC – Return on Invested Capital. Founders of businesses who do not sell their companies are not counted in this business model.
Examples: This business model (creating a company then selling it) is very rarely pursued by public companies as a business model.
Advantages: Potentially, a successful entrepreneur can get fantastic returns on their investment of time and capital.
Key Challenges: Risking significant equity assets in starting and growing a venture, overcoming barriers of entry; companies can be illiquid, possibility of bankruptcy.
Description: A Wholesaler/Retailer is a Distributor who buys and sells physical assets without changing the fundamental nature of those assets. The value Wholesaler/Retailers bring to the marketplace is they specialize in connecting Manufacturers and consumers. Wholesaler/Retailers aggregate products from various Manufacturers, and use distribution and logistics economies of scale to offer those products and services to customers. The primary business goals of Wholesaler/Retailers are to create and execute superior logistics in order to maximize margins. The primary tension in this business is keeping product and service margins as high as possible while successfully competing against both established competitors and new market entrants.
Examples: Wal-Mart, Nordstrom, Macy’s, Amazon
Advantages: The barriers of entry for niche Wholesaler/Retailers are quite low; these business models can be systematized.
Key Challenges: Barriers of entry to become a low-cost leader or differentiated Wholesaler/Retailer are often high due to the large infrastructure and logistics networks needed to leverage economies of scale and/or economies of scope.
5. Intellectual Property Trader
Description: An Intellectual Property (IP) Trader buys and sells intangible assets. This may include firms that buy and sell copyrights, patents, trademarks, mobile device applications (mobile apps), digital currencies, domain names, etc. If a company uses this business model, it is more likely than not that company also uses the Intellectual Property Landlord business model.
Examples: This business model is very rarely pursued by public companies as a business model.
Advantages: Intellectual Property Traders can have low fixed costs.
Key Challenges: Finding willing buyers and sellers of the intangible assets can be difficult and the transaction costs can be steep. The task of properly valuing intangible assets is quite difficult.
6. Financial Trader
Description: A Financial Trader buys and sells financial assets without significantly altering them. Financial Traders mainly buy and sell stocks and securities. Financial Traders invest in a wide range of private or public companies and securities.
Examples: Vanguard, Goldman Sachs, JP Morgan Stanley.
Advantages: Financial Traders can achieve high profitability by recognizing undervalued or overvalued assets and employing an appropriate trading strategy to exploit these opportunities.
Key Challenges: Financial Traders can suffer huge losses due to a systemic financial crisis. The majority of Financial Traders cannot achieve better sustained returns than the overall market.
7. Physical Landlord
Description: Where a person or entity either creates or purchases a physical asset and sells (rent, lease or admission) a limited right to a customer to use that property. This is a widely used business model and prominent in the following industries: real estate rental and leasing, accommodation, transportation and entertainment or recreation.
Examples: Hilton Hotels, Zipcar, Netflix, Hertz Rental Car.
Advantages: Often the income from renting or leasing activities can be passive. Acquiring physical assets can be a significant barrier of entry for market entrants. Real estate asset prices can rise over time and can be used as a source of financing for business operations.
Key Challenges: The capital costs of acquiring assets to rent or lease to others is usually significant and is a substantial barrier of entry for a new market entrant. Furthermore, the assets to be rented or leased must have and maintain steady market demand.
8. Intellectual Property Landlord
An Intellectual Property Landlord is a person or entity that either creates or buys intellectual property assets (trademarks, patents, trade secrets, copyrights…) and then sells a limited right to use that intellectual property to customers. There are three major subtypes of this business model:
Description: Publishers provide limited use of information assets (software, video, audio, databases…) in return for a purchase price, subscription or license fee. The Publisher grants the customer certain limited rights to use a copy of an information asset (the limitation could be time, scope or amount). The Publisher retains the right to make and sell additional copies of the information asset to other customers.
Examples: Disney, HBO, Random House, Microsoft, Apple (iTunes).
Advantages: The costs to create additional copies of an information asset are usually small to negligible. Copyrights and trademarks provide some legal protection for the information assets.
Key Challenges: Generating information products is usually labor intensive. Attracting and retaining customers is critical for success as a Publisher.
b. Brand Manager – Franchisor
Description: A Brand Manager (Franchisor) leases the limited use of a trademark or other elements of a brand (trade secrets, process knowledge) to a customer (Franchisee).
Examples: McDonald’s, Wendy’s, Curves.
Advantages: The Brand Manager business model can allow a successful company clone their business model, allowing their brand to expand rapidly and extract continuing rents from franchisees.
Disadvantages: Franchisors lack direct ownership of their Franchisees’ assets. Franchisors lack direct control over their Franchisees and must rely on contracts to constrain their business decisions.
Description: An Attractor publishes information IP products to gain the attention of potential customers. Once the Attractor has the attention of potential customers, it taps one or more revenue models to monetize that customer attention (advertising, freemium…).
