4 Different Types of Business Models

by Thom Tracy

2 min read

A business model refers to how a business generates profit and revenue from its operations; these models use different rationale to capture value, each with its own advantages and disadvantages. Understanding various business models helps entrepreneurs select one that is appropriate for them.

Manufacturer

Manufacturers create a product from raw materials; they may also assemble existing components into a product. Car manufacturers, such as Ford and General Motors, use this business model. Products typically get constructed on an assembly line by machines or robots to streamline the production process. Manufacturers sell their products directly to consumers or to retail businesses that onsell their goods. If you own a small online store, you could use a manufacturer to drop ship products to your customers. Starting a manufacturing business is expensive due to high overhead costs and extra scrutiny in regards to labour and environmental laws. Demand for manufactured products is likely to grow as the global economy expands. Manufacturing businesses can make products to their specifications that meet customers’ needs.

Distributor

Distributors are independent agents that purchase products directly from manufacturers and sell to retail outlets or directly to public consumers. For example, a snack food distributor may purchase potato chips from a manufacturer and sell wholesale to convenience stores. Restrictions may limit distributors to sell one product line exclusively, or distributors may have the freedom to market multiple brands depending on licencing agreements. As well as handling payment and procurement, distributors educate resellers about vendors’ new products through demonstrations, road shows, and training. Distributors typically buy in large size, which provides greater buying power. Manufacturers are increasing their direct sales to the public, which may reduce the need for distributor services.

Retailer

A retailer purchases products from a distributor or wholesaler and sells them to public consumers. Rebates from manufacturers in return for prime shelf space may generate additional income. Retailers can conduct their operations from a physical location or online. Prominent Canadian retailers include Loblaw Companies Ltd., Alimentation Couche-Tard Inc., and Metro Inc. Before you open a retail business, familiarize yourself with federal, provincial and territorial permits and licences. Be prepared to work long hours if you open a retail business, especially during holiday periods. Retailers have direct contact with the public, allowing them to keep up-to-date with the latest fashions and trends. Small retail businesses have the ability to respond to customers’ changing demands and build customer rapport.

Franchisor

A franchisor distributes goods and services through a licencing agreement. The franchisor provides the franchisee with a proven business system for an initial fee and ongoing royalties. For instance, if you purchased a bookkeeping franchise, the franchisor may provide guidance about what marketing strategies to use or how to manage staffing requirements. The business model is suitable for entrepreneurs who have minimal business experience since they receive ongoing support and training to help them avoid mistakes. Receiving access to the franchisor’s trademark name provides brand recognition and credibility. Poor performance by other franchisees may negatively impact the franchise’s reputation. McDonald’s and Subway are examples of successful franchise business models.

References & Resources

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