In a previous role selling software, I gained insight into the importance of choosing the right business model. In an effort to appeal to the entire marketplace, from enterprise users to solopreneurs, our product was priced based on usage—the more API calls we had to handle for a customer, the bigger their bill.
Unfortunately, selling the product without a minimum price created a situation where a majority of customers placed substantial demands on our support team while contributing very little to revenue. We had just a few major users left propping up the entire business.
The situation stabilized when we implemented a monthly minimum price, but since then, I’ve paid much closer attention to business models. I’ll never again take for granted that a company has found the best one for its product and market.
To help you avoid similar situations and run a business better from the start, I’ve put together a guide about different business models, examples of companies that rely on them, and best practices for choosing the best fit for your business.
Table of Contents
What Is a Business Model?
A business model is a cornerstone of a broader business strategy that describes how a company will create value and monetize its offerings to generate a profit. If you’ve ever paid for a streaming subscription or purchased a one-off disk with software, you’ve encountered different business models.
Choosing the right business model is essential for every business. You have to assess if your product makes sense as a subscription, a retail offering, or a pay-per-use service. Equally as important, salespeople like myself need to know what the business model is so we can sell more effectively.
Business models offer different ways to make money, and it takes careful thought to hone in on the right space for your business to operate profitably. Consider these seven as you decide how your business will go to market (GTM) — or how you might pivot to stay afloat.
7 Business Models You Need to Know
1. Retailer
Likely the most common business model around the world, retailers source products from manufacturers or wholesalers. These businesses then mark them up and sell them to the consumer either online or through brick-and-mortar locations.
Product originators give up some of the margins they could theoretically capture because working with a retailer offers a host of benefits. The retailer buys in bulk, simplifies logistics, markets products, offers post-sale support for consumers, and more.
This division allows product designers and manufacturers to focus on their own strengths.
Example: Car Dealerships
With a few exceptions, car manufacturers don’t sell their products directly to the consumer. Instead, they ship vehicles to a network of dealership retailers who help customers find the right vehicle. Dealerships also offer coverage plans and warranties beyond what the manufacturer provides, present financing options to customers, and perform regular maintenance for their primary brands.
2. Subscription
Once primarily the domain of milkmen and magazines, the subscription business model has pretty much become inescapable. In fact, there are now subscription services like Rocket Money that help you find and cancel your other subscription services.
With a subscription, you pay at a set interval so you can access a product or service. The subscription model might annoy consumers who really just want to be able to use the heated seats in their BMWs, but it’s ubiquitous for a reason.
For one, subscriptions help buyers split hefty expenses into smaller, more predictable chunks. At the same time, sellers can reinvest resources into products that continue to produce revenue. Investors also quickly gravitated to subscription sales because the model generated such a reliable revenue stream.
Often, buyers can choose from different subscription packages. That pricing flexibility is a key advantage of subscriptions — according to Bastien Paul, CEO of Hublead.
"We chose a subscription model with per-seat pricing to make the tool accessible to businesses of all sizes while supporting their growth. This flexibility allows companies to add or remove seats as needed, ensuring they can scale with us and only pay for the benefits based on their team size,” Paul says.
Example: Netflix
I’m old enough to remember renting a single DVD from Netflix by mail, but Blockbuster’s fate was truly sealed when its upstart competitor embraced the subscription model. Today, the streaming giant has more than 282 million paying subscribers, and customers can choose from cheaper, ad-supported options or premium, commercial-free viewing.
3. Freemium
In a freemium business model, a version of the product is given away for free. Then, a version with more features can be purchased for a price. The idea is to lower the barrier to entry to entice users to try something. Over time, the company shows them paid tools and upgrades that will make a good experience even better.
The freemium model is a good option for gradually introducing complex or expensive products to a user base. It’s especially great for audiences who wouldn’t consider buying if they had to eat the whole elephant (both its features and price) on day one.
Example: Ecobot
HubSpot itself has always had a freemium model, giving away key functionalities from each of its six hubs for free and betting users will want to gain access to other more powerful tools.
Thanks in large part to a presentation by former HubSpot CRM Mark Roberge at SaaStr, HubSpot customer Ecobot decided to pursue the same model when launching its software platform for environmental consultants.
According to CEO and Co-Founder Lee Lance, the decision centered around a GTM strategy emphasizing product-led growth (PLG). He elaborates, “By leveraging marketing to drive high-quality customer targets to a valuable free version of the product, we could let the value of the product pull the customer through the subscription pricing journey.”
In his mind, “the only impactful way to sell B2B software top-down is after there's critical demand within the end-user base at a company.”
It takes time to tell if a business model is working as intended, but Lance is seeing early signs that they made the right decision. “We just closed a significant enterprise license agreement with a customer that started off with just a handful of free users about a year ago.”
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4. Pay-Per-Use
In the pay-per-use business model, a company charges for its products based on how much a customer uses them. This practice is common when higher usage puts a higher demand on the seller. This model also allows sellers to give their best customers discounts by lowering the cost at higher volumes of usage.
Some pay-per-use services will have a minimum bill, ensuring that the smallest customers don’t end up costing a provider more than they generate.
