A guide to business models, and how to pick the right one
“Business model” is a term that people talk about very easily as if we all know what a business model is. But it seems that many disagree, and can’t quite define what a business model is. It’s a slippery term. People say business model when they mean business strategy. Others will talk about writing up their business model, but they mean business plan.
This article provides my definition of a business model, from the point of view of the small business owner. With this guide to business models, you can clearly define the model of your business at the moment. And within this guide, I’ll also give you some different types of business model, with recommendations as to how you can pivot or change your model.
I’ll be encouraging you to change up to a model which will increase your company’s profits, and maybe make it easier for you to earn your money.
Because that’s what we’re here for at the Joy of Business, supporting people to make good money and to enjoy running a small business at the same time.
The importance of the business model
When you first started your company, you probably didn’t ponder for too long on the importance of your business model. You just got going, finding your first customers, building your marketing, doing your thing. And then a little further in, you start to think about how the company can grow.
Understanding the business model you’re using now, and the alternative business models you could be using is even more critical for a small business than for our bigger corporate cousins.
Changing the way you think about how you run your business, making a few tweaks and changing from, say, the billable hours to the projects business model, could move your net profit from the “I’m just about surviving” level to the “ooh, I’ve got enough in the bank for two holidays this year” level.
Stay with me, and I’ll show you how, with some examples of how this works in practice.
The Julia Chanteray definition of a business model
I define a business model as the mixture of how the money flows into your company, how you put together whatever products and services you sell. And how the money goes out of your business. We can see that the relationship between these three decides how much profit is left for you, the business owner at the end of the year.
Let’s look at this definition of your business model in a little more detail. Firstly we have to think of your business like a machine. Money comes in from your customers, you do something in your magic machine, which costs you time or money or both, and profit flows out.
Your business as a money-making machine
Key features of your business model
The business model is decided by:
- How many customers can you handle? Can you sell to lots of people at the same time? Or just a few at any one time. Ignore the fact that you might not have attracted all the customers you want at the moment, that’s marketing. Which is part of your business strategy. We’ll look at the difference between strategy and business models later on.
2. And how often do your customers pay you, i.e., do you charge them once for a one-off project and hope they might come back, or do your customers buy from you every month
3. How you put together the products and services you sell
4. How much money and time it costs you to do whatever you do to provide those products and services
Types of business model
This guide to business models is for people who run the kind of small businesses I specialise in supporting. Most of the businesses I work with have started with the billable hours model, but this isn’t necessarily the most successful business model for a small business. I often encourage my clients to move up to the projects model or the recurring income business model. Some are busy developing into the products business model, and some pivot into a membership or subscription business model.
Main types of business model for a small business
The main types of business model for a small business are:
- Billable hours business model
- Agency business model
- Recurring income
- Projects business model
- Productised consulting
- Selling products
- Membership or subscription business model
- Software as a service
- Freemium business model
- Charlie’s Angel’s business model
I’ve gone through all of these, changing my business model since setting up the Joy of Business from a straight billable hours model consultancy company, through to a productised service (my business coaching, where I see clients every month for 6-12 months). Nowadays I use a mixture of the productised services business model with my coaching clients, plus selling products (books and programmes) and subscription products.
You can see this in action over at Adventures in Products
Feel free to mix them up
Notice how you can successfully mix different models, even in a small business. The big advantage of having multiple models is that it has a significant effect on your cash flow, which both feels good and gives you a competitive advantage because each part of the business contributes to profitability in its own way.
Let’s look at these different types of business models in more detail
The billable hours business model
The billable hours business model has one big advantage as the startup business model. When you’re starting up, you can get going immediately, just selling your time to clients. Often this is a successful business model for someone who has just left their job – your first client is the company you’ve resigned from. Voila, you’ve got cash flow straight away.
I’ve called the billable hours billable model the prostitute model. Not because it involves selling sex. Unless you are a prostitute, all are welcome here. But you are selling your time for money if you’re a consultant, coach, trainer, plumber, or chimney sweep. Read on for why you might want to change to a different business model.
You’re only human
There is a disadvantage to the billable hours business model. You only have a certain number of hours in the day. I often get clients joking that they wish they could clone themselves to get more billable hours done, to increase their profits. So there’s a ceiling to how much money you can make. You can increase profitability by moving your prices upwards, and this is often where I’ll start with clients who are selling their billable hours.
If this is you, then you should read my Sweetspot Pricing book for a guide on how to get to the maximum price that your clients will pay, plus how to improve your marketing, so you get the maximum number of customers at your new sweetspot price.
When you use this as your startup business model, it’s too easy to get trapped in this way of working. That’s happened to me at every stage where I’ve moved up to a new business model. It takes time to set up the new way of working, but you have to prioritise the clients you already have with the old model.