Examples: New York Times, NBC.
Advantages: This is a potentially lucrative business model for Attractors who develop and offer valuable or popular content.
Disadvantages: An Attractor relies on network effects and multi-sided platforms where one customer segment subsidizes the other. It is often difficult for a company to correctly gauge how one customer segment should subsidize the activities of the other.
9. Financial Landlord
A Financial Landlord lends liquid financial assets (cash) to a customer under certain conditions that the customer promises to fulfill. There are two major subtypes of this business model.
Description: A lender provides cash to a customer on the condition that, within a predetermined timeframe, the customer agrees to pay back the amount borrowed plus a fee (interest). In a sense, a Lender rents money to a borrower. Often the Lender
Examples: Bank of America, Wells Fargo, Lending Tree.
Advantages: A Lender can hedge its risk in lending to a borrower by requiring the borrower to pledge collateral (or other terms) to protect against a potential loan default by the borrower. If a borrower meets all of its loan obligations, the Lender will earn a predictable stream of cash flows.
Key Challenges: Lenders must be experts in determining the credit worthiness of a borrower. There is generally a high level of competition among companies who use this business model. Interest rate risk can erode profits. This is a highly regulated industry and its regulatory framework could be a significant barrier of entry for a new market entrant.
Description: Insurers provide their customers conditional financial reserves in exchange for a fee (premium). A customer cannot have access to these monies unless the customer sustains a predetermined category of loss.
Examples: AIG, Farmers.
Advantages: Steady and predictable cash flows.
Key Challenges: Risk management – catastrophic events and natural disasters can overwhelm an insurer. Also this industry is heavily regulated and could present a significant barrier of entry for a new market entrant.
10. Contractor – Landlord of Human Labor
Description: A Contractor sells a service provided primarily by people to a customer. Common contractor services are, but not limited to: consulting, construction, education, tax and legal services, personal care, package delivery, live entertainment and healthcare. Customers pay Contractors usually on a fee-for-service basis where the fee is usually (but not always) based on the amount of time the services require. In a sense, all employees are contractors.
Examples: Accenture, Federal Express.
Advantages: Often low barriers of entry; potentially low capital intensity.
Key Challenges: Companies that employ this business model are usually difficult to scale. Credentials and certifications can be a significant barrier of entry. Businesses that employ this business model are employee-centric (their labor generates the revenue) and sometimes difficult to organize and manage.
Note: A Contractor and Physical Landlord can be confused – Physical Landlords can provide human services that are necessary for their assets’ value propositions. The differentiator between the two business models is what kind of asset is essential to the nature of the service being provided. For example, a bus company such as Greyhound would be classified as a physical landlord because the essence of the service is to transport people from one place to another. Conversely, a maritime shipping company would be classified as a contractor because the essence of the service provided is the transportation of goods from one place to another.
11. Financial Broker
Description: Financial Brokers match buyers and sellers of financial assets. This business model includes insurance brokers, large stock brokerage firms, and large investment banks that underwrite IPOs.
Examples: Etrade, Charles Schwab, Ameritrade, Goldman Sachs.
Advantages: Market participants can be highly profitable; there are huge opportunities for economies of scale using this business model.
Disadvantages: The success of this business model requires network effects – the more people who use the platform increases the overall value of the platform. This can be exceedingly difficult to establish for a new market entrant.
12. Physical Broker
Description: A Physical Broker matches buyers and sellers of physical assets. A physical broker may connect buyers and sellers of physical assets (eBay) or owners and renters of physical assets (Airbnb).
Examples: eBay, Priceline, Century 21, Airbnb.
Advantages: There is a significant opportunity to create market opportunities using this business model for Physical Brokers who facilitate exchanges between owners of physical assets and people who want to rent those assets. Network effects can establish powerful barriers of entry for an established Physical Broker firm.
Disadvantages: New firms who attempt to use this business model may face significant barriers of entry due to the network effects of established brokerage firms.
13. Intellectual property (IP) Broker
An Intellectual property (IP) Broker matches buyers and sellers of intangible assets or owners and renters of intangible assets.
Examples: Valassis. There are very few large firms who employ this business model.
Advantages: There are future market opportunities for using this business model because new and different types of IP assets are being created all the time. An example of a relatively new form of IP that can be brokered is phone apps.
Disadvantages: It is difficult to determine the value of intangible assets. Buyers and sellers of intellectual property have a hard time agreeing on IP asset prices. This can inhibit deal volume for IP Brokers.
14. Human Resources (HR) Broker
A Human Resources (HR) Broker matches buyers and sellers of human services.
Examples: LinkedIn, GlassDoor, Odesk.
Advantages: This business model benefits from the increasing trend of companies hiring contractors for project work. Network effects can create a hugely profitable business through facilitating the buying and selling of labor.
Disadvantages: New market entrants can have great difficulty overcoming established firm’s barriers of entry (network effects).