Example: Amazon Web Services (AWS)
Many AWS products, including virtual servers and storage solutions such as Simple Storage Service (S3), are priced according to a customer’s usage. This flexibility allows small businesses to use the same products as leading enterprises without incurring the same bill, while major users benefit from economies of scale.
5. Marketplace/Brokerage
In direct-to-consumer ecommerce, a seller does business directly with the end-buyers of its products. Meanwhile, a company with a marketplace or brokerage business might not have any of its own products at all.
Fundamentally, the marketplace business model revolves around connecting buyers and sellers. The marketplace can then capture some of the value created with that connection, whether that’s a cut of each transaction or a cost to join the marketplace.
Example: BikeExchange
BikeExchange is a platform offering the digital infrastructure for small, local bike shops to sell products online.
According to Chris Cosgrove, head of BikeExchange North America, “The BikeExchange platform was designed with a low barrier to entry, providing an easily accessible way for retailers to reach a broader audience.”
BikeExchange provides simple integration options with the retailer's POS system, allowing the seller to get the product online in minutes. The BikeExchange team handles the rest. “By leveraging our marketplace, even the smallest shops can significantly increase the visibility of their products, attract more traffic, and ultimately drive conversions,” Cosgrove says.
BikeExchange offers access to its platform at three different price points depending on the features and add-ons a shop is looking for. This allows retailers to start small online and then scale their ecommerce over time.
6. Retainer
Under the retainer model, a company allocates a specific portion of its capacity to individual clients each month. The retainer model allows marketing agencies, legal teams, accountants, and PR firms to anticipate how much time they’ll need to devote to specific clients each month.
This model also allows for flexibility with overages billed by the hour. In many cases, these service providers will acknowledge the importance of dedicated retainers by discounting these pre-allocated hours from the company’s established billable hourly rate. Think about the retainer as a subscription for services instead of a software product.
Example: ALINE
My current company, ALINE, is a web design and digital marketing agency that serves clients ranging from real estate investors to insurance groups to local nonprofits. We’ll occasionally take on clients for one-off projects, but we’re built around the retainer model. This ensures expenses are predictable for the client and their demands are more predictable for the agency.
Without retainers, many agencies are forced to rely on freelancers or contractors, but our business model lets us bring talent in-house.
7. White Labeling
For brands that have a strong product but might not have the expertise or budget to break into a market and attract customers, the white label option provides a compelling alternative. A white-label product can be rebranded and sold under a different name, allowing the creator to benefit from a reseller’s robust marketing and distribution arm.
Example: HighLevel
HighLevel is a software platform for marketing agencies that combines many different capabilities into a single solution. Because HighLevel is a white-label product, marketers can resell it to their clients under their own brand names. With customers doing much of the work marketing the product, the HighLevel team can focus on developing new features on the roadmap.
How to Choose a Business Model
You can pivot between different business models, but it’s obviously disruptive (and not in a good way). Lots of other parts of your business plan depend on your business model, so a change that fundamental might require you to recode your billing system, rewrite standard operating procedures, and notify your customers of potentially major changes.
To avoid that chaos, it’s best to get your business model right the first time. If you’re not sure what business model you should use, here are a few questions you can ask yourself to help narrow things down.
1. What are competitors in my space doing?
It’s important to differentiate yourself from your competitors, but that doesn’t mean you have to reinvent the wheel. Look at how the incumbents in your space are operating and decide if your solution should be set up in a similar way.
If everyone in your industry is selling a service under a certain business model, there may be a very good reason for it.
2. Is my product or service a one-time transaction or an ongoing relationship?
If a sale is a one-off event, the transaction probably should be as well. If landing a new customer is instead the beginning of a long relationship, a subscription model is a much better fit.
While paying for HubSpot isn’t necessarily my favorite part of doing business, I would never give up the 24/7 access to support, ongoing product development, and incredible educational resources that come with the software. It’s an ongoing need, so a subscription makes sense.
3. How price-sensitive are customers?
In the example I gave at the beginning of the article, I mentioned that I worked for a pay-per-use company without a minimum cost. This choice was made to appeal to price-sensitive customers, and it had exactly that effect. Ultimately, a huge portion of the software platform’s user base wasn’t profitable and cost the company money.
Factor in price sensitivity as you decide on a business model, but make sure you aren’t inadvertently creating a nonprofit. Use a subscription or monthly minimum fee to split major costs for your customers up into smaller, more manageable chunks. You can also offer financing options through your own company or a third party if it helps expand your audience.
4. What are the major costs associated with the business?
If costs are ongoing, like server capacity, cloud storage space, and a customer support team, the subscription model is a good way to build a revenue stream that offsets the cost of goods sold. If most of the costs incurred in each sale are one-time expenses, such as the costs to manufacture and ship a physical product, you probably won’t want to charge customers over and over (and they’re unlikely to see the value).
Bringing Home the Bacon
I’ve seen firsthand how the wrong business model can cripple a company’s chances of success and how changing it — painful as it may be — can right the ship almost overnight. The lesson? What seemed appropriate at a company’s inception might have unintended consequences at scale.
If you have any doubts about your business's path, don’t put off more in-depth consideration of your current business model and how it might be inadvertently hindering your growth.
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