There’s lots more about the billable hours model here…
And a great article about changing from a freelancer mentality of selling your time to building a grown-up business
The agency business model
The next logical step when you want to move up from the billable hours model is to bring in some more people to do the work for the clients. Of course, this is still the billable hours model, but it does mean that you don’t have to do all the work yourself or turn potential clients away.
Many people will bring in freelancers or associates as a first step in building an agency. Or you might bring in new people to train up to do the work in the way you want it done. This works well for one of my clients, who recruits untrained people, puts them through a structured training programme and then she has lots of new staff who will do things to her high standards. It’s taken a lot of time and effort to develop this system, but it’s well embedded in her company’s culture.
Another client recognised that he was much better at selling his company’s products and services than providing them. He brought in a couple of talented people to do the work, and then spent his time on a content marketing programme and doing training courses which ended up selling his company’s services. Sixteen years later, they’re still going and have 20 staff now.
The recurring income business model
By encouraging your clients to buy from you every month, you know that you will get paid this month, and every month after that. You can sleep easily at night.
I’ve worked with all kinds of businesses to change how they pitch to their clients so that instead of selling a one-off product or service, the client buys their services every month. Even the most simple of businesses can change to the recurring income business model quite quickly with a little thought, and a small investment in setting up some systems.
Here’s how it can work for a super simple business
Last week I had to get my chimney swept. I should do this every year, but I’m busy, and I forget. And I don’t think about it in the summer when I’m not using the wood burner in my living room. Come autumn, I start to worry about setting the house on fire, and call Sean, the chimney sweep. Everyone else has done the same, and he’s booked up for the next three weeks.
To move to the recurring income business model, all Sean has to do is book me in for next year. He can set it up in his Google calendar, and maybe get me booked in for August when he’s not so busy. And then he texts me next August to confirm my booking and I text him back to say I’ll be there.
I’d say that’s an instant 30% increase in revenue for Sean, plus he doesn’t have to work so hard in the autumn and can spread out the work a bit.
But what about your business?
That’s a straightforward example of the recurring income business model. You might be saying right now that your business is much more complicated than that, or that you sell a much higher ticket service. The recurring income business model can work for all kinds of products and services. And the lovely thing about it is that it usually means that you can do a better job for your client than a one-off project.
Here are more thoughts on the recurring income business model, and how you can apply it to your business.
Projects business model
If you’re currently working on the billable hours business model, changing the way you work to the projects business model can make a whole lot of difference very quickly.
Let’s use the example of a data visualisation company. They take lots of boring, incomprehensible data and turn it into beautiful graphics so that ordinary people like you and me can understand complicated things easily.
Our data visualisers get approached to do a piece of work for one of their clients. They usually put together their proposals, detailing how many hours it will take to do the job, and multiplying it by £80, which is their hourly rate.
Instead of doing their proposal this way, they just say to the client, that will be 5k, please. The client says yes, they get on with the work, send their invoice and get paid. Of course, they’ve done a rough check of how long it will take to make sure they’re in the right ballpark. However, it’s much easier to give a simple quote to the client and get paid for the project rather than justifying the price with a long drawn out list of precisely what they will do to provide the service. The client doesn’t care; she just wants the job done.
The big gain from the projects business model
Partly this is a sales tactic, and partly this is a way of not spending hours at quotation stage when you don’t know if the client will want you to go ahead or not. These factors are useful efficiency gains in their own right.
The big gain is that instead of thinking of your work as the number of hours you can bill out, you start to think of it as the number of projects you can do for clients. And then you start thinking about how you can standardise what you do into set projects. Most of us have a vague idea of this anyway, as the work you do for one client is often similar to the work you do for another, or takes the same amount of time. And once you’ve done this, you’re working on a different business model, where you can think about how to develop templates, standard operating procedures and ways to reduce the number of hours you spend on a client project.
Here’s a full guide to moving to the projects business model, before we move on to the next version, productised consulting.
Productised consulting is the next step up from the projects business model. And it’s where you start to think like the big businesses, even if your business is still just you and the cat.
Productised consulting is one of my favourite type of business model for services. If you’re currently selling any kind of consultancy on a day rate, you should think about moving to this model for consulting services.
How does productised consulting work?
Let’s think about Peter. Peter left his job as a user experience designer to set up his own company. He booked a strategy session with me to get his new venture off to a good start.
We agreed that instead of charging his new clients on a day rate basis, Peter would sell them his services in monthly chunks that would not be defined in time. His clients would get access to his expertise and hard work, but he would put together his proposals in terms of outcomes for the client, rather than the time he spends working for them.
It’s worked well for Peter. He’s now working for a handful of clients on a regular basis and making improvements in their user experience. He told me over coffee that he’d had to plan his work much more carefully with this model. But it had meant that he was getting recurring income each month from each client, which was great for him as he’d been used to getting a regular salary, and he has three children, so he didn’t want to take any risks with his cash flow.
What is productised consultancy again?
Productised consulting is when you sell your consultancy services as a package or product. Clients buy the product, which might be just access to you when they want to ask you questions, regular reporting, a monthly or quarterly meeting, or the opportunity to give you a certain level of work per month.
