Business Models Defined

What is a business model?  Simply, a business model defines the way business delivers value to its customer base, receives payment from the customer, and converts the payment to (hopefully) profit.  This differs from a business structure, a legal form of business ownership.  Changes in technology – notably the Internet – has created new forms of business models, and given home business many more options.

This post examines some of the most common business models and their pros and cons.  Some are part-time models while others have options for full-time or part-time commitments.

Traditional brick and mortar store

A brick and mortar store is a local dry cleaner, retail store or any business requiring a physical location outside of the home.

Pros

Physical locations allow for passing traffic to browse and shop, increasing marketing and sales efforts.

A dedicated space allows an owner to become mentally and physically vested in day-to-day running of the business.

Provides the opportunity to work directly with customers – face-to-face – and become part of the local business community.

Cons

Startup cost and risk is higher.  Location, lease, purchase, and local licenses are all needed to set up shop.

Inventory for retail stores is critical with diverse and adequate quantities to merchandise the store.

A full-time commitment for owners or employees is required for setting up and staffing the store.

Home Business

Advances in technology have made home businesses more attractive and competitive.  According to the SBA, home business is about 20% of new businesses.[i]  Home business can use a spare room, kitchen table or garage as an office, “manufacturing facility” or conference room.

Pros

Lower startup cost and less risk.  Home business is part-time or full-time and allows one to work a job with benefits if desired.  Startup cost is low with no rent and minimal staff.

Many functions can be outsourced.  Contract with other companies for marketing, public relations, manufacturing, website creation, accounting and more.

Home business is scalable.  Start small and test the business waters.  If a market is strong for your product or service, expand as space and time allows.  If needed, outsource.

Cons

Local laws may limit customer traffic to your home and also specific products made or services provided.  Check with local and county governments for details.

If the business depends on physical customer traffic to the home, your family or residence may not appreciate the intrusion and leave a negative impression.

The home is often filled with distractions from children to pets and spouses.  Are you prepared to deal with these issues and run a business with time split between priorities?

e-Commerce

Another possible home business option without the home traffic and distractions.  Sales are through a website to consumers or other businesses.

Pros

Choose this for a part-time or full-time job.

Easily scalable to meet market demands or as time restrictions allow.  The e-Commerce business may be large or small based on personal needs and wants.

Low risk, low startup cost.  A website is inexpensive and inventory can be made or purchased as it sells.  Offer limited edition items and when gone, don’t worry about refilling them.

Market and sell to a national or global customer base via the Internet.

Cons

Inventory management and credit card processing are concerns, though PayPal and similar companies are good alternatives for the latter.

Customers to your website can be difficult.  If they find you, are you trustworthy and create customer confidence?

eBay

A sub-category of e-Commerce and also home business, e-Bay is a location for your online store.  eBay’s customer base is huge and helps drive traffic to your online store.

Pros

Low cost and low risk.  eBay provides sellers with many tools to help their business get started.  Instructions for market research, store templates, and credit assistance are available.

eBay has a huge global name and customer base, avoiding the need to build a website and a customer base from scratch.

Cons

Much like e-Commerce, brick and mortar, and home business, inventory management can be a hassle.

Competition on eBay can be fierce, especially from established and known sellers with good feedback ratings and a loyal customer base.

Franchise

If this option is chosen, you use a proven business idea as a roadmap.  Upfront fees and possibly a percentage of revenues are paid to the franchisor.  More information on franchises is available at www.franchise.com.

Pros

Lower risk because of known company name, support, training, and existing business processes.

Established brands are familiar and attract customers automatically.

Franchise success rates are higher than independent startup businesses.

Cons

Cost.  Some franchise chains (McDonalds) can charge millions in upfront fees.

Franchise rules may limit creativity in marketing, product offering, and pricing.

Revenue may be limited because of ongoing profit sharing with the franchisor.

Multi-level Marketing

This is a marketing and distribution model.  Classic examples include Avon, Pampered Chef, Mary Kay, and Primerica.  This pyramid style structure typically benefits those higher in the structure while a high number of people on the low end make little money to start.  Homepreneurs covered MLMs and direct selling in this article.  For additional information, refer to www.mlm.com or www.dsa.org .

Pros

Primarily a home-based business.

Limited startup costs required for a membership and small inventory commitment.

Company provides marketing, product, and sales tools.

Cons

Limited money return for time spent and sales problems.

Reputation problems from selling to friends and co-workers.  Many MLM companies are also a scam.

Each of the above business models is viable and proven.  Carefully weigh how each fits into your lifestyle, financial needs, and future goals.  How much risk are you willing to take?  How much money do you have to commit to a startup?  Check back for the next post discussing business structures.

By Dion D Shaw

Dion D Shaw is the founder and owner of Homepreneurs.

Homepreneurs.  New Day.  New Opportunity.

Reference


[i] http://www.sba.gov/content/can-i-operate-business-home

Disclaimer

Homepreneurs does not endorse nor have any relationships with any of the services listed.  Homepreneurs receives no compensation or consideration for its suggestions.  Homepreneurs strongly urges all interested parties to conduct research and accepts no responsibility for any losses incurred.

© Homepreneurs 2010 – 2012, All Rights Reserved

10 Responses to Business Models Defined

  1. A very informative article. it can be expanded a little bit to guide a newbie along the way a little bit better and faster.

    Home business is very appealing bu it is not as easy as it looks.

  2. Great article- knowledge sharing is a key in the society we live in to market and produce effectively, your article is a good example of that

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