A Business Model Describes How Profit Is Made

How Does Your Business Model Translate to Profits?

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Definition:

A business model describes how a business is going to make money.

And it should be the first thought in your head whenever you're thinking about a business idea, whether for a business you're thinking of buying or starting yourself or for a business you're thinking of investing in.

The Problem With Some Business Models

It's crucial to keep this essential notion of what a business model is top of mind in an age where so many businesses seem to treat the concept of making money as an afterthought or just some sort of fortuitous coincidence.

Internet startups are especially prone to this – they assume that because they’re creating so much social/cultural/entertainment value that people will want to shower them with money and their companies will become fabulously profitable.

In reality, the "build-it-and-it-will-become-profitable" business model is extremely risky and only rarely successful. Even large companies with enormous numbers of users struggle with it. Witness the saga of ‎‎Facebook, for example, and the failure of their public offering.

Common Types of Business Models

Another helpful thing to know about business models is that there are really very few of them.

Remember that old adage about there being nothing new under the sun? Well, it's really true when it comes to business models.

The B to C Business Model

The *Sumerian scribe sitting on a street corner selling his services was using the same business model that many businesses use today, the Business to Consumer model (B to C), where the business makes money by selling products or services directly to consumers.

Read more about the B to C business model:

The B to B Business Model

The business that sold the tablets and other tools of the trade to the business where the Sumerian scribe bought them would be an example of the Business to Business (B to B) business model.

In the B to B model, a business makes money by selling products and/or services to other businesses rather than selling directly to customers. Wholesaling is one example of this business model.

Read more about wholesaling (the B to B business model):

The C to C Business Model

And if our Sumerian scribe had access to a marketplace where he was able to interact with others and exchange goods and services with them, that would be an example of a Customer to Customer (C to C) business model. The marketplace would make its money by charging the users of the marketplace in some way, such as a portion of each transaction that took place there, rather than by directly selling goods or services to consumers. eBay and craigslist are outstanding examples of this business model today.

Read more about the C to C Business Model:

The B to G Business Model

Our Sumerian scribe might also engage in the Business to Government (B to G) model of business if he contracted his services to the local or federal Sumerian government.

From the government’s point of view, contracting out lets them access a pool of people who have the talents and skills necessary to do particular jobs, talents, and skills they may not have already on staff and that may only be required over the short term.

Certain fields have much more opportunity for bidding on government contracts than others, such as IT, health and construction.

Variations on a Theme

Everything else is just a variation of these four basic business models.

For instance, warehouse stores such as Costco are a variation of the Business to Consumer model with an overlay of the Business to Business model. The premise that Costco is “cutting out” the middleman wholesaler and selling directly to customers, who are thereby getting lower prices, is what draws consumers into the stores.

Online, everything that offers free content but makes money based on selling ad space, are examples of Business to Consumer businesses. (Learn more about Online Business Models.)

And Business Models Can Be Sold, Too…

Which is basically what a franchise is; the franchise seller is selling a reproducible business model, not a certain way of cooking meat or vacuuming people’s houses. Franchising, the process of turning a successful business into a reproducible business model and then selling franchises, has become a route to super profits for many entrepreneurs.

Read more about Franchises:

A Business Model Is Not Optional

Without a business model, a business can’t exist; making a profit is every business’s raison d'etre.

So if you’re thinking of starting a business, figuring out how your new venture is going to make money is the first step.

And if you’re thinking about investing in a business and the business owners can’t clearly articulate what their business model is, run!

*Why a Sumerian scribe in the examples above? Because the Sumerians excelled in business and were first in many things, including the first written business contracts and the idea of credit.

Examples:

Kevin thought his business model of selling chalk drawings on pavement to passersby was excellent - until it rained.