The products business model
Let’s look at the most familiar version of this first — physical products.
You make or buy in a thing. Maybe you sell mugs, peanuts or spectacles. Or any of the other items on my desk as I write this. Or cars, paving slabs, turf…
You sell them for more than you paid for them, or what it costs you to make them. Some of that gross profit goes to pay your overheads, which might be your warehouse, staff, website, business coach, phone bill, and then you have some leftover as net profit, which you use to pay the tax bill, and then finally yourself.
How to be successful at the physical products business model
The trick is selling enough products at enough of a gross margin to cover those overheads and leave some net profit at the end of the day.
Let me stress both of those factors, selling enough of your products, and selling them at the right gross margin. Take a look at Sweetspot Pricing, especially the sections on our hero Quilt Guy (he makes patchwork quilts) for more tips on how to make a success of the products business model.
Selling digital products
And then we have the more nebulous digital products. Selling digital products is one potential upgrade from selling billable hours, as you have tons of expertise in your trade which you can sell to more people than you can sell billable hours to because you can make more e-books or online courses than you have hours in the day.
The downside of the digital products business model is that you have to spend a whole lot of time making that e-book or online course in the first place. Which can be a significant investment of time, resource and a giant learning curve in itself.
Do not be taken in by the idea that you can write a book in a weekend, launch it on a Monday, and then be rich by Thursday. It took me three years to get Sweetspot Pricing finished because most of my time was taken up by my business coaching clients. And many people aim to write a book, develop a course and get stuck, so they never finish it.
Best advice for selling digital products
The best advice I can give you here is to not be overly ambitious at the beginning. Don’t go for a video course, a book full of everything small business owners need to know about pricing, or an iPhone app at the beginning. Write a 20,000-word ebook on a niche area of your world, and sell this first. Then you have some initial customers, who will probably buy the next product, and you’ve started to learn the marketing skills you need to make a success of the digital products business model.
Membership and subscription business model
The membership business model (also called the subscription business model) is a mixture of the digital products business model but with elements of the recurring income business model. It takes the good stuff from each to make the membership business model potentially very powerful indeed.
The basic idea of the membership business model is that you make a digital product, and people have to subscribe each month to access it. In some versions, such as my New Business Ideas Collection, members get new content every month, in this case, a new set of fresh ideas for new businesses and instructions on how to set them up. The Financial Times follows the same model for its online content, albeit on a larger scale.
For small businesses, one of the attractive features of the membership business model is that you don’t have to write the whole thing before you sell it. You can write the first three months’ content, plus some landing pages and emails to encourage people to continue their subscription. Starting this way lets you adopt the minimum viable product development route, where you do the minimum you need to get going, and then make changes when you get feedback from your first subscribers.
Software as a service business model
The software as a service business model is the grown-up cousin of the subscription business model. Traditionally software was sold as a something you bought, usually on a CD. Ironically, this made selling software into the physical products business model. And then you could download it from the internet, and buy a licence key. That’s the model used by Scrivener, the writing software I’m using to write this article.
In about 1999, the software as a service business model came into being. I remember writing a business plan then for one of the first versions and trying to explain it to the investment team at the Royal Bank of Scotland.
Software as a service (SaaS to differentiate it from the Special Air Service, SAS) is used by Xero accounting, the SEMRush SEO software I’ll use later to check my keywords for this article, and many others. They sell me the ability to use their software, but without having to download it or own the software at all. I pay a monthly fee, and they let me do my accounts or search for backlinks to the Joy of Business blogs. They keep my data secure in the cloud, and I can access it through my browser.
The software as a service gives you recurring income from the monthly fees from users, which is great for cash flow and maximises profit. I’ve been paying Xero £22 per month for about ten years. Ouch. That’s £2640 so far, which is much more than I would have shelled out for accountancy software on CD. But great for Xero of course, they’re getting a massive Life Time Value per customer.
But the SaaS model does usually require a lot of work on product development before you can attract your first customers. And you have to keep them happy, so they continue to pay their monthly fees. It’s often too ambitious for a small business, as the cost of developing resilient software can be too high.
Freemium business model
The freemium business model has become pretty much standard for SaaS businesses. The most basic version is a 14-day trial subscription for free. Or you give people a free, easy to sign up to service with basic functionality or with irritating ads. Like me, you may well have signed up to Spotify through their freemium offer and then got very tired of the ads.
Here’s a more detailed look at the freemium business model.
Here are some next steps for you to think about:
Get a copy of my Sweetspot Pricing book. As well as helping you to work out what you should be charging your customers, it has lots of tips for changing your business model to one where you get more monthly recurring revenue. Get Sweetspot Pricing here…
Think about pivoting your business model to a product-based business. Lots of help in building productised services and your entire product ecosystem.
Set up a call to talk about business mentoring, ongoing help and support for your business. This is how my business mentoring works…